Why investment clubs are failing

The young graduates approved their constitution, put signatures to their bank account and started saving Shs50,000 per head every month. This figure grew to Shs100,000 along the way.
But this only lasted a year. Once the cash started piling, the club began giving small loans at an interest rate of 20 per cent per month.

“They would write us a post-dated cheque as our security. It had the principal and interest amount. It was good money and they did earn a reasonable profit towards the end of the year. The profit we had made was almost 50 per cent of our total savings,” he says.
A few months later, Mr Mubiru sold the idea to his three friends. With Shs100,000 each, they began saving in a new club.

Then, the investment clubs got a business deal from a friend Mr Mubiru had known for more than 15 years. Allan Mutebi (not real names) suggested the two clubs invest in a consumable commodity Mr Mubiru does not disclose. They were to wait for prices to rise in order to make a killing. On a purely trust basis, his coworkers’ club contributed Shs5m and the other Shs4m, savings accumulated over months.

“We were to contribute to his capital and receive two times the amount of money we had given him after three months,” he narrates. Three months later, Mr Mutebi did not pick their phone calls because the deal went bad. The clubs could not seek redress because not even one agreement was signed at the point of giving Mr Mutebi the money.

“We accepted the loss and it drained every one of the motivation to continue saving,” he says.
From his observation, Mr Mubiru cited a lack of vision on the two investment clubs’ part.
“We did not have a specific goal, for example, we had no plan, we were just saving until the time an opportunity would crop up,” he says. This, he says, made it easy to interest themselves in the quick money deal.

Two members left the bank making it difficult for the club to coordinate. Income levels also changed. With time, savings dropped forcing the club to wind up.
On the other hand, the investment club with his three friends was harder to operate because of different work places. The Shs4m loss gave it a blow too. One by one, the four friends lost enthusiasm and the club died.

The lesson the tax advisor took home was never to trust people easily, use brains instead of emotions. He now wants to invest in agriculture and real estate, and awaits to join an established club.
Investment clubs centre around people willing to pool resources for engagement in economic activities that would otherwise be harder on an individual level.

Institutions such as Centenary Bank, dfcu Bank, Bank of Africa have between 300 and 1500 clubs they support to invest. Unfortunately, some clubs shun banks because their money could go to waste through bank charges.
Chief manager business growth at Centenary Bank, Mr Michael Jjingo dismisses the claim, saying some banks have charge free accounts so the benefits for banks are better than targeting charges on clubs.

“We get the members to bank, as individuals, there are charges on their accounts. Whereas we may not benefit from the club, there is a downstream business that we target,” he says.
Mr Jjingo who interfaces with clubs that cut across all demographics says investment clubs should be able to grow. But quite a number are silently collapsing due to mistrust and inability to track their investments, inability to mobilise members for investment decisions and absence of return on investment.

Mr Henry Ssegawa, a financial advisor who helps investment clubs to come to life, says they are a good savings plan but admits they are failing because of lack of common interests, and lack of knowledge on good investments.

“We have bylaws so that they can help us control and give us boundaries within to invest. Where there is no limitation, people will come up with any kind of investment. Many of them breakup because they have no confines for investment and do not agree from the start,” he says.

In addition, not all investment clubs are seeking financial advice. Mr Ssegawa says club members want to do it all although they are ignorant of what is happening in the financial world. Instead of getting excited about every “hot business” in town, Mr Ssegawa recommends understanding the purpose of the club and knowing where more money can be earned in a given payback period.

He encourages investment in treasury bills because unlike bonds, their returns are short-term. They are also risk-free. Real estate is increasingly becoming popular and is profitable depending on the prices in the market.

“People buy land at Shs30m, subdivide it and sell it off,” Mr Ssegawa says. The challenge is that at times investors cannot get their money as and when they need it. Shares are not a bad deal especially if they are initial public offerings.

“We have those that invest in securities but those are mainly for high end corporates. If you have a salary of Shs800,000-Shs1m, you cannot save much to invest in initial public offerings. The best you can do is first invest in land of Shs7m and when the price of land appreciates, you are able to make a profit,” he advises.

For clubs that can hardly raise huge sums of money, small businesses such as small scale agriculture offer a good starting point.

Risk assessment
While investment clubs are attractive, they are associated with risk.
Experts see the need for clubs to know the kind of risk they are taking on and look into trends over the years. Also, unless you are already an expert in a given sector, seeking financial advice should be the way to go if you are to make risk-free investments.

Major reasons
Mr Henry Ssegawa, a financial advisor who helps investment clubs to come to life, says they are a good savings plan but admits they are failing because of lack of common interests, and lack of knowledge on good investments.
Institutions such as Centenary Bank, dfcu Bank, Bank of Africa have between 300 and 1500 clubs they support to invest. Unfortunately, some clubs shun banks because their money could go to waste through bank charges.

It is crucial for every investment club to have a clearly defined investment style, ideally with some amount of measurable rules or limitations on the club’s investment portfolio. An investment club might stipulate that members can suggest only stocks for purchase that have a minimum share price or market capitalisation. The club might place sector restrictions on the portfolio to ensure that some level of modification always exists.