Esusu banking

"I tried for several months to get a loan from a bank. They asked me to provide land as collateral, which I do not have. I joined an esusu group with ten members and we contribute N10,000 every month. This has really helped my business as when it was my turn last month I received N100,000. I would never have been able to save that amount to invest in my business. If someone runs away with all our money, we all know each other so I will just go to her house." Mrs Banjoko - Trader

"I formed an esusu group with 12 colleagues; we each contribute N25,000 monthly. It became impossible to meet some of my obligations which required a lump sum and no bank would lend me money without collateral; I didn't have much that I could provide. Esusu has been a blessing. The best thing about it is that unlike when you take loans from the bank, you do not have to pay back with interest."

Millions of Nigerians are not being adequately served by the formal financial sector and remain largely unbanked; they continue to find mainstream financial services to be unaffordable, unresponsive and unfriendly. As this limits their opportunity to save, they are forced to rely on informal modes of saving and depend on the credit unions, co-operatives and Rotating Savings and Credit Associations ("ROSCA"). Such institutions have clearly demonstrated the ability of people to organise themselves at a basic level and come together to save and borrow to their mutual benefit. ROSCAs are the most commonly found financial institution in the developing world and have been in existence in many forms for hundreds of years. Indeed, in some rural areas, they are the sole savings and credit associations.

The "esusu" or "contribution club" is a traditional rotating savings and credit association that has flourished in West Africa for generations and is still widely practiced today. The incentive of participating in "esusu" is the forced savings that it encourages; putting aside money today to benefit from a lump sum payment in the future. Subscribing members contribute a fixed amount periodically. The accumulated funds are usually then assigned to each member of the group in rotation, until all have benefitted from the pool of funds. As a result, each member is able to access a larger sum of money during the life of the association, and use it for whatever purpose she or he wishes.

Access to credit

Formal lending institutions attach stringent conditions to the granting of loans and informal moneylenders tend to be highly exploitative, offering exorbitant interest rates that put credit out of reach of the small borrower. Esusu, in a sense, allows individuals who may ordinarily not have access to credit markets a form of interest-free credit. Through the pooled contributions saved, albeit without interest earned, participants enjoy the possibility of gaining access to the accumulated sum long before the individual has saved up that full amount. Such lump sums make it possible for participants to acquire goods that they may otherwise not be able to afford, pay off debts or meet other pressing obligations. They can also take advantage of the occasional opportunity to improve their general welfare.

Based on trust

This form of collaboration is totally founded on trust. Though naturally there will be instances where members of the groups have been duped of their contributions, yet, even without formal statutes or regulation of their affairs, they usually carry on without fraud or miscalculation. Even in societies where levels of trust on financial matters are questionable, esusu has proved to be popular and effective and continues to be so.

Whilst there is a significant economic role for the esusu and other forms of rotating savings and credit associations, particularly in societies where millions of people remain unbanked, the esusu ignores the whole concept of the time value of money. The first recipients of the pooled funds are thus the main beneficiaries of the scheme, whilst subsequent collectors are essentially lending money to others interest-free; they also have to bear the additional risk of default from other members over time.

Although esusu has played a significant role in helping people cultivate a savings habit, more formal investment clubs have been in existence for decades, and are a more effective way of achieving the saving and investment aims of members. They offer their members a means to grow their personal wealth and learn about investing at the same time.

Unlike the esusu scheme through which contributions are given to one member to spend to acquire consumer items or take care of other needs as they wish whilst others await their turn, members of an investment club make subscriptions and invest the pool of funds as an entity in a variety of instruments including mutual funds, stocks, and real estate. Compensation is expected in the form of interest and dividend payments as well as appreciation in the value of the underlying investments.

Whether you are completely new to investing, or are already a seasoned investor and want to share ideas with like-minded individuals, or you have limited resources for saving and investing and would like to build up your savings, an investment club presents an effective way to grow your wealth.

There is no doubt that the activities of the informal financial sector is a hub of economic activity. The onus is thus on the micro-finance banks and other mainstream financial sector participants to develop appropriate products and services to target the informal sector of the economy.

These informal credit institutions should, through registration and regulatory guidelines, be gradually integrated into the formal financial community to protect members. Until this happens, it will continue to thrive unabated and unregulated.