Save your money at the local bar and earn a 30% return

Last Friday I was at a bar near Mango Tree’s offices in Lira – I’m not sure what its name is, but it’s about a block away. I was trying in vain to buy a beer when two gentlemen interceded with the bartender – apparently she was doing something non-work related, and should have prioritized me as a customer. Or maybe not, and these guys were just asserting my priority as a white person on my behalf. That’s an uncomfortable gray area I find myself in a lot here, so I will almost always just stand politely until noticed rather than try to get the attention of e.g. a clerk at a store.

In any case, they were really nice guys and we ended up talking about what they were doing at the bar. They were there with their savings group, they said, making their weekly contributions to the savings pool. The group meets each Friday and everybody chips in. They got the idea, they said, when they realized they were spending 200,000 shillings as a group on drinks each Friday, so they had to be able to save a decent amount as well. So they merged the incentive of drinking socially with the goal of saving money. Then they lend money out to members of the group who want loans and have a decent plan for the money.

I absolutely love this group, for multiple reasons. Reason number 1 for that is that they started this themselves, rather than having some NGO come in and explain how they should have a savings group that will promote all kinds of socially-valuable buzzwords. The guys I talked to might have been bullshitting me, but if anything the tendency in Lira is to play up your ties to NGOs rather than playing them down: NGOs are where the good jobs and money are. This home-brewed nature makes me think the whole scheme is much more likely to last: there is more impetus behind it, and it’s something the members clearly want.

A second reason is that they save their money at the bank, instead of focusing entirely on trying to loan out money to group members. They talked me through the fees they pay, and they amount to something like 1-2% of their capital per year, whereas the interest rate they earn is 19%. Just speculating offhand, I assume that one benefit of their group is to get a good interest rate and low fees, by having a lot of money in one account. Consumer banking in developing countries tends to be a raw deal of high and poor interest rates, so it’s heartening to see people getting a good deal from one.

Third, they have a clever interest rate system for their borrowing members that I have never heard of before. If you want to borrow money, the monthly interest rate is 10%, which is an annual interest rate of over 200%. But that’s only for the first month – for later months, the interest rate goes down to 5%. The group members I talked to described this as a penalty, when it kind of sounds like a discount, but it makes some sense in context: if you want to borrow $20, you have to pay back $22 within a month. If you take longer than a month, you will have to pay more. People don’t like paying more than they should, so that penalty probably has teeth – but it is less likely to trap borrowers in a spiral of odious, unpayable debt.

Finally, they say that the overall savings fund earned 300,000 shillings last year on an investment of 1 million. Granted, we were discussing this over Nile Specials at 10 on a Friday, not in a corporate boardroom. And even if they really did earn a 30% return per year, that’s not going to scale up. It’s largely a function of the fraction of group members who want to borrow money, and they have a limited number of projects to invest in, so foreign investors are probably not going to flood into this asset class. Still, it’s not too shabby for something a bunch of folks came up with at the local bar.

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