This article appeared originally in Gulf News: link to original article
The Abacus Federal Savings Bank is a community-based bank in the US. The idea behind its establishment came because of a pressing need to serve the Chinese community in New York.
The community, despite having high savings and deposits with other banks before the establishment of Abacus, was not able to avail of loans and financing when needed. This was mainly because of the rigidness of the existing, well-established banks about whom they lend their money to, until before what led to the 2008 financial crisis.
The solution was simple. Take deposits from the community that you know best and provide financing to the shops and restaurants you pass by on regular basis. In such a case, the footprint and waiting lines replace supposedly sound bank statements, audited and verified by respectable firms.
Mohammad Yunus, a Nobel laureate for his innovative microcredit solution, established Grameen Bank for the same purpose as Abacus, except it was in Bangladesh and for the noble goal of reducing poverty. In a similar vein, communities in Africa have been establishing community-based cooperatives that allow contributions from members and allocates financing to each one of them on periodical basis.
By doing so, recipients use the money to cultivate crops, buy farms to expand the ones they already own, and purchase livestock to diversify sources of income and secure access to food at most times. Peer pressure, through participating community members, became the safeguard that ensured loan repayments. Otherwise, the defaulting members cannot obtain any further financing.
In all three examples, the credit score was more of a social score for members in a community, where they are able to vouch for one another. It is what made such banking activities possible; lifting individuals out of poverty and enabling others to move up the income ladder.
The essence of banking is in linking those with excess funds with others who lack them, whether those funds go into consumption or into investing in existing and new businesses. Community-based banking is about the same, except at a micro level that doesn’t interest other banks and financial institutions, and with products that are customised to the community needs.
According to the United Nation’s International Migration Report for 2017, the top five countries of origin for international migrants are India, Mexico, Russia, China, and Bangladesh. In the US alone, Mexicans, Chinese, Indians, and Filipinos are among the top 15 migrant populations, from a single country of origin and residing in another country.
Indians are also the biggest migrant population in both the UAE and Saudi Arabia. Out of 1.7 billion adults worldwide that lack access to bank accounts, Chinese and Indian adults top for 2017. Mexicans, Bangladeshis, and Filipinos are in the top 10 too, according to Forbes.
The Grameen Bank was established on the basis of providing financing to Bangladeshis who lacked access to it, and so was Abacus in the US to serve the Chinese community. They both sensed a need to be turned into a poverty-reduction opportunity as well as a business one.
In fact, opportunities can be found wherever similar migrant populations who lack access to banking and financing are provided with community-based banking that provides them with what they need.
Whether its lending facilities or the provision of microfinance, community-based banking is all about tailoring what is being provided to those who are in need of it, at reasonable rates. Such rates are not decided by credit scores.
Instead, scores are socially implicit rather than financially explicit. Success of community-based banking depends on the number of people it reaches. Given the number of adults without access to bank accounts, community-based banking is far from reaching its full potential.
The last thought that I want to leave you with: should community-based banking be government-led by the host countries, or business-led by individuals in that same community?