Payroll Deduction, the perfect gift this holiday for the urban dweller

In the last few weeks I have sought to find out how employees in town save. Many will tell you that they save through a bank saving account, a fixed deposit, a mobile money account, a deduction through their employers to an insurance or an investment fund. Those who provide these last two options being very few indeed. I dig deeper and ask where they go when there is an emergency or some financial crisis - an advance from the employer or a friend, a quick loan from the bank… all the while being conscious that these respondents make up a small portion of the 10 per cent of adults who earn income from the formal sector. Well these questions have already been asked at the national level through the Rwanda FinScope Survey the latest having been released this year, 2020. Musafiri graduated from the university seven years ago and joined the insurance industry straight after college. His idea of building assets was to take a loan and buy land. Great thinking for a young graduate. After five years he joined an organization that had an organized staff Savings Group (SG) which he joined and over a period of one and a half years had been able to save between Rwf 150,000 and Rwf 50,000 each month. He had borrowed thrice with loans totaling Rwandan Francs 2.3 million. In the process he had created five jobs. That means that these five young people now woke up to work and had an income. Uwimana, an employee from the same organization, accessed a loan and bought a simple house from a neighbor while another staff member paid the initial deposit on a mortgage from the group’s loan. Nothing new about Ibiminas (the Kinyarwanda name for Savings Groups). They are widely used among rural and business communities in Rwanda. You only need to visit the main markets in Kigali and ask a few of the traders about their groups. They will give you good advice on financial planning and management. In Rwanda Savings Group data is available through the Central Bank of Rwanda website. The 2018 data collected from 23 Non-Governmental Organisations (NGO’s) indicates 1.2 million members of SGs with 80 per cent of these being women. A total of Rwf 31 Billion (USD 33 million) was accumulated in savings while Rwf 24 Billion (USD 25 million) was accumulated in loans outstanding. The Central Bank of Rwanda Annual Report 2019-2020 highlights the importance of these groups and also the role that digitalisation plays not only in making data available which can be used to inform policy, but also in linking these informal groups to formal financial services. A discussion for another day. These groups are recognized the world over as a powerful instrument for economic empowerment and financial inclusion. The SEEP Network records more than 15 million members of Savings Groups over 73 countries of the world. Nothing new as is the case with all things under the sun. What Covid-19 has done is created a teachable moment on financial health. This means, according to the FinScope 2020 Survey report, how well one’s daily financial systems help build resilience from shocks and create opportunities to pursue one’s dreams. A shock is simply one such as the loss of income or business caused by the Covid-19 pandemic this year. The report showed that 71 per cent of Rwandan adults surveyed actually had plans to balance their income and expenses and that 63 per cent of adults did build and maintain reserves through saving money and investing in assets and businesses. The interesting bit though was that a majority of these adults used informal and non-financial methods to meet their goals. Those surveyed had experienced shocks, the main ones being serious illness of a family member, agricultural crop or livestock loss and death of a household member. Of those who experienced shock only 40 per cent used a financial device to mitigate a financial loss. That spells opportunity for the formal financial sector. As businesses make plans for recovery in the coming year, supported by the measures already put in place by the Government such as the Economic Recovery Fund, this short discourse proposes that Small, Medium and Large firms also think though saving plans for their staff. We discuss here one simple plan - the Savings Group which is simple to start and does not impose liabilities on the employer (this done through an individual’s written declaration at the notary). In fact what it does is that it frees the employer from frequent salary advance requests since staff get their own channel within the office to save and borrow. Members also become more financially literate and broader discussions on investment funds, private pensions or the stock market can begin to happen. Above all however there is some saving for a rainy day. Savings Groups are registered with the Sector and the monies deposited with a regulated financial institution. The prerequisites are interested staff, a visionary leader, a simple accounting system to ensure transparency of funds, a set of simple laws guiding the conduct of the group, registration at the Sector, an account at a regulated financial institution and you are good to go. Where then does the employer come in? The success of the staff Savings Group will be hinged on this one gift to the staff – payroll deduction. Their savings grow while they need not wonder whether their colleagues have honored their payments or not. Imagine a future where all employees have scheduled savings plans and instruments that allow them to borrow without much ado. History has shown the power of pooling funds through member owned financial entities. A great tool for domestic saving mobilization, meeting not only personal but also national saving mobilization goals. The writer is an Inclusive Finance Enthusiast based in Rwanda waringa@fanaadviso.com

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Payroll Deduction, the perfect gift this holiday for the urban dweller