opinionBy Cathy Mputhia
Chamas (investment clubs) have become a common savings vehicle in Kenya whereby a group of friends contribute a set amount of money periodically into the fund.
Some chamas operate as investment vehicles whereby after a long period of time the savings are re-invested for the members' benefits.
However most of them do not invest and the few that do make investments without the necessary financial knowledge and this leads to losses.
Rarely do investments made by chamas lead to an optimum return for the members as most of the options are made on a speculative basis.
Other chamas operate in a cyclical manner whereby each member receives the entire funds of the group after a set period of time.
There is usually no legal entity formed and neither is there any documentation regarding the group's activities.
Many have contributed into the fund faithfully only to loose their entire savings at the last minute due to fraud and dishonesty by other members.
Other members do not faithfully honour their obligations to contribute, yet expect a piece of the cake when the group posts any returns.
Most chamas operate on good faith and in the event of a dispute recovery becomes difficult. These clubs face a number of unique challenges.
Other than the internal legal weaknesses, a lack of a legal mechanism to regulate chamas is a great challenge.
Another problem is the lack of technical expertise by the members.
The most common way that chamas operate in Kenya is as SACCOS.
Though only a few are registered under the Act, their mode of operation qualifies them as SACCOS.
Contributions are made by members periodically and loans are also offered to members.
However chamas which are formed with the object of investment of pooled funds may overcome the unique challenges faced by chamas by pursuing registration as a Collective Investment Scheme under the Capital Markets Act.
The benefits to be derived by registration as a Collective Investment Scheme are numerous.
Firstly the chama will be regulated by the Collective Investment Scheme Regulations of 2001 and will be governed by the CMA.
The regulations are made with a view to protect investors from any fraudulent activities by fund managers amongst other protective provisions.
Collective Investment Schemes by their very nature operate as trusts.
With a chama the absence of a trust deed means that the managers who are charged with running the it are not regulated by any laws and do not owe the members a fiduciary duty.
With a Collective Investment Scheme, if the fund manager is negligent or over steps his mandate then other than the penalties under the Regulations, the members can still recover against him for breach of fiduciary duties.
Registration under the CMA would be very advisable if the chama's capital base is very large.
Some chamas hold a lot of money in cash and there is therefore need for the members' interests to be well protected.
A second benefit to be derived from a CMA registration is the fact that running of the chama will done by an expert.
The Regulations provide that the Fund Manager must be one that is licensed by the CMA.
Licensed Fund Managers have expert financial advisors in their employment and therefore the likelihood of suffering any financial losses due to lack of knowledge is minimised.
The downside of a CMA registration is the fact that there is a loss of control of the Scheme.
The investment activities are run by the Fund Manager and the individual members rarely participate in the day to day affairs of the Scheme.
The Scheme is also governed by the trust deed.
Lack of control may be unattractive for some people but if the main purpose of forming the chama was to invest then this disadvantage is overrun by the attractive features of a CMA registration.
Other minor disadvantages include loss of privacy for the members and it is also more expensive to maintain a Scheme registered under the CMA as the Scheme has to pay the Fund Manager's fees, the Custodian's fees and also the Trustee's fees.
Registration under the CMA is only advisable for chamas with a very large capital base amounting to millions of shillings.
For smaller chamas registration under the CMA would add more problems than solutions.
A few issues that the promoters need to consider before getting the CMA license is, the valuation of a share in the scheme and the investment policies and goals.
A number of private equity funds registered under these CMA regulations are run for the benefit of a few members.
These equity funds have posted very high returns and are even considering making offshore investments.
It is said that chamas hold billions of shillings in assets.
It might be time to cede control and management of your chama to a fund manager so as to enjoy maximum returns.
Mputhia is an advocate of the High Court of Kenya.