By L. Carlos Lara
Borrowing and lending is as old as mankind. The primary reason for this is because at some time or another, we all want something, but we don’t have the money to acquire it. We need someone to help finance it for us. We need credit.
It was this need for credit that gave rise to the very first banks during the Middle Ages. It all started when Italian grain merchants began extending credit on their own goods and charging a fee (interest) for the delay of payment. In the beginning, banking was originally intended for financing long trading journeys; these methods were later applied to finance the production and trading of grain. Over time this activity became known as “merchant banking.”
It was the Jews, however, who expanded merchant banking to the next level. Displaced Jews fleeing Spanish persecution were attracted to the banking business, but were not allowed to own land. They entered the great trading piazzas of Italy as unlikely competitors and set up their benches alongside other Italian traders of crops. But they had one great advantage over the locals—Jews were not subject to the Church’s laws against charging interest. Consequently, the Jewish trader quickly flourished and soon began performing both financing (credit) and underwriting (insurance) functions.
The merchant’s “banco” (bench or counter) progressed from financing trade on one’s own behalf to settling trades for others and then holding deposits for settlement of notes. These notes came to be known as bills of exchange, and later still, became the check. If someone lost his traders’ deposits, the business arrangement would obviously fail. In effect the failure “broke the bench”—banca rotta. The term’s meaning is where we get our word “bankrupt.” Being “broke” has the same connotative meaning.1
Of course we are a long way from these early beginnings of banking. Banking has changed considerably. The rise of trade and industry throughout the world in the 19th century led to the development of powerful merchant banks culminating in the likes of J.P. Morgan & Company here in the United States. In modern times the financial establishment has outgrown the small family- owned merchant bank of long ago. Corporations now dominate the banking business. Yet in the midst of this spectacular growth and expansion over the centuries, many rural communities are often excluded from the ability to tap into these sophisticated financial institutions. It was this way long ago and in many respects is still the same today. Nevertheless, man’s wants are unlimited and the need for credit (money) is insatiable. Man always seems to find creative ways to obtain it.
A Bunch of “Hui”?
Denied access to conventional bank sources, Mexican immigrants in California, Texas and other states are known to start their own loan pools called tandas.2 Asian immigrants have access to something very similar. The Chinese use loan pools known as Hui, the Vietnamese call them Hoi, Tanomoshi in Japanese and Kye in Korean. These groups all trace their roots to small village culture. Their unique financing system has been passed down from generation to generation. This is how their ancestors seem to have made all of their major life’s purchases, such as farm equipment, homes and weddings. But today, in our modern age, these tightly knit cooperatives are being used to help launch small businesses for aspiring entrepreneurs who seek the American dream. How does the concept work? —Surprisingly simple.
One individual will start out by recruiting the group’s honorable members (usually 10 to 20 members). This person becomes the hui master. Previous experience as a group organizer actually makes recruiting of members easier since these clubs rely mostly on trust. Each member is required to put in a certain amount of money (let’s say $200) into a fund at each meeting (usually once a month). The hui master will then solicit secret bids from the members on how much interest each would pay for that month’s accumulated $4,000. They continue to meet until all the members have won the pool and each earned a share of the interest. The highest bid takes the pot. Usually the higher bids in the group take the earlier rounds, but the hui master always gets the first round regardless and pays no interest. The tradeoff is that the hui master performs a valuable service. In addition to getting the club started he must act both as the credit manager to make sure everyone in the group is contributing, and the lender of last resort in case someone fails to make their regular deposit. If one of the members does not make their committed payment, the hui master must cover it himself. Although transactions really are based on trust, the hui master must be sure to recruit members of high integrity because some pools can reach up to $500,000 and members may become tempted to cheat.
According to one author, Lionel Haines:
“Very little is known about the extent of this invisible banking system. Participation may be as high as 75 percent of all entrepreneurs in some communities, decreasing as the community gets used to American financing methods.
Even though there are no credit checks, very few clubs fail—at least not in tightly knit communities. Every bank in America would kill for their clout. Defaulting means social suicide.”3
Actually, this invisible banking system works because of the sociological concept known as “social capital.”4 This refers to the value of social relations and how working together can lead to solving economic problems. It is in essence the very same concept that led to the formation of merchant banks discussed earlier in this article. We are simply seeing a smaller version of that development. Interestingly, a closer inspection of these money clubs reveals that they are nothing more than a form of forced savings.
What we must recognize is that the development of all banking systems, from their early beginnings to their most sophisticated forms in modern times, is that they can expand into enterprises that are either for profit or not-for-profit. The non-profit kind is not to be confused with charities or similar organizations that depend on donations, but rather that the profit, or surplus generated by these banking systems, is returned to their patrons. Such is the case with a kind of bank that developed in Germany in 1864 known as a credit union.
Rural communities in Germany, like rural communities everywhere, were viewed as unbankable by the more sophisticated banks in the cities because of their weak seasonal flows of cash. In order to access credit for himself and others, Friedrich Wilhelm Raiffeisen organized a group and created a pool of money that became the first credit union. In explaining what these money pools were, he wrote:
“Credit unions are merchants…they accordingly form a sort of commercial business enterprise of which the owners are the credit unions’ members.”5
By the time of his death in 1888 credit unions had spread all over the world. In fact, the Reiffeisen name is still used by Reiffeisenbank, the largest banking group in Austria with subsidiaries throughout Central and Eastern Europe.
According to a special research report on the economic impact of cooperatives that was published in 2009,6 the first credit union in the United States opened in Manchester, New Hampshire in 1909. By 1934 there were 1,100 credit unions in 32 states. When government began permitting federally chartered credit unions in states that did not have credit union laws, thousands of new credit unions were formed and spread throughout the country. As the industry developed it became more professional and created support institutions. For example: just as banks have the FDIC, credit unions formed their own self-funded insurance funds—the National Credit Union Share Insurance Fund (NCUSIF) for federally chartered credit unions and the American Share Insurance for state chartered credit unions. All federally chartered credit unions and 95% of all state chartered credit unions are insured by the NCUSIF for $100,000.
Also, in the same way commercial banks have an organizational structure that includes a central bank like the Federal Reserve; credit unions have the U.S. Central Federal Credit Union. To see the organizational structure properly, picture it as a three-tiered system with the CFCU operating in the top tier. It acts as a wholesaler providing support services to Corporate Credit Unions (CCU), which occupy the second tier. The Corporate Credit Unions, in turn, provide services to over 8,000 credit unions that make up the third and bottom tier.
The Central Liquidity Fund is a two member-owned supporting organization to the U.S. Central Federal Credit Union. The Central Liquidity Fund, as an arm to the CFCU, is the lender of last resort and provides liquidity during economic volatility.
The National Credit Union Association (NCUA) governs all three tiers of the credit union organization. This is a three-member board appointed by the President and confirmed by the senate.
Credit Unions now provide banking services to nearly one- third of all Americans and have 86.8 million members. Though they are much smaller than commercial banks with less than 2% of them having assets of more than $1 billion, nevertheless, as a whole they hold $774 billion in assets. While credit unions look like and provide the same financial services that typical banks provide, they have the two distinct differences. They are not- for-profit cooperatives with an IRS tax exemption status. Secondly, they return their earnings to their membership in the form of reduced interest on loans and increased interest on deposits, or they may reinvest earnings into the credit union.
It is helpful to know that there are alternatives for banking services other than the volatile commercial banks. If you are serious practitioner of IBC, it is possible that you already only use banks for the convenience of a checking account or debit card. Credit Unions, as we can see, may present a good alternative for those purposes. It may be well worth the time to pay a personal visit and check them out.
As I was researching and writing this article, I took a few minutes and contacted a local credit union in my neighborhood. Over the telephone I asked the receptionist if I needed any special qualifications to join as member and she said, “No—anyone can join.” Apparently, what once began as a closed membership association for certain groups, such as teachers, religious or community organizations is now open to all. I asked if they provided the same services typical commercial banks provide, such as checking and savings accounts, mortgage loans, debit cards, credit cards, online banking and CDs and she said “yes.” “Do you provide investments, such as mutual funds, life insurance and other types of securities,” I asked? She said “we provide all of that too.”
Unbelievable, I thought— all this from a bunch of Hui!
See Merchant Banks at http://en.wikipedia.org/wiki/Merchant_bank Accessed March 29, 2012
See “The Anthropology of Money in Southern California” http://www.anthropology.uci.edu/~wmmaurer/courses/anthro_money_2004/ Tandas.htm Accessed March 29, 2012
Article written by Lionel Haines, Success Magazine, Copyright 1989, Hal Holdings Corporation. Submitted by Russ Bragg, Distinctive Financial Services, March 14, 2012
Social Capital: http://en.wikipedia.org/wiki/Social_capital Accessed March 30th, 2012
Credit Union http://en.wikipedia.org/wiki/Credit_union Accessed March 30th, 2012
Research on the Economic Impact of Cooperatives, Deller, Hoyt, Hueth, Stukel, University of Wisconsin Center for Cooperatives, revised June 19, 2009