This is exactly what Our Grandparents Did To handle Risk And Save Money
Back in those days where insurance or investments were inaccessible to ordinary folks and collaterals were difficult to secure, tontine schemes – or “hweis” and “duit kutu” as your grandparents might have called them – was one of the few choices for these to manage savings or access cash.
Tracing its roots to the 17th century, tontine combines the component of lottery and group annuity where each subscriber pays a sum into a pool and receives dividends by means of interest each month. These schemes were typically organised by friends, neighbours or relatives. Recommendation from existing members were usually required before a new member could enroll in a scheme.
The accessibility made tontine scheme the most well-liked choice for many ordinary folks to safekeep their monies. While cases of absconded monies through the bankers were not unheard of, it did not deter them from getting involved in such schemes.
How Tontine Schemes Work
A tontine scheme usually includes several members. One member will behave as a banker to conduct the monthly meetings and recording every transaction that occurred, and the remaining members are subscribers.
Every member will need to make a monthly contribution to a pool, using the banker taking a small fee, usually 50% of merely one member's monthly contribution, as management expenses.
Subscribers who would like to obtain the schemes for just about any purpose inside a particular month will then make a bid for that pooled money. The member with the highest bid will get the pooled contribution of the month, minus the amount paid to the banker and the interest, the amount of his bid multiplied through the number of other subscribers in the scheme. However, he will be barred from taking part in the following few rounds from the bid process, while continuing to bring about the pool.
We have a tontine scheme with 10 members as an example.
The scheme consists of one banker and 9 subscribers, with an agreed monthly contribution of $100 from each member. In cases like this, the banker will deduct $50 from the scheme, which is 1 / 2 of the $100 monthly contribution from a single subscriber.
In the first month of operation, any of the 10 members can create a bid for that scheme. If Member A, a non-banker, tries to bid for the schemes with $10 and wins the bid, the other members will need to pay Member A $90 ($100, less $10 of his bid amount), totalling $810. After subtracting $50 for the banker, A gets $760. However, he will be barred from taking part in the next six months.
In the 2nd month of operation, Member B, another non-banker, constitutes a successful bid of $9. He will receive $91 each in the eight members who didn't bid successfully previously, and $100 from Member A who made a successful bid previously. In total, he will get $778 after subtracting $50 for that fee towards the banker.
In the third month, Member C, the banker, constitutes a successful bid of $8. He'll receive $92 from seven members who did not bid successfully previously, and $100 from Members A and B. Because he may be the banker, he will receive $844 instead of $794.
Unlike typical investments, resolve for tontines was generally irrevocable, and members could be required to inform the banker ahead of time their intention to withdraw from the scheme. These members would continue paying their share of contribution until the final day.
In addition, the rest of the balance of the individual that leaves the scheme weren't used in the member's beneficiaries. Instead, they're fairly apportioned among the remaining members, allowing the risk of an individual member to be pooled together and shared collectively.
Problems With Tontine Schemes
The toughness for the tontine schemes depended very much on the integrity from the folks. If the banker was dishonest, he would collect the premiums in the members and absconded by using it.
If a subscriber was dishonest, he might have simply bid for his amount and wander off thereafter without having to pay his dues. It would also be possible for some members to game and manipulate the bidding process, making such schemes vulnerable to abuses.
In fact, crimes from disagreements in tontine schemes were common during those times. One particular case was the killing of the tontine banker that took place 1974, where the subscriber, who been the sister-in-law of the banker, fought over unpaid contributions that amounted to $2,000. The altercation resulted in strangulation of the banker, which caused her death. The perpetrator was sentenced to 10 years in jail after convicted of manslaughter.
Despite the negative press, tontine schemes stayed largely unregulated and well-received through the public. It had been in the 1970s the authorities began cracking recorded on these schemes using the introduction of the Chit Schemes Act.
The Beginning Of An End To Tontine
Despite governmental regulation, tontine schemes continued to thrive in the 80s. Articles from the Straits Times in October 1989 reported that such schemes drew young professionals, as it offered higher interest and readily available amount of cash.
To help curb the development of these schemes, NTUC Income introduced the Saver Policy later. The launch of the policy was targeted at encouraging the general public to put their monies in safer options, rather than illegal tontine schemes.
For a regular monthly premium of $30 a month, the policyholder would be able to receive a lump sum of $2000 on the fifth year. Additionally, the policyholders were also eligible for insurance policy of $10,000 for the entire of policy's duration. The insurance policy directed at working female adults underneath the chronilogical age of 35, although men were also permitted to sign up.
By the 90s and early 2000s, tontine schemes were much relegated into history, through strict enforcement and regulation through the government, increased accessibility of investment products within the store bought, as well as the gradual demise from the aging members during these schemes.