How do Stokvels work?
Very simply, participating members contribute a fixed amount of money per month, or at regular intervals. The group has control over how they wish to use that money, but commonly each member will receive a lump sum rotational pay-out at an agreed-to date.
Anyone can start a Stokvel but it is recommended that you join one first, so that you understand what you are getting into, how it works, develop trust and support, and gain practical knowledge.
Informal Stokvels depend on a trust system and inter-personal relationships, and are usually among people who know one another. The founder of the Stokvel is usually the person who administers it, but members are responsible to ensure that the direction followed is as intended, and what recourse can be taken if they become dissatisfied with the running of the scheme.
Types of stokvels
Stokvels serve a purpose with their focus. This can be savings, property, funeral or investment focused. Savings is the most popular, with pay-outs often used to purchase groceries in bulk, or help tide families over during difficult financial times. A funeral Stokvel has proven to be an extraordinary facilitator of being able to afford a decent funeral service.
Property Stokvels are gaining in popularity. Investors pool their savings to invest in a particular property or to purchase land for development. Usually Stokvels of this nature take some time to reach the point where they may be equipped, or have enough savings, to venture into property acquisition. It is also dependent on the extent of the membership and the skills of the administrator.
National Stokvel Association of South Africa (NSBSA)
This organisation represents some 800 000 Stokvel groups, collecting some R50-billion annually. This is by no means the full extent of the number of Stokvels that exist, which is in the region of some 8-million. Registration is simple, and requires property-focused Stokvels to formulate their own constitutions, which among other things show whose names will appear on any title deed of purchased properties.
The NSBSA has designed an easy-to-use constitutional application that will go a long way in securing members’ confidence.
What a Stokvel can do for you as a first-time property investor In two words: the start of a journey to wealth creation! When Stokvels are focused on this aspect, poverty can be alleviated and further provide for retirement and generational wealth.
Most importantly, however, investing in a Stokvel that provides loans at an interest rate that is lower than many other financial houses, means an individual may be able to secure a deposit for a home, which gives a real boost to being eligible for a home loan. Part of this journey may take time because it is far better to first pay off any existing debt using the Stokvel pay-outs, which also improves your credit rating. (Insert recent link to improving credit score).
Another way to use a Stokvel payout if property is the focus, is for the recipient to buy a piece of land. Once that is acquired, further regular payouts can be used to begin to build a home in stages.
The Stokvel itself may even decide to build or buy homes as a collective, securing monthly rentals that benefit the entire membership in the form of a passive income. The advantage of this is that the property is acquired through cash and doesn’t need to wait for bank approvals on home loan applications.
Warnings
If one member defaults on the monthly Stokvel instalment, it can negatively impact on all the other participants and the pool of funds. It is recommended that in such a case, the member be given three-months to recover the loss, by increasing their monthly contribution. If the member continues to default, they should be given the appropriate pay-out and ejected from the scheme. And in a property Stokvel, it is quite usual to have hundreds of members, which can be difficult to administer.
Three tips for those considering entering a property Stokvel
Ensure the Stokvel has a clear constitution and is registered with the NSBSA.
Get to know the leadership and members.
Ask questions about how where the money is invested, and how it is to be used.
