How to use the magic of social saving groups and blockchain to encounter housing shortages in Berlin — Part II
The “Poor but Sexy” Chama
In this blog post series, I am going to apply the concept of social saving groups from Kenya, called Chamas, to the problem of the housing shortage in Berlin. Starting as a thought experiment here on Medium, I am going to play through the process of starting and maintaining a social saving group for property loans. With this I hope to discover the potentials of social saving groups and familiarize myself with the difficulties and challenges of this alternative financing method. Further, I will explore how blockchain technology can be applied to social saving groups, and what will be the benefits from this.
What are Chamas?
In a social saving group, friends, families and communities come together to form an economic network. This is more often the case in countries, where banks are inefficient, see no business sense in offering bank accounts to people with lower incomes and/or have a reputation for corruption. Many people in the middle and lower class do not have access to finance or prefer to use alternative financing over the distrusted banks. Sometimes, even when people can get bank accounts or loans, the process can take so long that they prefer to turn to the informal finance sector.
Social saving groups are known by different names in different region of the world: Chit Bishi Fund in India, Asusu in Nigeria, Stockvels in South Africa, Tontines in French West Africa (my favorite name for it so far!), Tenda in Latin America, Hui in China, and so on.
In many regions, those groups are the dominant vehicle for savings, credit and investment. In Kenya for example it is estimated that at least 6 out of every 10 Kenyan adults is part of a social savings group. There are around 1.2 million groups, formal and informal. And these groups are used across all economic classes. These saving groups are called “Chama” in Swahili.
A typical Chama is a small group of five to 30 people who trust each other, make a commitment to save money together, and meet weekly or monthly in pursuit of their goals. Other groups come together to collectively invest. Members can also take loans from these groups. For example, in Kenya investment Chamas are often used to save money for tuition fees for children to attend private schools.
How the Chama for property loans in Berlin could work — The general idea
After getting familiar with the idea of social saving groups, I will try to start my own Chama — not in Kenya, where there already so many, but in Berlin. The purpose of this Chama is to issue each other property loans. (Please read my blog post Part I, if you want to understand what got me to the point of wanting to start a Chama for property loans.)
The idea is rather simple, to begin with. We gather a couple of people that want to buy apartments and bring a certain amount of capital to the group. In the Chama, we will help each other finance, and maintain the apartments.
Let’s say for the simplicity of my calculation, we are four people. Each of eventually has to provide a 100 000 Euro of capital. (I will explain how we get to 100 000 Euro capital each in the next blog post). And we all agree to buy an apartment with a price of 400 000 Euro. (Depending on location, size, etc. this could get you a nice 3–4 room apartment)
With this 400 000 Euro, we buy the first apartment. Once the first apartment is bought, we take a mortgage on it. With this 400 000 Euro, the next Chama member can buy his/her apartment and so on until all four of us own an apartment.
From first inquiries I made show that if I take a mortgage of 400 000 Euro on a property worth 400 000 Euro in Berlin, I have monthly credit payments of around 1200 Euro including everything (see graphic).
(I can only find this calculator in German. What it says: If we take a loan of 400 000 Euro, with debit interest of 1,59 percent (fixed for 10 years) and a repayment rate of 2 percent, we would have to pay 1196,67 Euro each month for the next 36 years and 8 months.
If we raise the repayment rate to 3 percent, we would have to pay 1530,00 Euro each month for the next 26 years and 8 months.
If we raise the repayment rate to 4 percent, we would have to pay 1863,33 Euro each month for the next 21 years.)
The repayment rate is something we would have to decide on in our Chama. Further, those are offers by banks. We should also decide on whether we would like to get this mortgage from a bank (I would opt against it) or private creditors. We should also decide on whether we take the same terms for every mortgage we take.
Once the last apartment is bought, we will also take a mortgage on it. The 400 000 Euro from the last mortgage will be put as savings for future maintenance costs as well as for collateral for payment defaults.
In other words, each of the four members has a corresponding 100 000 Euro (which equals the original amount of capital he/she paid into the Chama). Whenever he/she needs to pay for maintenance cost in the apartment he/she can take this money from his/her corresponding 100 000 Euro. Further, in case that one of the members cannot pay the monthly repayment fee, he/she can take this amount from the corresponding 100 000 Euro.
When the last mortgage is paid off (in this case 36 years and 8 months — maybe longer, depends on when the last mortgage runs out), the remains of the 400 000 Euro will be paid out to each member.
The mortgages will be paid of collectively. Each member pays a monthly 1196,67 Euro credit payment to the Chama. And then the Chama during the meeting of the members pays the mortgages. I case one member cannot pay a monthly contribution the credit payment can still be paid by the Chama taking the money from the Chama savings.
There are a lot more features to these savings that I haven’t yet considered in detail. For example, members can give each other loans from their corresponding 100 000 Euro savings. And there are more open questions we need to think about. For example: What happens if somebody exceeds the 100 000 Euro in spending and nobody wants to lend him/her more…?
If everything goes well, we each need to pay 1196,67 Euro and in total 4786,68 Euro every month (if we decide for a repayment rate of 2 percent and a repayment time frame of 36 years and 8 months) in order to get our own apartment. Just for reference, a three-to-four room apartment costs around 1600–2000 Euro per month to rent in Berlin.
This model using 100 000 Euro as initial capital obviously does not work as a blueprint for many. However, it is only a model, with different variables that can be changed.
First, the size and hence price of the apartment. If you would go for a single-room apartment in Berlin the acquisition cost would be between 100 000 Euro and 150 000 Euro, depending on the area. If we stick to four chama members each has to bring up to 37 500 Euro.
Second, for simplicity, I kept the number of Chama members at 4. If we stick to the example of a 400 000 Euro apartment and we double the number of members to 8, each only needs to bring 50 000 Euro. With 16 members, each needs to bring 25 000 Euro. This already looks a lot more realistic to many than 100 000 Euro. It should be taken into consideration that the more members the complicated it gets to coordinate the Chama, and each members has to wait his turn a lot longer.
Third, I imagined each Chama member to be a representative of a buying party. In the case of a 3–4 room apartment I believe we would be dealing with young families. This means probably two people with income, eventually two sets of grandparents/parents that would love to help the young family get settled, etc. It depends on each case, but I would highly believe that the burden of raising the 25 000 Euro/ 50 000 Euro or 100 000 Euro will internally be divided among more than one person.
Another thought: Once the first buyer moves into his/her new apartment there is a time frame, where the Chama hasn’t take the mortgage on top of it. (The procedure to take a mortgage actually takes long) So the first buying member of the Chama doesn’t have to pay the credit payment yet, whereas the other members still live in there rented apartments and thus have to pay rent. In order to avoid disbalance between the members, we will charge the member a monthly contribution equaling to credit payment. This extra money can either be used as a backup for the Chama, or it can be distributed among the members to reduce their monthly rental costs.
How to raise the initial capital
In my next blog post I will dig deeper into how we can help each other raise the initial capital. And I will have a look at how we can use cooperative banks instead of commercial banks.
Disclaimer: I have been working for Ian Grigg and Chamapesa through my involvement with Proof of Work. This is how I started with the idea of the “Poor but Sexy Chama”.