The Radical Economics of Lending Your Friends Money
Lending circles have allowed poor people to pool resources in cultures around the world. So why aren't they more used in the US?
Photo via PM Images/Getty Images
A few underemployed twenty-something pals and I were recently chatting about how great it would be to start our own businesses. A craft beer and junk food shop, for instance, or a 24-hour deli with low lighting and records. Great ideas were floated, but everyone seemed to have the same problem: no startup funds. There’s no VC on a golden Silicon Valley throne willing to finance their ideas. No bank that would take their low credit scores seriously, no rich parent sitting at home ready to cut a check. And even if a bank would give them a loan, they’d probably be eaten alive by high interest—a problem many small business owners, especially people of color, face in this country.
I suggested that, because they’re young and can afford a risk, perhaps they should band together and start a kye.
The word kye (pronounced “geh”) drew a huh response from my friends, because it is indeed a foreign concept—one dating back to 16th-century Korean farming villages. Essentially, a kye is a lending circle based on mutual commitment. Imagine a group of neighbors and friends who gather once a month over a communal kettle of makgeolli, with each person throwing the same amount of money into a kitty. At each monthly meeting, one person would receive the month’s pot, allowing them to go off and start a (hopefully) flourishing business. The club would continue meeting monthly until every investor had her or his payout.
Peasants and merchants who couldn’t procure a loan from a yangban (a member of the Korean ruling class in the Joseon dynasty) were able to economically and socially empower one another only because they chose to unite. Here in America, we find ourselves atomized by our very own yangban, who rule powerful corporate entities and politics. With immigrants and black and Latinx applicants being frequently denied loans and millennials struggling to save, a kye could be the entrepreneurial leg up many Americans need.
The practice of lending circles isn't unique to Korea—Japan has the tanomoshi, China the hui, West Africa the sou-sou, and Latin America the tanda. Immigrants from various countries have brought their lending circles to America, each with unique traditions. In English, a kye is known as a rotating credit and savings association, or a ROSCA.
Most of the clubs don’t charge interest on loans, though the Chinese hui system does, at a rate decided by the club organizer. In the hui, each bidder for a particular month’s loan must submit a bid with an interest amount. The highest interest rate bidder usually wins the month’s pot, and the interest is evenly divided among the remaining group members. In other systems, the club organizer decides who gets the disbursement based on need, there is a consensus-like decision-making process, or the drawing is random.
Melany DeLa Cruz-Viesca, assistant director of the UCLA Asian American Studies Center, told me that financial and social shifts in the past decade could have created potential for kye-type schemes in America. “There was this whole shift that happened with the Great Recession, where the credit line started tightening up and millennials couldn’t get credit from bank or government programs, so they turned to foundations and venture capitalists,” DeLa Cruz-Viesca said. “The shared collective identity is more common amongst millennials—with living spaces, shared businesses, and shared economy—so I think [a lending circle] is possible if you do have the resources and the means.”
In the 80s and 90s, restaurants popped up like mushrooms in LA’s Koreatown because after long days at work, groups of Korean immigrants gathered over bubbling pots of kimchi jjigae and glasses of soju and whiskey to trust one another with what little money they had.
Over the years, bonds grew and strength beyond money emerged from such Koreatown kye communities. As someone who runs her family’s restaurant in Southern California, I know how isolating owning your own small business can be, as well as the mental health issues that often plague small business owners. Calculating taxes until 1 AM can be easier and less lonely when you're part of a lending circle because you have a rock-solid network to consult and commiserate with. While it’s easy to miss other social commitments, the strong financial bonds of a kye knit its members together, in the process creating a supportive social system.
“There’s a psychological aspect for it,” Jephthah Acheampong, head of marketing and sales for Esusu, a lending circle app based on the West African sou-sou, told me. “Whenever I get returns, and I chip in and someone else gets the return, I feel like I owe that person something. I automatically feel like I'm supposed to be there for the person, and it goes past the financials—it becomes a mutually beneficial relationship.”
“It surpasses the idea of getting immediate capital—instead, it focuses on bonding with other people in your group,” added Acheampong. In that spirit, he believes lending circles can empower larger communities, including those outside their groups. He cited Kenyan financial circles that he’d heard of that pool returns to build community wells as an example.
“So many cultures have been doing this for generations and it's such a beautiful way to build trust and community with others and create collective economic power,” said financial planner Pamela Capalad Kushner. “I don't think it's any coincidence that many immigrants and people of color have brought this tradition to the US, where we often face discrimination when it comes to financial and banking institutions.”
Danny Bin, vice president of private equity at asset management firm Neuberger Berman, is a hui success story. Twenty years ago, Bin and his father immigrated to the United States without savings or credit history to speak of, plus “mountains of debt,” said Bin. Living in a small studio in Flushing, Queens, they shared a bathroom and a kitchen with six other families. Bin’s father worked as a waiter in Chinese restaurants and the small family struggled to stay afloat. Then their relatives invited them to join a hui, from which Bin’s father started his first business; another hui provided a house downpayment. Bin’s father now owns three businesses and two houses.
“[My dad] achieved what he envisioned as the American dream, all thanks to hui,” Bin explained. Inspired by this, Bin left his job at Google and started Monk, an app based on the hui model. Though he ended up closing Monk, he believes the lending circle system can help millennials save and spend money responsibly, develop a system of social and financial accountability, and reduce reliance on banks. Most importantly, said Bin, “You can magnify the power of communities with the people you love and trust.”
But what happens when a lending circle goes bad? For some Korean immigrants in New Jersey and some Chinese immigrants in Flushing, it meant financial devastation and frayed relationships. Informal lending circles operate on trust, and the only incentive in many of the groups is social pressure and immigrant inter-reliance. “One of my biggest concerns is if someone receives the lump sum early on and just ghosts the entire group,” said Capalad Kushner, the financial planner. Because of an undocumented immigration status or distrust of American legal systems, some financial losses from corrupt lending circles are never recouped. A kye organizer could also abuse their power by playing favorites, delaying a disbursement to a member who badly needs funds.
Insurance, social connections, and security deposits have been suggested as methods for deterring lending circle defaults. “I do recommend that you create or join these apps with a group of friends and colleagues you know and trust, especially at first,” Capalad Kushner suggested.
If you want to go formal, there are lending service apps like eMoneyPool and eSusu, and companies like Mission Asset Fund. eMoneyPool offers tiered rates based on urgency of need and guaranteed payment protection. eSusu aims to empower black communities and may report non-payers to credit bureaus like any default. Mission Asset Fund seeks to help the most economically disempowered, monitoring its lending groups and vetting applications to help prevent non-payments. All three report members financial activities to credit bureaus in order to help build their credit.
Even with company-run formal lending circles, Capalad Kushner recommends going with your own network. “These (lending circle) apps do have mechanisms to vet strangers, but I would use them as the platform for organizing your own lending circles,” she said.
If you choose an informal lending circle, you can structure your group how you’d like. That could mean $500 a month with 20 members, or $2,000 a month with five members, or two linked groups of ten people each—it’s up to you. Withdrawals can be random or predetermined, based on a tiered level of contribution or need. Regardless, social meetings should be encouraged—a kye has to be taken seriously to function.
Immigrants from many countries have long used these clubs to survive discrimination by banks, in the process bringing fresh ideas and a wealth of diversity to American entrepreneurship. These ancient lending circles can breed communal empowerment—which is more important than ever in these Trumpian corporate times.
Capalad Kushner sees bonding together financially as our only option for successful resistance: “In today's era and political climate, as economic power is being taken away from low-income citizens and communities of color, finding ways to collaborate and come together financially is one of the main ways we can get through this administration with our resources intact.”
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