How did it start?
The Mission District in San Francisco is a gateway immigrant community; 44% of residents do not have credit histories. Mission Asset Fund set out to change this by piloting the first Lending Circles program—Cestas Populares—in San Francisco’s Mission District in 2008. On average, our participants see an increase of 49 points in their credit score after participating for just six months. Then our dream got bigger: we wanted to see if we could bring this to other communities. We got excited just thinking about the potential benefits that this model could have on other communities. We got funding to expand and evaluate our idea but we continue to run the Cestas program in the Mission District. We are proud to say we are supporting other organizations to bring Lending Circles to other communities who need it.
What are informal lending circles?
A lending circle is when people get together to form a group loan. Everyone in the group contributes money to the loan, and everyone gets a chance at taking the loan out. People across the world organize loans between friends or family without a financial institution all the time. This practice is known by many different names across the world: Susus throughout Africa, Paluwagan in the Philippines, Lun-hui in China, and Tandas in Mexico. Participants may not have access to a bank, or may not be a good candidate for a traditional loan, or they may just prefer getting loans from people they know and trust.
How do informal lending circles work?
A small group of people come together, agree on how much they will put into the general fund each month, and they hold each other to it. Let’s say a group of five people agreed to contribute $10 per month for five months, at the end of each month, one person from the group gets $50. You keep going until everyone has had a chance at the $50. This is a popular way for people who don’t have bank accounts, who want to save money, or who can't get approved for mainstream loans to get access to capital. By relying on our neighbors, everyone benefits. These groups have an organizer who makes sure everyone makes their contributions on time, collects the contributions by keeping them somewhere at home or placing them in a private bank account. The organizer also distributes payments to the members and keeps track of whose turn it is to receive a distribution.
Many of our clients come to us with a bad taste in their mouth from a prior experience with an informal lending circle. We have heard heartbreaking stories about how one person in the group walked away with the loan and never repaid it, actually causing everyone else to lose money. Besides this risk, the other downside to an informal lending circle is that it doesn’t do anything to build your credit. While you may be able to get loans from your neighbors, you still can’t get one from a bank. Without credit, it’s hard to find apartments, build a business or even get a loan for school.
How is MAF's Lending Circles Program different?
We stay true to the roots of informal lending traditions found across the globe. This tried-and-true way of providing loans feels very comfortable and familiar. We speak the same language, we’re not in it for the gain, and we’re part of the community. Lending Circles helps low-income individuals get loans, build credit histories and learn to use loans wisely.
Here’s an example of how it works: Maria, Juan, Sylvie and Josh have a lending circle together and each puts in $100 per month. Each month, they take turns getting $400 until everyone has had a turn. Maria needs $400 to buy equipment for her business. Juan has supplies for school. Sylvie has credit card debt she is paying down. And Josh is expecting a tax bill. With financial classes, they can better manage their money and meet financial goals. Every time they make a payment on time, it’s reported to the credit bureau. The result? Everyone gets and pays back a loan of $400 over the four months. And all the participants see an average credit score increase of 49 points in just six months.