Pilot Study of Lending Circles and Financial Inclusion among Lower-Income Immigrants and Minorities: The Mechanisms of Behavior Change

Project Date:
Dec 2014
Award Amount:
$75,000
Project Programs:
Behavioral Economics

Low-income minorities and immigrants have difficulties integrating into the financial mainstream. A 2011 Federal Deposit Insurance Corporation study showed that over 30 million U.S. households are either unbanked or under-banked, including 55 percent of Black households and 49 percent of Hispanic households. Much like poverty, households enter and exit periods of being unbanked and under-banked. This presents unique problems for those trying to achieve financial stability. For example, being unbanked may occur as a result of periodic personal economic crises that are exacerbated by the fees associated with over-drafting, insufficient funds, and low balance penalties. However, it is not clear how the process of “re”-banking occurs.

Lending circles, also known as rotating savings and credit associations (ROSCAs), are widely utilized in the developing—and to some extent, the developed—world. A given group of people meets regularly to deposit a previously agreed-upon sum into a communally-held pot. The pot is then loaned out to one member of the group per meeting, either by predetermined order, or by a bidding process. The members of the group are, therefore, both borrowers from, and lenders to, each other during the course of a full “circle.” A June 2013 study conducted by Mission Asset Fund (MAF), a nonprofit that helps low- income populations in the U.S. build assets and credit, showed that 69 percent of those who participated in lending circles without a credit score had a score after participating. Scores improved by 168 points on average, and participants were able to reduce their outstanding debt by over $1,000 on average.

Sociologists Frederick Wherry, Kristin Seefeldt and Anthony Alvarez will use the Mission Asset Fund’s lending circles program to investigate the mechanisms of financial decision-making and behavior change of low-income immigrants and minorities in the San Francisco MSA. Through in-depth interviews, they seek to answer three key questions: 1) What are the mechanisms that lead to greater participation in mainstream financial services for low- and moderate-income minority households? 2) How does the collective experience of a formalized peer-lending circle affect the rules-of-thumb people use to manage their household finances? Do people change the way they account for money (in practice) as a result of participating in a lending circle? 3) What strategies do people use to deal with intra-household pressures for acquiring high-cost debt? How do people differentiate between “good” and “bad” debt?

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