Lending circles can break barriers to banking

Mission Asset Fund (MAF) staff and client meeting.

By Stephanie Presch, Content Specialist, UnidosUS

Alicia Villanueva came to the United States in search of a better life for herself and for her children. When she arrived in the United States, she wanted to start her own business selling tamales, but lacked the funds necessary to get it set up.

Villanueva had participated in lending circles back in Mexico, so when she saw a flyer for one being offered at UnidosUS Affiliate Mission Asset Fund (MAF) in San Francisco, she decided to sign up. The money from the tanda helped her pay bills, her car registration, and invest in starting a business that could support herself and her three children.

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The concept of a lending circle did not originate with MAF. In Mexico, they are known as tandas or cundinas. In Brazil, they’re known as pandeiros. In West Africa and the Caribbean, they’re called susus. And in Asia, they’re known as hui. In all cases, the concept remains the same—a group of people coming together to lend money to each other.

Lending circles at MAF typically use payments that range from  $50 to $200 a month, and are formed between 6 to 12 people. Each month, the money that people in the lending circle contribute is given to one member of the group. The cycle repeats itself every month until each person in the group has received the money.

MAF clients, Kimberly and her mom.

A Tool to Build Credit

Whether it’s starting a business, buying a house or getting a car, having good credit is critical to financial mobility in the United States. Still, Latinos are almost twice as likely as Whites to be credit invisible, meaning banks can’t score or even see their credit. 30% of Latinos are credit invisible or have thin credit files.

Lending circles are an important tool that can be used to help members of our community build credit. In a recent UnidosUS report, The Future of Banking: Overcoming Barriers to Financial Inclusion for Communities of Color, we found that language barriers and a lack of culturally relevant services can act as barriers to traditional banking for members of our community. Lending circles have roots in our community’s traditions. In Alice Villanueva’s case, she had participated in lending circles when she lived in Mexico, and other members of the group were also from Latin America.

Because the lending circle at MAF reports to all major credit bureaus, this provides the opportunity to build a credit record in the United States. On average, those who participated in their lending circles were able to increase their credit score by 168 points.

Without resources like MAF’s lending circles, many Latinos resort to payday lenders that charge as much is 300% to 400% interest. MAF’s lending circles lend money at little or no cost, so participants can keep more money in their pockets.

ID Requirement Barriers and Opportunities

Most banks also have strict identification requirements that can be difficult for people with low- to moderate-incomes to meet, especially immigrants. As our report indicates, even when many banks say that they accept matricula consular IDs or municipal IDs, branches may refuse to accept them because they don’t see them as valid. As a result, it’s difficult for an immigrant to visit a bank and be certain that the branch will allow them to open an account.

By contrast, lending circles accept a wider range of IDs, including city IDs and consulate IDs—opening doors for people to participate in the economy and invest in their own futures.

Banking in Person

In our report, we found that Spanish-speaking people preferred to visit a bank in person. For example, in 2017, 41.7% of Spanish-only speakers visited a bank teller as their primary method of access, versus 23.8% of non-Spanish-only speakers. In fact, the existence of a physical branch in the community had a sizable impact on whether someone had a bank at all.

One of the benefits of a lending circle is that they happen in person and the group has a chance to get to know each other in the process. While there is always the chance that someone could take the money and disappear with it, these groups are also able to hold each other accountable through their social ties.

Checking Accounts and Savings Accounts

Spanish-only speakers are more likely to only have a checking or a savings account—not both. The number of Spanish-only speakers with a savings account has constantly hovered around 50% for the last several years.

As our report notes, ChexSystems and Early Warning Services have files on people with negative balances or who were suspected of fraud on their accounts. While the systems were originally used by banks to detect fraud in their customers’ accounts, they’ve had the effect of blocking more than a million people from accessing bank accounts because of standard issues like a bounced check or an overdraft fee.

These reporting systems aren’t the only barriers to banking. Banking fees are higher for Latinos than they are for Whites—on average, Latinos are charged $262 more by financial institutions than Whites to use bank services. Once banked, Latinos then experience unforgiving overdraft fees when deposits and withdrawals aren’t timed exactly right.

With so many barriers and risks to having a bank account, it is no wonder that many Latinos feel the need to choose between having a checking or a savings account and as a result, don’t end up saving as much as they could. Fortunately, lending circles address this concern. While lending circles can act as loan programs, their format also encourages participants to save through the deposits that they make with their group—all at little to no cost.

MAF’s client, Verónica, at her restaurant, El Huarache.

When We Create Financial Inclusion

There are 63 million unbanked or underbanked people in the United States, but it doesn’t have to stay that way. Moving forward, we can create a nationwide network of “financial navigators” that can guide members of the community through the process of becoming banked, increase language access and reward inclusive financial models. These strategies, along with more outlined in our Future of Banking report can help low- to moderate-income consumers.

In the years since Alicia Villanueva joined a lending circle with MAF, her dream has grown to become a catering business that boasts 14 employees that make more than 4,500 tamales a week. Not only is she thriving in a career she fought hard for, but she is actively employing members of her community—creating jobs and opportunities for others. Lending circles are among many innovative solutions we must consider if we are to create a just and inclusive economy that gives back to our communities and sees what Latinos can bring to the table.

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