Stokvels, like Wilson toffees and Ouma Rusks, have been a trusted part of the South African fabric for decades, but unscrupulous operators, pretending to be something they are not, are giving this tried-and-tested community savings model a bad name.
Stokvels have provided a vehicle for more than 12 million South Africans to save and meet their financial needs. Yet, the past eight years, a string of so-called online stokvels have been accused of operating outside the ambit of what legally constitutes this type of credit union.
In 2015, the then Financial Services Board raised the alarm over a popular online stokvel, The Wealth Hub, which signed up more than 20 000 people within weeks.
In 2021, the National Consumer Tribunal fined the founders of Up Money R1 million, while the Asset Forfeiture Unit of the National Prosecuting Authority obtained a preservation order of assets valued at up to R18m.
Last month, the FSCA issued a warning against United African Stokvel (UAS), advising the public to be cautious when conducting any financial services-related business with UAS. According to the FSCA, UAS – although having been in operation since March 2019 – had not applied for a financial services provider licence.
Read: FSCA investigating stokvel following tip-off from a whistleblower
What constitutes a stokvel?
The National Stokvel Association of South Africa (Nasasa) describes a stokvel as a type of credit union whereby a group of people enter an agreement to contribute a fixed amount of money to a common pool weekly, fortnightly, or monthly.
Michael Bailey, an associate in the finance and banking practice at Cliffe Dekker Hofmeyr (CDH), says stokvels are afforded various exemptions in terms of the Banks Act, the Financial Advisory and Intermediary Services Act, and the National Credit Act (NCA) that allow a large number of individuals to invest money with stokvels.
“Too much legislation in the informal sector of stokvels may result in creating a less inclusive financial environment,” Bailey says.
A document titled “Stokvels and the National Credit Regulator” compiled by CDH clarifies that, in terms of the Banks Act, stokvels are designated as an activity not falling within the meaning of “the business of a bank”. As such, they do not have to comply with the Banks Act when they are established and pool their funds.
But stokvels that hold contributions from members amounting to more than R100 000 are required to register with the self-regulatory body approved by the Registrar of Banks: Nasasa.
The FSCA’s Board Notice 43 of 2013 provides that stokvels are exempt from being licensed as an FSP. To meet the definition of a stokvel requires a group of natural persons who, by invitation only, form a saving to rotating credit scheme that conforms to the following criteria:
- It consists of members who pledge mutual support to each other towards the attainment of specific objectives.
- A continuous pool of capital is established by raising funds through the contributions of members.
- The capital does not exceed R100 000 a year.
- Members share the profits and nominate management.
- It follows self-imposed regulation to protect members.
- It does not fall within the scope of the “business of a bank”.
Bailey explains the exemption allows for a stokvel to render financial services to or on behalf of its members.
“Where a scheme does not meet the definition of a stokvel or renders financial services to those not deemed members, it will be required to be registered as a financial services provider.”
Stokvels are permitted to lend money among their own members at an agreed interest rate. If a stokvel lends money to people who are not members and charges them interest, the stokvel must register as a credit provider in terms of the NCA and comply with the provisions of the NCA, says National Credit Regulator (NCR) spokesperson Rishana Singh. Failure to do so may result in the NCR imposing administrative fines.
When things go wrong
According to CDH, there is currently no government interference in the affairs of a stokvel, and there are no regulations on how and where the mismanagement of stokvel funds is to be reported.
The law firm states that it will largely depend on the rules of the stokvel as to how mismanagement of funds is dealt with.
Theft of stokvel funds or fraud involving a stokvel is a crime that may be reported to the South African Police Service for investigation.
The members of the stokvel may also choose to report the issue to the Nasasa, “which may provide assistance in resolving the issue”.
He adds that the National Consumer Commission can refer a stokvel to the National Consumer Tribunal if it is found that a stokvel is a pyramid scheme in contravention of section 43(2) of the Consumer Protection Act.
“The National Consumer Tribunal can impose an administrative fine on the purported stokvel if it is found to be a pyramid scheme.”
Bailey states that a pyramid scheme or Ponzi scheme that is purporting to be a stokvel can never have the protections available to a stokvel.
“Where such investment club is found to be a pyramid scheme or Ponzi scheme or acting without appropriate licences, it will be treated as such with criminal and administrative proceedings,” he says.
The rise of pyramid schemes
Andrew Lukhele, the chairman of Nasasa, says the regulatory body and the government are 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,” Lukhele says.
He explains that for everyone to profit, an unlimited supply of willing investors must be continuously introduced to the scheme as members. 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 much longer for their return 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,” he says.
United African Stokvel
In the case of UAS, Nasasa has confirmed that the regulatory body rejected the digital stokvel’s application for membership in July 2019. In a letter addressed to UAS, dated 19 July 2019, Nasasa wrote that “your organisation falls outside of the regulatory framework”.
Bailey says the failure to register with Nasasa will not in itself result in punitive measures against the stokvel.
“There are currently no regulatory fines and/or penalties in terms of the Banks Act for failing to register with the relevant regulatory body, since the stokvels do not ‘conduct the business of a bank’ and therefore are not subject to the Banks Act.”
Established just three months prior to the declined Nasasa registration application, UAS went on to operate unchallenged for the next four years. Only after the FSCA received a tip-off from a whistleblower – and complaints from members stating they had not received the promised returns – did an investigation into UAS begin.
Read: Anger, despair, and hope – stokvel members respond to email urging patience
In the warning issued in July, the FSCA said it suspected UAS was conducting unauthorised business and breaching “certain financial sector laws”.
The Authority said it was in the process of investigating UAS, and once the investigation was completed, it “may take regulatory action, report the matter to the South African Police Service, and support the National Prosecuting Authority in its responsibilities, if required”.
This week, the FSCA told Moonstone that – at this stage of the investigation – the Authority could not disclose details, as doing so would comprise the integrity of the investigation.
The FSCA said the nature of an investigation was such that investigators had to confirm and corroborate evidence obtained. As a result, it said, it was difficult to put a timeframe to its conclusion.
“With that being said, we emphasise the need for investors to contact us.”
Investors can contact the investigators instructed to conduct the UAS investigation through the FSCA’s Business Centre using the following link: https://www.fsca.co.za/Pages/Contact-Us.aspx
