A central principle of The Black Bank Initiative (BBI) is that informal institutions of financial intermediation like investment clubs and rotating savings and credit associations (ROSCAs) are just as important as formal institutions like minority-owned commercial lending institutions as we pursue wealth creation, financial literacy and community development.
These institutions borrow heavily from cultural and family traditions and rely heavily on trust, familiarity and social forces.
According to the SEC’s website, an investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members. Members of investment clubs meet at regular intervals to decide on which stocks to invest in, and make a contribution of the dues that have been determined for the investment club. Club meetings focus on education and each member actively participates in investment decisions. Research is a major part of any successful investment club. Members take turns researching and reporting on promising companies in which they might invest or companies in which the club is already invested.
According to Investmentclubhelp.com:
‘Considered a small business for purposes of tax returns, investment clubs are generally social groups of like-minded people who want to see their money grow. If you are interested in the stock market – and if you want to gather information on a particular set of stocks – then joining an investment club may be right for you.
Usually, investment clubs are run in a democratic fashion. Members, as a collective, elect their officers (which usually consist of a president or spokesperson, a treasurer, and so forth). They also vote on stocks, bonds or securities – which they want to purchase, how many they want to buy, whether or not they want to sell, whether or not the interest rate is conducive to a comfortable amount of growth.
Investment club officers delegate who researches which stocks. Research can consist of any number of different methods: stock market profiling, looking at or visiting the individual companies (if they’re local) in which you may be interested in investing, and even historical comparisons. Stock prices are a driving factor in the purchase of individual shares…as are growth futures.’
The National Association of Investors Corp. (NAIC), established in 1951, has set forth guidelines for running successful investment clubs. It urges members to:
- Invest money regularly, regardless of market conditions
- Reinvest all dividends and capital gains
- Buy stock in companies that are growing faster than most of their peers
- Diversify investments, not putting all the communal eggs into one basket
A Rotating Savings and Credit Association or ROSCA is a group of individuals who agree to meet for a defined period of time in order to save and borrow together. Meetings can be regular or tied to seasonal cash flow cycles in rural communities. Each member contributes the same amount at each meeting, and one member takes the whole sum once. As a result, each member is able to access a larger sum of money during the life of the ROSCA, and use it for whatever purpose she or he wishes.
Every transaction is seen by every member during the meetings. Since no money has to be retained inside the group, no records have to be kept. These characteristics make the system a model of transparency and simplicity that is well adapted to communities with low levels of literacy and weak systems for protecting collective property rights.
The system further reduces the risk to members because it is time limited — typically lasting no more than 6 months. This reduces the size of the loss, should someone take funds early and not pay back.
ROSCAs have existed in many forms and many names for hundreds of years. Their legacy in African and Caribbean culture is rich. From the book Ethnic Enterprise in America by Ivan H. Light we read the following, from a section called, ‘Esusu in Africa, Britain, and The Americas’:
Anthropological research has documented the existence of rotating credit associations in many parts of Africa, including West Africa from which the progenitors of American Negroes were abducted as slaves. Although the details of administration and organization differ substantially among African regions and peoples, the essential rotating credit principle is ubiquitous. However, one such rotating credit institution, the Nigerian esusu is of especial importance here because of its historical influence on Negro business in the Americas. The esusu developed in southeastern Nigeria among the Yoruba people. Among the Yoruba’s northern neighbors, the Nupe, the rotating credit institution is known as dashi, but the Nupe’s custom differs little from the Yoruba’s. The antiquity of the esus has not yet been fully established, but researchers are of the opinion that the custom was indigenously African. Certainly the Yoruba esusu existed as early as 1843, for it is mentioned in a Yoruba vocabulary of that date. In Sierra Leone, thrift clubs of some sort existed as early as 1794, but they cannot be positively identified as organized on the rotating credit principle.
In his discussion of Yoruba associations, A.K. Ajisafe provides a statement of the esusu institution which summarizes its formal operation:
There is a certain society called Esusu. This society deals with monetary matters only, and it helps its members to save and raise money thus: Every member shall pay a certain fixed sum of money regularly at a fixed time (say every fifth or ninth day). And one of the subscribing members shall take the total amount thus subscribed for his or her own personal use. The next subscription shall be taken by another member; this shall so continue rotationally until every member has taken.
In the principle of pooling funds and rotating the pot among the membership, the Yoruba esusu does not differ from either of its Oriental counterparts; however, in common practice, it exhibits some idiosyncrasies. As W.R. Bascom observed, “anyone who wishes to do so may found an esusu group, provided that others are willing to entrust their funds to him.” But the organizer or president of the esusu needed only to be known; he did not need to know all of the members personally. Once an organizer had announced his intention to sponsor an esuse, persons willing to entrust their money to him indicated a willingness to join. Such personal acquaintances of the organizer, if accepted, became in turn heads of ‘Roads.” There were as many separate roads as there were persons who had directly contacted the organizer and had been scrutinized and accepted by him. As heads of roads, these personal acquaintances of the organizer were entitled to contact their own friends and kin concerning membership in the esusu. Heads of the roads normally were responsible for “collecting the contributions and making the disbursements within their subgroups which consist of members who have applied to them rather than to the founder for admission.” In this manner the Yoruba esusu delegated responsibility for the integrity of all members from the original organizer to managers known and appointed by and accountable to him.
The Yoruba esusu was apparently carried to the Americas by African slaves. Indeed Bascom bases his argument for the indigenous African origins of the esusu on the persistence in the West Indies of the same custom among the descendants of slaves. An early reference mentions the practice of asu in the British Bahamas in 1910:
Another method of promoting thrift is apparently of Yoruban origin. Little associations called ‘Asu’ are formed of one or two dozen people who agree to contribute weekly a small sum toward a common fund. Every month (?) the amount this pooled is handed to a member, in order of seniority of admission, and makes a little nest-egg for investment or relief. These ‘Asu’ have no written statutes or regulations, no regular officers, but carry on their affairs without fraud or miscalculation.
In the Trinidad village studied by M.J. Herskovits, residents referred to their rotating credit association as susu. As Herskovits observed, the term is clearly a corruption of the Yoruba esusu. Trinidadians originally from Barbados and Guiana told Herskovits of the form of the susu in their birthplaces. In Barbados the rotating credit association was commonly known as “the meeting” and in Guiana as ‘boxi money.” According to Herskovits, the Trinidadian sus ‘takes the form of a cooperative pooling of earnings by those in the group, so that each member may benefit by obtaining in turn, and at one time, all the money paid in by the entire group on a given date. Members may contribute the same amount. The total of the weekly contribution…is called ‘a hand.’
Jamaicans refer to their rotating credit association as ‘partners’. The partners in Jamaica is headed by a ‘banker’ and the membership is composed of ‘throwers.’ In operation the club is apparently identical to the susu of Trinidad. In the Jamaican setting, however, members apparently used their partnership portions for business capitalization, whereas rural Trinidadians appear to have made use of the fund only for consumption purposes. Many Jamaican petty traders used their partnership ‘draw’ to restock their stalls with imported goods for which they were required to pay cash. The partnership constituted the “most important source of capital for petty traders.”
Please carefully study the following information resources on Investment Clubs and Rotating Savings and Credit Associations (ROSCAs) and consult expert legal and financial advice before starting an Investment Club or Rotating Savings and Credit Association.
Investment Club Links