Latin American Lending Model Improving Access to Credit for Underbanked

Today's Christian Science Monitor has an article about a new program in California pairing small, informal lending circles -- a concept with roots in Mexico and Latin America -- with institutional backers. These lending circles go by lots of different names: cestas, tandas, cundinas. Whatever the name, participants each pay into a common pot every week or every month, and take turns with who gets to withdraw the money. An example:

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.

It's an arrangement that has a pretty good track record, despite relying exclusively on trust and social pressure. But with the involvement of the Mission Asset Fund, there are two added benefits. First, MAF guarantees the funds, which cuts the risks inherent in what boils down to interpersonal lending. Second and maybe more importantly, MAF reports to the credit bureaus, allowing participants to build credit histories as they lend to one another. Preliminary data shows participants have raised their credit scores an average of 47 points, and are leveraging their cesta funds to improve their general financial health.

The cesta participants profiled in the article are all Latino, primarily women. And if what we know about international microfinance stats holds for this peer lending program, cestas could offer one promising way to not only improve the lives of women in the program, but also their families and larger communities.