The Thrift System of Savings and Investment

I got a call from one of my friends and she wanted to get my opinion on the Thrift Savings System, popularly known as the AJO (or Esusu) system of investment.

First, let me declare my biases ahead. I am a Yoruba boy and I grew up in Ijebu-Igbo town where the culture of the AJO system is well ingrained. Of course, only an irresponsible child will use the “left hand” to describe his father’s house. So, this post is to defend our local culture. So, despite my few certificates (not mere affidavits o), I still have my respect to the long enshrined way of community savings.

My friend mentioned that the system deprives the participant of interest income, especially if the participants not one of the first set of people to collect the contribution. While the comment on interest income is not entirely wrong, it is very misleading.

But, lets start from the basics. What is the “AJO” system about? It involves a group of people who know and trust each other, and take turns in pooling a certain quantum of savings to each participating member on a monthly basis, till the cycle is completed and all members have collected a similar amount of savings.

There are four key principles that drives the thrift system.

“Know” – refers to the level of demonstrated good standing by each participant of the group. The family (wife or wives, children, brothers, sisters, father, family oracle, etc.) are known. This is “due diligence” or “Know Your Customer” at the advanced level. This helps to ensure that the risk profile is minimal.

“Trust” – refers to the level of comfort and brotherhood that exists within the group. In those communities where this practice is very strong, the participants usually have a strong personal and family ego and self respect (which is probably lacking in most of our urban centres) that they hold in high esteem. They don’t want to spoil their “family name”, so they are disciplined and committed to the group’s goals. The success of this arrangement heavily depends on trust. Each member has no option but to keep faith that others will contribute their due at the agreed interval.

“Pooling” – Unlike the banks or mutual funds where you can break your investment at will (subject to termination clauses and conditions), it is very uncommon for people to withdraw from the ajo cycle. Secondly, the monthly contributions are usually set at an upper percentile of the average group member’s capability levels. This means that the participants might not be willing to drop such amounts in a bank account or mutual funds, especially when they have some personal needs, probably not so important needs. Hence, this also helps to mould financial responsibility and behaviour.

While I recognize the fact that, theoretically, an automated transfers to mutual funds or restricted account could help achieve the forced savings culture, we need to respect the benefits of working together as a “community”.

“Cycle” – In order to manage the concern that the last set of people in a cycle are being penalized, most ajo groups always ensure that any community savings must have two full cycles so that the participants in the tail end of the cycle are rotated to be at the starting point of the second cycle. This instills fairness into the “packing order” and addresses the concerns my friend raised as regards “time value of money” and “unfairness”.

Based on the model, which assumed that members know and trust themselves to pool funds together for one another in a minimum of two cycles, then it would appear more like each member is actually collecting term loans from the group on an “interest-free” arrangement.