Excluded by banks, minorities in California became their own lenders

If you've ever been to a Cambodian-owned doughnut shop, fried chicken restaurant or jewelry store, there's a good chance it was financed by a tontine. 

In Cambodia, “tontine” is the name given to a rotating savings and credit association, or ROSCA, an ancient practice that has different versions all over the world. The general concept is that by contributing to a monthly pool that pays a lump sum to a single member, people can make and receive loans as well as earn interest on savings.

The lending circles are especially prevalent in the Cambodian community, where many people don't use banks because of language barriers and a distrust of institutions caused by genocide and economic instability in the aftermath of the Vietnam War.

In Los Angeles, diverse neighborhoods probably wouldn't exist today without ROSCAs, which are most often run by women. When banks wouldn't lend to minorities, the kye helped Koreatown business owners cluster in central Los Angeles. The hui helped finance Chinatown, and tanomoshis helped start some of Little Tokyo's early businesses.

There are also Latino tandas or cundinas, Filipino paluwagans and Ethiopian ekubs, and in South Los Angeles, family investment teams were formed after the L.A. riots to help black people buy property. ROSCAs are called tontines in Cambodia, Cameroon and Nigeria because of French colonization, but in Europe the term “tontine” refers to a different financial instrument created by exiled Italian banker Lorenzo de Tonti, who advised the French crown to use it to finance the Thirty Years' War.

In Tonti's tontine, investors make annual payments to a pool. As members die, their shares are reallocated to the survivors until there is only one investor left. In Cambodian tontines, the verb for leaving the group translates literally as “to die,” says Occidental College professor Sophal Ear.

Tonti's tontine is actually illegal in the U.S. The practice was outlawed in the early 1900s after abuses were discovered at insurance companies, prompting a New York judge to call it a “death gamble.” Tontines were sometimes called dead pools, a term you might know as the title of a Clint Eastwood film or the name of a Marvel superhero played by Ryan Reynolds, depending on when you were born.

In Long Beach, where more than 50,000 Cambodian Americans make their home, tontines are especially popular because there is no Cambodian American bank. Even in Cambodia, just 5% of people rely on traditional banks to manage their money, according to a 2015 survey, while 12% exclusively use informal tools like tontines.

Tontines help people pay rent, afford homes, start businesses and, for those like Lynn Hong, 25, ease the burden of student debt. Each month the Cal State Long Beach student contributes a few hundred dollars to the pool and receives small interest payments from other tontine members. In 2021, when she graduates, she hopes to have enough to help her pay off her debts and jump-start her career as a social worker.

“It's like gambling, but it teaches you about saving. It's another way to rebuild relationships within families and friends,” Hong said.

In Los Angeles, home to one of the highest unbanked populations of any metropolis, the popularity of ROSCAs is both a product of discrimination and a tool to fight it.

Broadway Federal Bank, the largest black bank west of the Mississippi, was founded in 1967 to help black people combat discriminatory lending and housing practices. Chief Executive Wayne-Kent A. Bradshaw says minority deposit institutions and ROSCAs function on a similar principle: investing in the community. Bradshaw's mother also participates in a Jamaican ROSCA, known simply as a partner.

“It's based on the very powerful cement of social relationships, where if you break the circle, you'd be giving up your membership in that community,” Bradshaw said.

Nowadays the bank's portfolio has broadened to include all low-income and minority communities, Bradshaw said. About 90% of its loans are focused on creating more low- and moderate-income housing by financing so-called Class C apartment buildings, Bradshaw said. It's a reflection of the fact that explicit housing discrimination has given way to gentrification and a speculative housing market whose negative effects disproportionately fall on minority communities.

At Mission Asset Fund, a San Francisco nonprofit in the rapidly gentrifying Mission District, Jose Quiñonez is trying to turn ROSCAs into a tool to support communities' financial health and fight gentrification. His fund ensures and documents ROSCAs so that payments can help build the participants' credit scores.

Quiñonez observed immigrants paying their tanda debts first, even before covering costs such as rent and and groceries. By partnering with ROSCAs and asking participants to sign promissory notes, Mission Asset Fund turned existing healthy financial habits into better credit scores. The average participant raised his or her credit score by 168 points.

“We have this notion that poor people or immigrants are poor because of their own fault, that they're not saving or budgeting right,” said Quiñonez, who was awarded a MacArthur Fellowship grant for his work in 2016. “But this proves that poor people pay their loans back.”

The Mission Asset Fund has provided more than 10,000 no-interest loans to more than 68,000 participants. Despite lending to people who are traditionally seen as high risk, the fund has just 0.7% of its borrowers default.

The fund is partnering with nonprofits across the U.S. to expand the program, including six groups in Los Angeles.

ROSCAs are more popular among older immigrants; it's unusual for younger people like Hong to participate. She has a savings account and a 401(k), so she's no stranger to the mainstream financial system.

But she says tontines help Cambodians learn to trust one another, and that's something a community with many former refugees and genocide survivors really needs.

“It's a risk, but it's a risk that we are taking together,” Hong said.

It's a powerful idea no matter who you are or what is happening in the news. Tontines, ROSCAs and minority banks are gestures of faith and trust in a community, a reminder that sometimes our biggest strength is in one another.

Source: Published originally on Los Angeles Times, Excluded by banks, minorities in California became their own lenders, by Frank Shyong, March 18^th, 2019.