A Thriving Underground Money Culture

Recent immigrants – whether from Mexico, Africa or China – often form groups that regularly contribute to a pool of money. Group members then take turns pulling out $500 or $1,000 in accumulated cash.

These savings groups are one aspect of a pervasive underground money culture bustling beneath the surface in U.S. communities of immigrants and other low-income workers.

Savings groups are one of four types of “informal” financial arrangements identified in a new report, “An Invisible Finance Sector: How Households Use Financial Tools of Their Own Making.” These arrangements create a strong social commitment to saving typically absent in the formal U.S. banking system.

The four arrangements discussed in the report are:

• Savings groups, also known as lending circles, which are primarily found in immigrant communities.
• Interpersonal loans.
• Storing more than $100 in cash at home.
• Money guards who safeguard someone else’s savings.

“It’s tempting to think that these informal tools are last resorts, or second-best solutions, but informal financial mechanisms are often combined with formal tools, and sometimes are preferred,” according to the report on the U.S. Financial Diaries project of New York University’s Financial Access Initiative and the Center for Financial Services Innovation in Chicago.

Savings groups help low-income workers pull together larger and more useful lumps of cash than they could on their own.  They may be formed by families, friends, or even by people living in the same apartment building.  Each group member agrees to contribute a fixed amount to the pool, say, once a week.  An organizer for the group determines the order in which members can withdraw each month’s accumulation. Savings groups, which have been imported from cultures around the world, have many names – in Kenya, they’re known as merry-go-rounds.

Trust is central to making savings groups work, with social pressure creating a powerful commitment to save. “You feel the obligation to give a fixed amount weekly; with a bank you put money in the account when you feel like it,” said one person interviewed for the report. The obligation is “sacred,” said another.

People who withdraw early are effectively borrowing money, while those who withdraw later become the savers, having made numerous contributions prior to taking money out of the pool.  But “most people are in it more for the saving function,” said Jonathan Morduch, executive director of NYU’s Financial Access Initiative.

Savings groups require cooperation in delicate situations. Members who miss contributions may forfeit what they already put in.  But members also cover for each other. Sometimes participants unable to make a timely contribution can renegotiate where they fall in the withdrawal queue. When one Columbian immigrant and restaurant worker profiled could not make her $200 weekly payment, her sister did.

For the Diaries Project, the researchers studied the financial habits of Latino immigrant and native populations, immigrants from the Indian subcontinent, and African-Americans and whites in Mississippi, Ohio, and Kentucky.

Interpersonal loans between family or friends were used by 41 percent of those surveyed; they were the second most common form of debt after credit cards (55 percent).  During the one-year period studied, two out of every five households at any given time owed money to someone they knew.

Featured in the report was Andrea, a wife and mother who borrowed $1,700 from her father to pay off her credit card before its 0 percent interest rate expired.  An advantage of personal loans is that they may not charge interest. Repayment schedules can also be informal, though Andrea paid her father back in just two months.

Storing savings at home is convenient and ensures that people have enough money for unexpected expenses. Saving at home also avoids checking or savings account fees, which can be onerous for low-income workers. Eighty-one percent of households surveyed said they keep at least $100 in cash at home.

Money guards also help with saving. People use trusted friends or family to get money “out of the house to protect yourself from spending it or to keep it out of the hands of someone else in the household,” Morduch said.

When a money guard – say, a mother or friend – has the cash, “You can say, ‘I don’t have it.’ That’s a lot harder if it’s sitting in the drawer,” he said.

To learn more about this project, see this video where the researchers discuss what they found.