Ugandans love drinking. This is verified by my late-night trip to the town centre yesterday. After having a bottle of beer (I had “Club” and loved it), I followed my Ugandan friends to a local brew place. It was a spacious open area with a television playing Uganda popular music. People were sitting in groups and drinking brown colored “beer” using plant straws from a shared bucket. The local beer is called malwa and is made from fermented millet. As a foreigner and non alcohol lover, I had only one sip of malwa and nearly vomited. But the locals seemed to be having a good time.
It turns out that people don’t only drink and chat together: they save money and invest together. Each malwa drinking group is a saving club and has an account at the SACCO. Each saving club has a chairman, a secretary, and a treasurer. According to the brewer, the ten people in a group each pays 2000 for one night of drinking. Eight of them pay directly to the brewer, and the remaining two pay to the treasurer of their group. Members can also put any spare money they have into the pot (i.e.the joint account). If you want to join a group, you just find a seat there and ask for permission from group members. If all of them agree, you pay a fee of 10,000 UGX (around 4 USD) and becomes a member.
Don’t let the name “saving clubs” deceive you. These groups offer loans as well. To acquire a loan, a member needs to find three guarantors among group members. Guarantors are responsible to urge the borrower repay the money on time. The brewer told me there is no upper limit for the loan, but I think there might be informal rules as to how much you can borrow (e.g. a certain percentage of the total deposit). All loans should be paid back in one month with 10% interest, which is quite steep compared with loans from banks. But no collateral is required and it takes little time to get a loan. If someone fails to pay the full amount in a month, he can pay the 10% interest first, and will be granted another month to repay the principal plus 10% interest. Interest incomes are deposited in the joint account and will be shared among members equally at year-end.
The operation mechanism of these saving clubs reminds me of the Grameen Bank and ROSCAs where social capital plays a crucial role in reducing default. Since people usually sit beside their friends upon their first visit, they are more likely to form groups with acquaintances. However, whether this level of familiarity will bind people to their promises is not clear.
In developing countries, getting a loan from formal financial institutions can be difficult (because of collateral and guarantor requirements) and time-consuming. Borrowing from informal sources are usually easier but charges higher interests. These local brew saving clubs cleverly combine the best of the two worlds. Security of the money in their pot is guaranteed by the bank. At the same time, loan application is simplified through informal arrangements within the group.
You can expect follow-up posts in the next few weeks on this topic.