EDITOR’S NOTE: This article is part of our Money254 Partner Series produced in partnership with Absa Bank Kenya to celebrate the launch of their new digital savings account. For more on Absa’s new digital savings account, read here.
When looking for a savings product in Kenya, many choices are available, and deciding where to keep your money can be overwhelming.
With numerous options to consider, picking one that aligns with your saving goals and suits your needs is important. This is because selecting the wrong product can hinder your ability to achieve specific milestones or respond to changing circumstances.
Nonetheless, you can simplify your search by deciding whether you prefer a collective group saving approach or an individual saving approach. A group dynamic, such as chamas and Saccos, encourages discipline, shared accountability, and a sense of community.
On the other hand, saving individually, e.g., through bank accounts, digital savings accounts, and investment accounts like MMF, empowers you to set and work towards specific savings goals while maintaining complete control over your finances, thanks to personalised solutions.
Both group and individual saving approaches can help you achieve your objective when working towards a specific goal. However, there are factors you should consider to ensure you make the right decision.
Using the Absa Digital Savings Account and chamas as examples, this article will explore how group and individual saving approaches compare, based on six elements.
Before you begin saving, it is essential to have a specific goal in mind. Your saving purpose can help you determine the best platform to keep your savings.
If your goal involves saving for a short-term objective that requires easy access to your funds, such as when building an emergency fund, the Absa Digital Savings Account could be a convenient option.
On the other hand, if you're saving for a new washing machine, you might have to consider joining a single-purpose merry-go-round chama. Such chamas typically involve saving for one shared objective. In this case, at the end of each circle/rotation, one member receives money to buy a washing machine.
Suppose you are saving for a goal far into the future, but have bad savings habits. In that case, a chama could enforce regular contributions, fostering discipline and ensuring you consistently save. Some chamas may have soft penalties for late contributions which could help build a savings habit. However, you will typically not be making any return unless you join an investment chama that pools funds together and invests jointly.
In terms of enforcement, the Absa Digital Savings Account mainly relies on technology to build your savings habit. It allows you to automate your savings, which are deducted automatically from your current account - allowing you to save without actively thinking about it. Importantly, it offers attractive returns of 9% interest per annum.
Finally, if you are saving to access low-cost credit, you might need to consider modern table banking chamas, as digital saving products typically don't provide loans. Note that joining a table banking chama may involve a high initial deposit and regularly defined minimum contributions, which are not required when saving with the Absa Digital Savings Account.
Expected returns refer to the potential gains or profits you anticipate from your savings over a certain period of time.
When choosing a savings product, it is important to consider the expected returns as they directly affect the growth of your savings. Opting for an account with higher returns can help protect your savings against the effects of inflation, which can erode the purchasing power of money over time, especially when saving for long-term goals such as your child's college find or retirement.
Absa’s Digital Savings Account offers one of the most competitive interest rates at 9% per annum - the highest by a commercial bank in Kenya. On top of this, it provides daily interest accrual, monthly compounding, and zero fees and penalties. All these features can contribute to higher returns.
In contrast, returns on chama savings will depend on the type of chama you joined. Merry-go-around and single-purpose chamas typically have zero returns. You get what you saved. If you save Ksh100,000 over one year, you’ll receive Ksh100,000 on your turn. Chamas typically have no administrative fees, but members might be penalised for delayed contributions. Penalties can be momentary or in the form of postponing their turn to receive money.
Some types of chamas, such as investment chamas and table banking, might offer returns. In investment chamas, money is pooled from members and invested jointly on collectively picked vehicles. Returns from the investment are then shared among members depending on what they contributed.
Investment chamas might require paperwork to govern the ownership of investments and exit clauses. They might also come with joining and annual fees, as well as penalties for breaking chama laws. It is important to note that returns on these chamas are subject to investment performance.
The table banking chama generates income by advancing low-interest credit to members from a pool of money contributed by members. Members also share the generated profits (from lending interest) in dividends based on ‘shareholding’ at the end of the year. This type of chama might also come with fees such as joining and annual as well as penalties for breaking the rules.
It's important to note that while returns may matter less in certain saving scenarios, e.g., when you want to preserve capital through chamas, you should consider a saving platform that offers competitive rates within the context of your goals and risk tolerance.
Liquidity refers to the accessibility and ease with which you can withdraw your funds when needed. Different factors, including your savings purpose and habits, will determine your desired liquidity level.
If you are saving money for emergencies, you could consider keeping it on an easily accessible product such as the Absa Digital Savings account. This saving vehicle allows you to withdraw your money directly to your Mpesa any time of the day without consulting anyone or visiting the bank.
Chamas can be very liquid or illiquid, depending on your turn to receive the pooled funds. If you are among the first members, you will essentially receive all your savings upfront.
However, if you are among the last, it might take a while before you have access to your savings. Most chamas use random ballot tickets to decide the order in which members will receive their money - meaning you have little control in deciding when you get back your contributions.
However, some chamas will allow you the option to talk to the next recipient about possibly exchanging positions in the rotation. And since they are typically based on comradeship, some chamas might allow you early access when you have serious emergencies. Prematurely leaving some chamas might result in fines. You will also be required to return any members' money you might have taken and repay any outstanding loan.
The Absa Digital Savings Account allows instant withdrawal of your savings in the event of an emergency, there are no fines or penalties.
Risk here refers to the possibility of losing your savings when using the Absa Digital Savings Account or a chama as a savings vehicle. When choosing your savings platform, you first have to identify your risk profile and carefully analyse the risks associated with each product to ensure they align with the financial plans.
If you are risk averse, i.e., you prefer cash preservation and want to avoid potential conflicts and disputes that might disrupt your saving goals, you might want to consider the Absa Digital Savings account. The product is offered by Absa Bank Kenya, a commercial bank regulated by the Central Bank of Kenya (CBK).
If you are less risk-averse, you could consider chamas, but it is important to ensure that the potential reward justifies any potential risk. Merry-go-round chamas, although risky, don’t offer any return. If one or more members fail to contribute their agreed-upon amount or withdraw from the chama without fulfilling their obligations, it can disrupt the rotation and impact the payouts for other members.
Investment and table banking chamas might promise higher returns but still ensure they justify the risk. Additionally, research and check if they are fully registered as investment groups before joining. Finally, assess your risk profile, financial goals, and the reliability/trustworthiness of the individuals involved to make a more informed decision.
Circumstances can change unexpectedly, and having the ability to adapt your saving strategy accordingly can help you navigate through various life events and financial challenges. As such, it is important to consider the flexibility of the savings product you choose.
Look for saving options that offer flexibility regarding how much and when you can contribute and withdraw funds. Some products may have limitations on the frequency or amount of contributions or withdrawals, so it's essential to understand these terms beforehand.
Chamas typically require that you make specific contributions every day, week, month, or agreed interval. Despite their lack of flexibility in terms of contribution timing, certain advantages to their structure can make them beneficial if you typically struggle to save.
This inflexibility can ensure regular savings but can significantly strain your finances if an emergency prevents you from making the required contribution. Likewise, you can’t increase your contribution at will when your financial situation changes for the better. You might have to wait until the rotation is complete to increase your savings or join a different new chama.
If your current financial circumstances change, the Absa Digital Savings Account offers greater flexibility to adapt your savings strategy. You can increase and decrease your saving quotas depending on your situation without straining your finances.
Additionally, you will also not have a specific savings and withdrawal interval, allowing you to respond to unexpected expenses or income fluctuations more easily.
While chamas inflexibility supports goal-oriented saving, the Absa Digital Savings Account flexibility can enable you to take advantage of investment opportunities that may arise at any time. However, it is advisable to keep the withdrawals at a minimum in order to enjoy greater returns on your investment.
Both chamas and the Absa Digital Savings Account offer distinct account features that can help you achieve your goals. When deciding between them, comparing these features can assist you in choosing the option that best serves your purpose.
Features of the Absa Digital Savings Account:
Features of Chamas:
Both chamas and the Absa Digital Savings Account provide various advantages based on your savings objectives, and they can be utilised together for diversification and risk reduction. Additionally, they enable you to separate and track different savings goals effectively.
When you join a chama or open the Absa Digital Savings Account(You can open the Absa Digital Savings Account here), you can optimise your savings strategy and increase the likelihood of achieving your financial goal. You gain a clearer picture of progress when you allocate specific funds to a suitable saving vehicle. You can track accomplishments more effectively while minimising risks that might be associated with putting all your eggs in one basket.