Credit is king in the United States of America, but what happens when immigrants first arrive on these shores? With no credit history, and plenty of bills to pay, there is a secret lending economy that many immigrants join when they first arrive in the United States.
And it is not only immigrants who take advantage of this informal lending system. In a 2015 report, the Economist noted that 8% of American households have a yearly income of 15,000 dollars or less. This population sector does not have bank accounts and stay away from a number of reasons, including overdraft fees and other charges .
Unable to access a system most people enjoy, low income Americans rely on pawnshops and loan sharks. In his book Broke USA, journalist Gary Rivlin exposed this shady subculture of “the bankers of the underclass” who have made “the poor a great business”. The stories are sad, depicting a vicious cycle in which the poor end up poorer, and in a hopeless state. Yet, in this “underworld” of banking, there are other pathways. The informal credit rotating system is one of them.
What are Credit Rotating Systems (CRS)?
Credit Rotating systems are a way of informal banking created by “the people”. A group of individuals periodically contribute a fixed amount of money into a fund, which is then given in whole to each person in a rotating manner. Lending circles are a way of accumulating capital, avoiding the fuss of applications, credit approval or banking fees. It is a credit path for people either lacking credit history or unqualified to get one. Credit Rotating systems (CRS) usually last weeks or months.
CRS are not just used by immigrants and the poor; it could be used by everyone. However, CRS are seen more frequently withing immigrant populations. In fact, CRS were first brought to the United States by immigrants. Although its date of inception is unknown, it had quite a long practice among Asian, Latin American, African and Caribbean diasporas. Lending circles are called Tanda by Mexicans, Junta by Peruvians, Kyes by Koreans, Bui by the Chinese, chit fund by the Indians and Susu or tontines by African and Caribbeans.
How Credit Rotation Systems Work
Credit Rotation Systems are not built casually or in a rush. They have a definite structure that enhances their efficiency and security. Here are some important components:
Lottery-Image Source: Anthropology of money
This is the person responsible for the success of the lending circle. He or she is the one who encourages the plan and recruit the potential members. Being in a position that entails great responsibility, the leader must be a great communicator and have easy access to every member. The leader also has the duty of relaying messages among all members, and arrange a meeting if something unexpected occurred.
The leader has the power to decide how many participants a circle can have. (Although this is relative, as we will see below) Once all participants agree to join, the leader performs a lottery to determine the order of payment. In some cases, the leader has the prerogative to get the money first.
Lending circles can have 10, 15 or 20 members; it all depends on the leader.
The fact that you want to join a lending circle is not enough. Selectivity plays a role in everything: lending circles are not the exception. Although there is no main prerequisite, you must have certain qualities to be approved. A study by Donald Kurtz and Thomas Cope revealed some of the factors. For some reason, to be well educated quickly disqualifies you; some educated people also look down on CRS. Having two jobs is also something recruiters search for. Having a stable residence, a stable marriage, jobs with fixed schedule and income, and reliable friends are assets. Others show a strong sense of responsibility and commitment.
One great thing about lending circles is that all members can recruit. In fact, the more friends you bring the better, since the pool gets bigger. But you must first seek the leader’s approval. The leader will tell you the conditions and the risks for doing so, specially in the case of a default.
How the Money is Collected
Image Source: Youtube
Although a payment period is set beforehand, the leader often reminds all members to avoid future surprises. On the set date, the leader coordinates with every member to pick up the money. Once the fund is gathered, the leader gives the whole amount to the person assigned. And this process repeats every month, or any time period the circle has agreed upon.
What Happens in the Case of a Default?
Since the leader chose the person who defaulted, he or she must cover the pending amount. And the leader must keep paying until the rotation ends. There is no excuse to avoid this; unless he or she finds a new member (not as easy).
As noted above, every member can also become a recruiter. So, if member X brought someone who defaulted, X has the duty to cover his and the other pending amount. The leader has no responsibility in that issue. Probably the worst default can occur in a CRS of 20 people. Those cases have happened, and some have never got their money back. Once again, the selective recruitment is very important. Picking someone unreliable could ruin your pocket, your reputation, and make you lose someone you regarded as a “friend”.
To be on the safe side, every member should have a backup person. The smart leader, watching for the success of the circle, usually has two or three backup members in case of a default.
Mexico: Tanda or Cundina
India: Chit Fund
Korea: Kyes or keh
Dominican Republic: San
Sri Lanka: Chit fund
Thailand: Pia huey
Source: Indigenous African Institutions
Credit Rotating Systems in the US
If we expats trace lending circles, we must go back to our home countries. This is where they began, specifically in rural areas or cities under the process of urbanization. CRS are a “collectivist” tool in which individuals, due to lack of infrastructure, got financial support from their community. Based on the idea of equality, every participant received the same amount of money.
CRS then lie in the antipodes of the “individualist” urban setting, where citizens rely on institutions (banks). Lending circles and formal banking credit can be seen under the dichotomy “rural” vs urban” or “collectivist” vs “individualist”. Under that frame, CRS are an archaic form, in which communities are the priority, as opposed to banking credit, which benefits the isolated individual.
In an ideal case, immigrants would quit CRS upon arriving in the United States. Unfortunately, the good American infrastructure is “nonexistent”for some immigrants. They are unable to reach it, due to certain factors.
In the past, CRS prevailed in the US for a number of reasons. One of them was discrimination and segregation. Such exclusionary structure was particularly strong in the 19th and 20th century. The climate of distrust made immigrants rely on their own ethnic group and survive through their own cultural practices.
Chinese immigrants offer an example. As journalist Irish Chang wrote, “the knowledge that they could not get access to white venture capital had long ago instilled in them certain protective habits, such as frugality, reliance on family connections, and avoidance of frivolous debt. Isolated from white mainstream America, deeply distrustful of white banks, most Chinese businesses established their own credit system.” For most immigrants, all American benefits were unreachable due to racism. This is how, by the means of credit rotation systems, they found a path to the American dream.
CRS still exist in America; but not because of discrimination. Lack of knowledge of newly arrived immigrants is a factor. Feeble financial stability is another. Other people struggle with the process of cultural adjustment. Some immigrants take their time to learn how to build their credit. Others lack the patience or money to earn good credit. Under such circumstances, lending circles are the answer.
The Social and Psychological Benefits of Lending Circles
Image Source: Big Think
For some people, lending circles are more about social influence. Some enter the circle just to gain the acquaintance of neighbors. Friendship is power, and for those living on the fringes of society, lending circles is a way to get it. In poor neighborhoods where authorities can be either hostile or disengaged, lending circles are a matter of life and death. A 10$ per member CRS could get you the protection of a church or group.
Lending circles can also give you a good status. In Latino neighborhoods, it creates the system of “compradazgo.” Neighbors may ask you to be the godfather/mother of their child. You are admired in a way that neighbors already see you as a family member. The benefits of compradazgo remain for life.
There are also social and psychological benefits. Some people see it as a great saving device. It teaches you that “saving discipline”, so crucial for success in America. Some people need it. Without the discipline and peer pressure of the group, many would have been unable to save.
Scholars say that CRS are more influential than we thought. Chinese and Japanese immigrants thrived due to the discipline imposed by lending circles, which also empowered their entrepreneurial spirit. Despite language and educational gaps, those immigrants were able to join the capitalist class.
Others argue that CRS are pointless. The timing for them is irrelevant: to receive a fund earlier is the same as saving money for yourself. But critics overlook the psychological benefits of it. Participants say that “credit circles gives them the belief that they will be better off”, and just by this belief, they will likely achieve their goals.
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XpatNation is a Social News and Lifestyle magazine, focusing on the insights and experiences of ex-patriots living in The United States.
XpatNation brings together the voices, thoughts, perceptions and experiences of the people of the world who have made the USA their home. Using their insight and unique understanding of the global world we live in to discuss culture, lifestyle, Geopolitics and the day to day ongoings of this proud and powerful nation.