Are Savings Clubs a Good Alternative to Traditional Banking?

Informal structures offer their own upsides (and downsides)

Informal savings clubs have long existed outside of traditional banking. They tend to be popular in areas without access to traditional banking structures, primarily in developing economies and among immigrant communities. They’re based on reciprocity and trust in the social and familial bonds of those who are involved. They leverage those ties to create the motivation for saving.

They come with both advantages and drawbacks. On the one hand, they provide insurance and create a mechanism that encourages participants to save. On the other, they lack the legal protections that traditional banks offer. In this article, we explore how these savings clubs work, and how they compare to traditional banks.

Key Takeaways

• Informal savings clubs, such as “susus” (or “sousous”), are community pools where members each pay in a set amount at certain intervals, and the full sum is paid out to one member at a time on a rotating basis.
• As a financial tool, they don’t typically offer legal protections. Instead, they rely on trust among the members of the club.
• They are common in areas without access to traditional banking, although they have also become more common in the West.

Savings Club vs. Formal Banking

Because they exist in many different cultures, these informal clubs go by many names. Brought over by immigrants, informal savings clubs have become increasingly common in the West, often carrying names such as njangi, pandero, consorcios, or sousou. The umbrella term is rotating savings and credit association (ROSCA).

In ROSCAs, people pool their money together at certain intervals, and the full sum is paid out to one member at a time on a rotating basis. Take one example, as reported by NPR: In Kenya, they are called merry-go-rounds because of the cyclical nature of their payouts. A 63-year-old Kenyan woman named Mary Abagi, for instance, invested $10 per month into the pool along with 10 other people, using charitable aid from an American nonprofit to make the payments. Each month a different member would get a payout. When the rotation came to her, Abagi received $100, the total of her payment into the pool, which she used to purchase a goat.

Unlike traditional banking or savings clubs joined through traditional banks, ROSCAs are informal. They do not typically carry the legal protections of a bank, meaning that failure to live up to the terms of the agreement will typically not lead to a court date. It is therefore vital that those in the group trust each other to keep paying into the system. Otherwise, a member who got an early payout could theoretically stop paying into the pool, leaving other members without their funds. The importance of community trust carries over into providing a motivation to save, though the practice is not exclusively economic but one that also improves social cohesion. In fact, social capital replaces creditworthiness in determining who is allowed to join.

There are other notable differences that are relevant to the tool’s financial use:

• Liquidity—ROSCAs do not give easy access to the funds that are paid into them. When a person has invested in the pool, they must wait for their turn in the rotation to get their payout. This is notably less liquid than traditional banking.
• Interest—ROSCAs do not pay interest. Versions of these associations, known as accumulating savings and credit associations (ASCRAs), do, but these are less common. Most of the time, however, people will simply get back what they paid into the program. In traditional banking, depositors receive some interest on their deposits.

In the United States

Though normally associated with developing economies, ROSCAs are also popular in developed economies, as well.

In the U.S., these systems extend the tradition of antebellum South mutual aid societies that put together insurance and benefits for Black people in earlier centuries. They’ve become more prominent with the decline of immigrant access to the welfare state since the 1970s, as well as the restriction on loans and rising inequality since the Great Recession, according to scholarly accounts.

The contemporary uses of ROSCAs in America have been found to vary, including for major expenses such as weddings and funerals, with the relative success of West Indian and Asian immigrant small businesses in the country occasionally credited with the use of ROSCAs for startup capital in place of credit. There aren’t any solid statistics for how many such clubs exist in the U.S., but estimates have suggested that they are very common.

Fast Fact

Some studies have suggested that blockchain technology could improve the performance of ROSCAs for unbanked and underbanked portions of the American economy.

Scams

Scams masquerading as ROSCAs also occur. The U.S. Federal Trade Commission (FTC) warned of fake “sousou” clubs in the wake of the protests over the slaying of George Floyd. A “sousou” is an informal savings club originating from West Africa and the Caribbean. However, the scam “sousou” clubs were illegal pyramid schemes that promised investors that they would receive more money than they put in, cynically connecting the investments to social causes such as Black Lives Matter to encourage investment in the schemes. Legal savings clubs don’t promise profit, only savings, according to the FTC.

Not All “Susus” Are Scams

Proponents of “susus” have been quick to point out that illegal pyramid schemes with the same name aren’t the same thing. Rather, they trade on this legitimate societal practice to entice investors.

What Is a ROSCA Savings Plan?

A rotating savings and credit association (ROSCA) is an informal type of banking in which members pool their money and pay out savings on a rotating basis. They occur all over the world and have many different names.

What Are the Benefits of ROSCA Savings Plans?

Informal savings clubs can leverage social motivation to encourage savings, especially in areas without easy access to traditional banks. They also promote trust and social cohesion among their members.

Are 'Susus' Legal?

Some pyramid schemes masquerading as “susus” are illegal, but the real, legitimate savings clubs are not. These informal banking groups originate from West Africa and the Caribbean. Though they don’t provide the same legal protections as traditional banking, they do encourage saving.

Who Uses ROSCAs?

Scholars have found that ROSCAs may be more common among women than men in some societies. They can be a way for married women to protect household savings from immediate consumption, because the clubs prevent access to the funds for some time. Once the rotation returns, the savings can be used for a particular expenditure.

The Bottom Line

Most people who use ROSCAs are pursuing financial security. The clubs leverage social bonds to help users save money and increase their purchasing power, without the fees associated with traditional banking. However, they don’t offer traditional banking’s legal protections or ease of access to savings, and they don’t pay interest on invested funds.