My lender, my friend: Lending circles with a Latino twist
To build credit in pursuit of their dreams, Latinos in California are reviving an old community lending tradition, the "cesta," with a hand from local banks.
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“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.Skip to next paragraph
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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.