As my favorite robot startup dinosaur FAKEGRIMLOCK says, BE SHOES .
It is important to deliver a product or service that people want. Mission Asset Fund took an existing community practice and improved it by allowing payment activity to be reported to credit bureaus. Since its founding six years ago, MAF has been helping individuals obtain access to capital and improve their financial situation through their lending circles program.
I had the pleasure of speaking with Mohan Kanungo, an Accounts Manager at MAF to learn more about their innovative program. Mohan helps identify and onboard new providers of lending circles and also leads the local lending circles for DREAMers.
What are lending circles?
How do they work?
How can they benefit my community?
Get these questions and more answered below!
What are lending circles?
Lending circles are a time honored tradition of folks coming together to borrow and lend money to each other. At a basic level it is a social loan where members from the community help each other access capital for things like starting a business, immigrating to a new country, or offsetting the cost of a funeral. People all over the world have been using this method for quite some time. Before there were banks or financial institutions, there were lending circles.
Lending circles are not an alternative to banking. MAF uses the banking infrastructure to get people more familiar and comfortable with navigating financial products and building their credit. Then when it comes to realizing other financial goals, like saving for a child’s education or buying a home, those goals are less costly and individuals feel more empowered to realize them.
How do lending circles work?
MAF utilizes a unique process where everyone who participates is both a borrower and a lender. Each person puts in the same amount a communal fund, receives the loan in intervals, and pays back a fixed amount. For example, the average loan amount is $1,000 with 10 participants and a monthly payment of $100. Each participant would receive the $1,000 loan and pay back $100 until each person has had access to the capital.
The best part about lending circles is that individuals are able to build their credit on a 0% interest basis. The loans are formalized with a promissory note and program agreement. Payments are reported to the credit bureaus, giving each participant to ability to build their credit.
Who does Mission Asset Fund serve?
The target market is really low-income families, hardworking individuals that have an income. People actually have to have some income to join this program. MAF is trying to address the needs of folks that are unbanked, do not have a credit score, or have a credit history but it is damaged. People who, for very valid reasons, have a distrust of financial institutions either because of past experience or culture.
Regardless of whether people have heard about lending circles before or have had direct experience with them, this method intuitively makes sense to people. It makes sense at a very communal, basic level where people are supporting each other. It is really about building on the sense of community and social capital.
What are the barriers to lending circles?
A general distrust of formal institutions and products or a lack of understanding are large barriers. That is where local government initiatives have been really important for bringing financial institutions in line with the community needs in order to serve them better.
What has contributed to your success?
A key part of success is partnering with community based organizations to roll out the lending circles program. These organizations understand the community need and serve as advocates to help people through the process. MAF works with each organization to complement and enhance what folks are already doing. Oftentimes, MAF helps partner with the first year’s expenses to ensure costs are as low as possible.
Additionally, MAF leverages a lot of technology to automate processes, scale, lower costs, and make it easier for partners. Sometimes this means using technology when it’s uncomfortable for a community due to low digital literacy. Nevertheless, once the community conquers this learning curve, the impact is much greater.
Another element of success is the online financial education that helps participants understand financial products and institutions, what goes into a credit report, and what goes into a credit score. Financial education has really increased success in the program. MAF has found that coupling education with a financial product paves the road to financial capability.
What has been the impact of lending circles?
An independent evaluation of the lending circles program was published by the Cesar Chavez Institute at SFSU. These results are from across the organization and include data collected about local participants, as well as five partner providers of Lending Circles in the San Francisco Bay Area. Here are some highlights from the report:
Lending Circles is proven to establish credit scores – with a 69% success rate. Social loans are a successful vehicle to get the unbanked and underbanked into the financial mainstream. Nearly one third of the treatment group (29%) started with no credit score. After just 10 months in the program, this went down to 9% – a 69% success rate. The control group (who did not participate in Lending Circles) showed only subtle improvement, from 31% to 27% – with just a 13% success rate.
Lending Circles has a dramatic impact on credit scores – by an increase of 168 points. The average credit score improvement for the treatment group was 168 points. The average credit score of participants in the treatment group rose to 603 by the end of the Lending Circle. In comparison, the control group showed only a small increase to overall credit scores – a 41 point increase.
Social loans decrease debt levels – by over $1,000. From 2011 to 2012, following a severe recession that devastated the housing market and raised the unemployment rate, the average person in the control group increased their outstanding debt from $9,000 to $12,000 – adding $3,000 in their level of debt. With access to social loans, participants in Lending Circles had a very different result: the average person in the treatment group decreased their outstanding debt by over $1,000 for a total difference of over $4,000.
Participating in financial education increases credit scores – by an additional 27 points. Financial education matters for those without credit scores; participants who started without a credit score and received financial education increased their scores by an additional 27 points.
Where to next?
Various communities across the nation would greatly benefit from the lending circles program. Communities in need are defined by the presence of a large unbanked community, folks without credit, large immigrant communities, low-income families, and a strong network of nonprofit organizations. As mentioned before, partnering with local organizations is vital because of their knowledge and reach. The goal is to double the number of partners next year, especially in the context of immigration reform. MAF is hoping to expand into the Northeast, Mid-Atlantic, Midwest, the Pacific Northwest, Florida and Texas.
How can you become a partner?
The first step is to attend a monthly webinar that explains the requirements and process of becoming a partner provider. Following the webinar, each potential partner is assigned an account manager to serve as a contact for any questions or concerns. If both parties wish to pursue a partnership, the nonprofit organization would need to apply and be accepted to become a partner.
Special thanks to Mohan for sharing his time! We’re excited to continue following MAF’s great work.