Living Economies is interested in encouraging resilience in communities, and in educating communities about ways in which they might explore new or alternative ways of doing things.
One of the paths to be explored is how we might work together to acquire things we need (or want!) without having to borrow and pay interest.
Say, for example, you want to buy a second-hand car for $1,000. If you have the cash, you buy it. But if you don’t?
You could see a bank or a finance company – they’d lend you the money and you’d buy the car, and then you’d pay them back with interest. A friend might offer to pay half, on the basis that you would share ownership of the vehicle. Or, you might find a family member or friend willing to lend you the money interest-free.
How might a group of family members, friends or colleagues pool their resources to take this a step further?
A Savings Pool – an arrangement modelled by societies around the world for centuries – is one such way.
HOW MIGHT A SAVINGS POOL OPERATE?
A small group of people decide to form a Savings Pool.
A Pool member or a person known to the members agrees to keep the records for the Pool – without payment. The members adopt some Rules, and enter into Member Agreements.
A bank account is opened in the names of two or three Pool members. The account holders hold the money in the account on trust for the Pool members.
Individual members do not receive interest on their payments to the Pool – if the Pool’s account is interest-bearing, the members agree to use any interest to defray any operating costs (such as account fees, postage and legal fees, if any).
Each member pays money into the Pool account from time to time. Each amount members pay in is recorded against their own names in the Pool’s records – so members can see at any time how much of the fund in the Pool is their own.
Once sufficient funds have accumulated in the Pool account, a member might request a loan from the Pool. If approved, a Loan Agreement is entered into, the loan – which is interest-free – recorded in the Pool’s records and the money paid out – to the member, or as the member requests (for example, the member might ask the Pool to pay the seller of the item directly). If the Pool wishes to have greater comfort that the member will repay the loan, the Pool might ask the member to grant a security interest (in favour of members authorised to act on behalf of the lending members) in one or more assets belonging to the member. If the member does not repay the loan, those assets can be used to set off the member’s liability to repay.
Often, the Pool might choose to purchase the item directly – and it will then (itself or through Pool members nominated to act on behalf of the lending members) own that item until the member has fully repaid the loan from the Pool. This way, the Pool members have some security in case the member fails to repay the amount borrowed. Once the loan is repaid, the Pool transfers ownership of the item to the member.
Depending on the Pool’s Rules, a request for a loan might require the approval of all Pool members, or only a majority of members. Some Pool Rules provide that if a member does not agree with a loan request, but the majority do, that member can “ringfence” the amount they have paid in – it will not be taken into account when deciding how much is available to be lent. That way, members have complete control over how their funds are used.
Members who have borrowed from the Pool are legally required to repay their loan. Also, a Pool’s Rules will often require the member to continue to make regular deposits over and above their loan repayments (depending on previous deposits into the Pool and the length of time involved).
The basic operating principle of Pools is that a member who uses Pool funds in the form of a loan is obligated to make available to the Pool the same amount of money for an equal time period. Once this reciprocity requirement has been satisfied, the member is free to withdraw that money or continue to leave any part of it in the Pool. This ensures fairness and guarantees the continued availability of funds without the need for interest or fees.
Members can generally withdraw funds they have paid in at any time, provided the funds are available: a member cannot withdraw funds immediately after agreeing to lend those funds to another member, for example.
Can I apply for a loan as soon as I join a Pool?
Yes – you do not need to have made any payments before you apply for a loan. You will need to have some credibility with the other members, though. You might offer some form of security to the Pool while trust is being established.
How much can I apply for?
The amount you can borrow will be determined by several factors, including the total funds available from members who approve the loan, how much you can afford to pay each month, the level of security you can offer the Pool and the members’ confidence in your ability to meet your loan obligations.
What if several people want loans at the same time?
One or more members will have to wait – but not necessarily for long. With borrowing members making regular payments to the Pool, the amount of available funds will soon increase.
What if I don’t have much money to spare?
Making a start is the important thing. Even a small amount paid in regularly – say, $5.00 per week – accumulates with time, and helps start a savings habit that can last a lifetime.
Isn’t it risky to lend money to friends and family?
It can be! But Savings Pools take steps to reduce risk, such as selecting trusted members to be account signatories, providing that funds in the Pool account are held on trust for members in accordance with their payments, and taking security in purchased items until the borrowing member has repaid the loan.
Can I lose my money?
Yes, but the risk of this happening is low. You could lose some or all of your money if a member does not pay back in full the amount borrowed (if the Pool has taken security, this will help reduce its loss, but there could still be a shortfall) or if an account signatory misappropriates funds held in the Pool’s bank account (usually, the Pool will require that payments from the account will need two signatories, or have other security measures in place with its bank, to reduce this risk). As members’ funds are usually deposited with registered banks, there is also a risk that some or all of the funds could be lost if the bank collapses. Pools look to minimise this risk by not keeping all their funds in the account of a single bank.