To formalise or not: The risk behind push to formalise chamas

When it comes to financial inclusion, the strategy by mainstream banking institutions has always been to find a way to have informal engagements be formalised.

This means having the chamas, table banking, and merry-go-rounds onboarded by a regulated financial institution so that they can benefit from perks such as loans, insurance and capacity building which come with being formalised. 

But rarely do players in the sector look at how this transformation interferes with an already working system as far as the members are involved.

Before a bank, insurance company, or Sacco, for example, find their way into the deep rural village somewhere along the Snukur River, in West Pokot County, which is almost 10 hours from the main urban centre in Makutano, individuals in such an area would already have a financial system that works for them.

Yet for financial services such as insurance to get to such areas, institutions like banks need to find a way to kill two birds with one stone by onboarding these informal systems since they already have numbers and trust of the community and are an easy pick in an unfamiliar ground.

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The concern, as discussed during the launch of the  2024 Financial Services Monitor by Old Mutual, a financial services firm, is if formalising these systems does interfere with their authenticity.

For example, if a member of a chama borrows, it is only known within the circle of the members and a word of mouth or text message is enough to have the money availed to them. However, once such a system is formalised, paperwork takes precedence something that was noted to be encouraging a majority of Kenyans to borrow from mobile phone platforms.

These concerns are part of the reasons why financial services firms are considering going back to the drawing board to determine if the products they have launched are still relevant to the market.

Vuyokazi Mabude, Group Head Knowledge & Insights, Old Mutual, states that while formalising these systems is important, there is the risk of diminishing their influence and power over them.

It then becomes the tricky balancing act of formalising while not losing the authenticity of what the Chama, for example, stands for.

“The power of a chama system is in collective initiatives. That is the core,” she said. “What we need to think as financial services providers is how do we leverage that.”

Ms Mabude said financial institutions need to tap into the need that is driving the existence of that system. This is also because that system has won the trust of the members and in extension the community it operates within.

“There is a lot of trust there. If it is lending, you want to be able to lend with dignity but also through trusted sources,” she said.

Formalisation of these grassroots financial systems has been touted to be the make or break for sectors such as insurance, investment and pension which struggle to reach more clients. Old Mutual operates in this space.

Several products have been unveiled, some to reach these untapped market segments. An example is the last expense provided by Old Mutual that targets chamas or groups.

Anthony Muli, Senior Research Economist, Global Market Markets at NCBA Bank Kenya pointed out that a lot has been done around bridging the awareness gap around financial literacy, the bigger question is the feedback from the products pushed into the market.

“How many of these products are no longer suitable for these clients? What can we tweak in these products?” he posed.

He noted that mobile phone loans are being preferred since there is no shame of walking around with forms collecting signatures from guarantors.

“For us in the financial sector is that we should probably go back to the feedback we have gotten so far and maybe tweak whatever offering we have,” he said.

According to the 2024 Financial Services Monitor by Old Mutual, chamas and mobile money are the most utilised saving platforms by Kenyans. This is represented by 58 per cent, who use mobile money to save and 48 per cent who use chama.

Some 24 per cent save at home while 16 per cent use Sacco.

“Children’s education remains the leading savings goal among Kenyans,” the survey says. “There is also a significant increase in savings for the family’s future, indicating the importance of family and making decisions based on their needs.”

Nanzala Mwaura, Ipsos’ chief growth officer, in Sub-Saharan Africa, whose research firm was behind the findings, chimed into the conversation noting that the challenge with formalising informal systems is that it introduces the members to the regulatory requirements, a scenario she has encountered as a member of a chama.

She referenced that formalising a chama is akin to registering a limited liability company which brings in the politics of shareholding, structures and filing returns.

“Formal structures kill the concept of chamas,” she said.

In an earlier interview with Bancassurance Association of Kenya chair Aggrey Mulumbi, the challenge with the last-mile connection of grassroots communities to the larger financial system was noted to have a causative effect to the growth of other financial services.

While financial literacy is key in this strategy, someone needs to invest in it yet it is not a cheap affair due to logistics involved as they are preaching to the unconverted. Informal systems such as chamas are an easy pick as experts such as insurance agents can easily reach them during their meeting days. This then allows them to not only dispense knowledge but also onboard.

“The people you are engaging in the micro-insurance segment, a lot of them will be rural based a lot with trust gaps. They only generate trust through aggregation. For example, a farmer will belong to a farming group, or through a church, table banking or chama,” explained Mr Mulumbi, who is also KCB Bancassurance Intermediary Limited managing director which is a subsidiary of KCB Group Limited.

He added: “Micro-finance institutions have done well to bring people through table banking and mostly women to take health insurance and funeral expense policies.”