A ‘chama’ that forces loans on members is no good!

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

04 February 2018

Shadrack Mwangi and his colleagues have formed an interesting investment club (chama). They contribute Sh1,000 per month per person and the money is loaned to members at 10% per month. This is not unusual, but, in Shadrack’s group, if all the money is not loaned out, the balance is forced on those who have not borrowed!

Shadrack says that “the returns are good but only if you've not been forced to take a loan”. Now I cannot understand why members of a group would be forced to borrow money from the kitty even when they don’t need it. Especially when the interest rate is an exorbitant 10% per month.

Even though this appears like a good way to build up the kitty, it does not help members grow financially. Such a system defeats the entire logic behind investment groups! It is similar to what my ancestors used to call “crushing water in motor and pestle”!

Now Shadrack’s group has been making the Sh1,000 contributions for ten months. Now a new rule was introduced where members are supposed to make a one-off payment of Sh4,000. Those who can't raise the amount at once are supposed to treat this as a loan and pay sh.400 monthly for ten months. Shadrack wants to know which of the two methods of paying the Sh4,000 is better.

The answer is simple: when you pay Sh400 monthly for ten months, your total payment will be Sh4,000. So you have not paid anything extra! But if, after ten months you will be asked to pay up the “principal” as well, your total will be Sh8,000.

On the other hand, if you pay in the sh4,000 now and then make sure that you never borrow more than Sh4,000 in any month, then you total pay out will be lower than Sh8,000.

All in all; there is a fundamental error in the way this investment group is set up. Forcing members to take out loans is counterproductive. Furthermore, the way in which Shadrack is describing things gives me the feeling that he is not party to the decisions made. If that is so, I would advise him to get out of this group quickly!

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Several readers have asked me to solve this riddle: “A woman walks into a shop and steals Sh100 from the cash box. A few minutes later, she goes back and uses a Sh100 note to buy an item worth Sh70. She gets Sh30 back and walks away. Question: how much did the shopkeeper lose?”

Do you remember the law of conservation of energy from school? “Energy can neither be created nor destroyed; it can only be transformed from one form to another” It is applicable in this riddle. Instead of working out how much was lost, it is easier to calculate how much the woman stole. Whatever answer you get will be exactly equal to what the shopkeeper lost. Try it out for yourself.