My lender, my friend: Lending circles with a Latino twist

Their names are in Spanish, but easy to translate. La Millonaria. La Fortuna. And tonight, with arms raised in triumph and a collective whoop, Los Campeones are born.

Eight members strong, the Champions have come together in an upstairs office in this city’s predominantly Latino Mission District. Nearly all have spent the day laboring in low-paying jobs, and nearly all have dreams of brighter economic futures.

So here, over pupusas and sodas, they are meeting to take part in a pioneering program – apparently the first of its kind in the United States – that lets them pool their modest resources, disburse them among themselves at agreed intervals, and build individual credit in the process.

The program was established a little over a year ago by the nonprofit Mission Asset Fund (MAF). The groups usually consist of six to 12 individuals and are called “cestas,” the Spanish word for baskets. A longtime communal alternative to traditional banking, these arrangements had one major drawback: The activity never registered among the major credit agencies, meaning participants remained stuck in a world of either no credit or exorbitantly high-priced credit. MAF’s innovation is to link this peer-to-peer networking to the credit markets.

“It’s a breakthrough,” enthuses economist Barbara Robles of Arizona State University in Phoenix. And it’s a model that, according to Ms. Robles, “other nonprofits can replicate.”

On this night, as one cesta of eight individuals and another of six are formed, the democratic nature of the process is evident. “It’s all up to you,” MAF’s Daniela Salas, who runs the cesta program, repeatedly tells the group. “How much you want to contribute, the order of who is going to take it out, you guys have to decide,” she says.

The empathy quotient is high. Johanna Suarez, for instance, is stretched thin making interest-only payments on three credit cards each month. She asks the cesta members if she can receive the total group contribution of $400 for each of the first three months. With that $1,200, she says, she can pay off her three credit cards and then proceed with her $50 per month contribution to the cesta.

She knows she can manage the $50 per month because that is not much more than what she is already paying just to service the interest on her cards. But now, that same amount will be saved for more productive use, and she will be free of credit-card debt. The group agrees to put her first in line to receive the funds, and for three months.

In some immigrant communities, like San Francisco’s Mission District, it’s a long, uphill climb to gain access to loans with attractive interest rates, which are driven by credit scores. Here in the Mission, 44 percent of households had no credit history at all, according to a 2008 study by Social Compact, a Washington nonprofit research group. Also, more than half of Latino adults did not have bank accounts.

“This data is very discouraging,” says MAF executive director José Quiñonez. “But we decided, really our whole approach has been, to try and view the community from a positive perspective, to appreciate what they have, not what they lack, and to build on what they have.”

Founded on trust

Cestas (also commonly called “tandas” and “cundinas” in Mexico and Central America) are usually formed within families or small communities where there is a high level of trust. The pressure to obey the agreed rules, however informal, is more social than legal.

Business expansion, not credit-card debt, is the motivation for Reina Alguilera. Direct and amiable, she is a housecleaner with ambitions. She is a member of four distinct cestas and contributes $100 monthly to each. Her main goal is to grow her business, investing in more employees and equipment and learning more management skills.

“This program really helps us women move forward financially and emotionally,” she says. When Ms. Alguilera isn’t cleaning homes, she is brushing up her computer skills in a night class.

Not all cesta members want to spend the money they receive when their turn for withdrawal rolls around.

Wilfredo Montenegro, a house painter, was scheduled to receive $1,300 at the end of last year and intended to park it in a savings account. Mr. Montenegro knows the value of building a credit history.

“I wanted to start my credit because I know I will need it in the future,” he says. He dreams of having his own business.

Olga Hernandez, another member of the Fortuna cesta, shares that entrepreneurial instinct. She makes hand-stitched artisan clothing in the traditional style of Oaxaca, Mexico, and sells it at a local market on weekends.

The MAF cesta program is already showing results in terms of building and improving credit. With some 13 cestas up and running, and more than 80 participants, there is enough data to make some early assessments. An examination of the participants in the first two cestas over a period of six months shows, according to MAF, that credit scores rose on average by 47 points.

More significantly, in Mr. Quiñonez’s view, is that the same group showed an increase of 9 percent in the average number of “satisfactory” credit accounts held by members of the group. “Satisfactory” accounts are those where payments are being made on time. That nine-point gain demonstrates that participants are not only making their contributions on time, they are also improving their payment performance on other credit accounts.Quiñonez believes that MAF’s approach to helping individuals join cestas, which includes a measure of financial education, is improving how they handle all their financial affairs.

Not without risk

There are two risks with cestas. One is that the participants will not make their contributions on time. The other is that when a member receives the pooled funds, he or she will disappear with the money, meaning that the group will lose the future contributions of that participant. There have been two such instances in the MAF program thus far.

Yet MAF’s role in the system is as a final guarantor. The nonprofit agrees to make everyone whole by stepping in if any individual member stops contributing.

To make cesta activity relevant, and ultimately beneficial, to credit scores, MAF needed to partner with a bank that would hold the cestas’ funds, track payments, and report the results to a major credit agency. MAF’s partner is OneCaliforniaBank, a community development bank in nearby Oakland, Calif., that serves low- and moderate-income communities.

“There is a host of reasons why people don’t use banks. Some of the reasons are cultural and some of them are based on bad experience,” says Jeffrey Cheung, president and CEO of OneCalifornia- Bank. “Our goal was to find a vehicle to help bring people into banking. This [cesta program] does that.”

The program is just over a year old and is still a child learning to walk. Can it scale up to something much larger with national impact? The need is clear. “Credit is fast becoming the second most important thing to have, right after a photo ID,” says Quiñonez. “Here is a clear, direct way to get people into the mainstream.”

And while this program seems to be working because of its orientation toward the small, the local, and the individual, Quiñonez is not shy about saying he’d like to see it “replicated across the city and eventually the country.”

Will other banks be receptive to such nontraditional activity? Robles, the Arizona State University economist, thinks it will happen as the incentive becomes clear. All this communal savings activity going on beyond the traditional sphere of financial institutions represents a large untapped market.

“For banks, this is about cultivating a long-term customer base,” she says.