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In a country with a relatively low savings rate and a large community operating and relying on the informal financial sector, it is prudent and vital for government to support and encourage informal community-based savings. It is against this background that community schemes such as social, burial and savings clubs, commonly referred to as "stokvels", have been recognised by Government. Hence, legislation pertaining to stokvels has been introduced. In this regard, it may be of interest to note that South Africa may have been the first country in Africa formally to vest the aforementioned schemes with legal status.

Government is, however, aware that there are so-called savings schemes purporting to operate on the "stokvel" principle, but which are not savings schemes in the traditional sense. The basis for the sustainability of these schemes, unlike in the case of "stokvels", relies on recruiting new members. In order to pay higher returns on the "investments" of members, the investments of new members are used to pay the promised returns of each previous membership level. In order for everyone to profit, an unlimited supply of willing investors has to be introduced to the scheme continuously as new members. Therefore as soon as there is a decline in membership, new members, and existing members who have not yet qualified for any distribution, will have to wait that much longer for their turn, or may even lose their contributions. In fact, it is at times questionable whether these organisations are in a position to refund contributions if so required. It is also not clear whether members are made fully aware of these risks when they enrol.

Operating a scheme under the aforementioned conditions is, and will remain, in contravention of the Banks Act. "Stokvels" have been granted legal status under the provisions of the Banks Act and may therefore lawfully conduct business within this country, provided that such schemes are operated within the scope and ambit of the enabling legislation.

Government is mindful of the fact that schemes may have operated in the past in contravention of the Banks Act, unbeknown to the Y344

Office for Banks and may thus have escaped prosecution. The Government of National Unity is, however, committed to protecting depositors by ensuring compliance with the legislative control measures in future. This is all the more important in the case of the schemes described above, in that it is often the unsuspecting investors, who do not understand the risk involved or the complex and, at times, very vague pay-out ratios, that stand to lose their capital.

In view of Government's commitment to encouraging savings, and in order to give an opportunity to those who may unwittingly have transgressed the law, all existing community savings schemes that do not already comply with the existing legislation are urged to convert themselves into societies and/or associations that comply strictly therewith. To this end, the National Stokvels Association of South Africa ("NASASA") has been invited by Government to assist the Office for Banks in facilitating the normalisation of the schemes which currently fall outside the legal framework, in consultation with its members.The recent proliferation of the type of savings scheme described above, and a review of the legislation by the Office for Banks, tend to indicate that certain shortcomings may exist with regard to current "stokvel" legislation. Consequently, in an effort to make the law more user friendly on the one hand, and more specific on the other with regard to the type of schema that would be allowed, the Office for Banks and Government are currently consulting with the various stakeholders, including NASASA, to find a satisfactory solution.

APPENDIX

Why schemes such as those described above (referred to, in this document, as "non-stokvel" schemes) cannot fall into the accepted boundaries of a stokvel.

Stokvels generally enable people from within a particular group to save, and in addition to being afforded a turn to receive the contributions of all members of the group, members satisfy their need for social interaction, sharing, and belonging. In recognition of the social and economic upliftment role of stokvels, credit unions and employees' savings clubs in the South African environment, the Registrar of Banks, on 4 January 1994, with the approval of the Minister of Finance, issued a Government Notice whereby such schemes could henceforth lawfully conducted their respective operations within this country, provided that such "stokvel" schemes are operated within the scope and ambit of the contents of the relevant Government Notice.

In order to qualify lawfully as a stokvel, a common bond has to exist between the members of a scheme. A common bond exists between members of a specific group that may be described as a stokvel and that:

1. Is a formal or informal rotating credit scheme with entertainment, social and economic functions

In a stokvel, people enter into an agreement periodically to contribute a fixed amount of money to a common pool. This money, or a portion thereof, may be drawn by members, either in rotation or in a time of need.

Under the "non-stokvel" schemes, a person may "invest" a single fixed amount with the scheme for a limited period and qualify for a payout of sometimes up to three times the "investment".

2. Fundamentally consists of members who have pledged mutual support to each other towards the attainment of specific objectives.

Stokvels go to great lengths to admit only reliable and trusted members, following personal recommendations, since continuity is crucial to the working of a stokvel. This is why stokvels are often formed by neighbours, members of the same community or members of a church congregation.

Any member of the public throughout South Africa may become a member of "non-stokvel" schemes by simply paying a membership fee. Owing to the method of operation of such "non-stokvel" schemes, the recruitment of new members in large numbers is crucial to their viability.

The rules of a legal stokvel are such that no member, at any time, albeit subject to any such notice as may be prescribed in the rules of the group, may withdraw the full amount of such member's contributions. Two culturally proven schemes, are the "mogadisano" and "letsima" schemes. In the case of a "mogadisano" scheme, a group of people get together under certain rules and contribute some money into one person's account in a particular month. In the following month, all members again contribute into the account of another member in the group, and the procedure is repeated until every member in the group has benefited. In the case of a "letsima" scheme, there is no physical flow of cash.

In "non-stokvel" schemes, a member is entitled, after a period of time, with prior notice, to withdraw his/her total contribution plus "interest".

In terms of the provisions of the Mutual Banks Act, the minimum required capital to register as a mutual bank is an amount of R10 million. It was therefore felt, that any "stokvel" of which the subscriptions exceeded R9,99 million would be required to register as a mutual bank.

Having regard to the aforegoing, it should be reasonably clear that the activities and methods of operation of "non-stokvel" schemes preclude them from being regarded as a stokvel. Government would therefore urge such "non-stokvel" schemes, in their own interests and those of their members, to convert themselves into structures that comply with stokvel legislation, or, alternatively, to register formally as banks or mutual banks.

Enquiries may be directed to the Office for Banks at telephone number (012) 313-3596.

Issued by: Ministry of Finance

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