Poor People in Developing Countries Find Alternatives to Commercial Banking

Banking is a complicated process for working-class people who fail to comply with anti–money laundering regulations. Know your customer (KYC) requirements mandate prospective clients to provide their source of funding and possible employment history. Such policies make it difficult for working-class entrepreneurs to formalize and access funding. By restricting poorer people to informality, KYC requirements sap the growth potential of small businesses.

However, the ingenuity of working-class entrepreneurs has allowed them to compete by creating an alternative to the financial system. Due to the success of rotating savings and credit associations (ROSCA), informal entrepreneurs have managed to build lucrative businesses. In developing countries, these informal institutions are a pivotal source of capital formation. For example, in Nigeria, credit contribution clubs are quite popular, especially among the Igbo and Yoruba people.

Such associations have a formal structure and rules barring members from the arbitrary use of funds. In fact, payments to members are guided by a schedule and premature payouts only occur in the context of an emergency and are sanctioned by officers. Because of the vitality of these associations, working-class entrepreneurs have been able to procure capital for expansion, pay debts, and acquire properties.

In several cases, these informal groups in Nigeria function as a source of insurance and welfare. People use their contributions to cover medical expenses, get married, and educate their children. Likewise, in the Caribbean various versions of these programs exist, such as su-su and partner. Some sociologists argue that the entrepreneurial dominance of West Indian migrants in twentieth-century America is attributable to these informal banking networks.

Professor Eleanor Marie Lawrence Brown shows that Bajan migrants employed such networks to ascend socially:

In New York, a prominent Barbadian businesswoman, Louise Burnham, bought a home in Harlem and financed the purchase of two boarding houses in part from money obtained from a susu. Also in New York, Constance Payne, a Barbadian businesswoman, rented a three-story home that she turned into a profitable boarding house using the proceeds of a transnational susu which included participants living in Barbados.

Brown points out that some informal credit associations became so prosperous that they evolved into leading financial institutions, such as the Paragon Federal Credit Union in Brooklyn and the United Mutual Insurance Company. Partner, the Jamaican equivalent of su-su, has been equally adept at positing entrepreneurs to raise capital and venture into new terrains. The success of Jamaican higglers has attracted much international attention.

In Jamaica, higglers are primarily females who sell goods in the market; however, they have become key players in the economy due to their involvement in the importation business. William Tantam, in an intimate portrayal of Jamaican higglers in Black River, Saint Elizabeth, gives an account of how the typical partner is organized by its banker:

Janet was the “banker” for the market’s partner. She kept a red book with the thirty-six names of the members of the partner, and how many hands each had. Each person stopped by her stall daily and gave her J$200 (around £1.50), and she made a mark next to their name in the book. At the end of each day, Janet would give the “draw,” the total sum collected, to one person. The draw would be J$7,200 (around £54) with thirty-six “hands.” The next day, each member would again pay J$200 and the round would “rotate” for another person to receive the draw. . . . Janet was fastidious in her running of the partner, and her use of the red book revealed the organization required to maintain a ROSCA of such scale.

Partner schemes have also been responsible for the revitalization of slum communities in Jamaica. Divorced from government programs and the formal banking systems, entrepreneurs in Jamaica’s inner cities have resorted to partners to finance their cookshops and other microbusinesses. Due to the resourcefulness of banker ladies in Jamaican ghettos, scores of entrepreneurs have received loans to rejuvenate struggling businesses. There is even evidence that inner-city entrepreneurs prefer to collaborate with politically neutral partner clubs rather than relying on government assistance or corrupt private actors.

Caroline Shenaz Hossein, in a 2013 article lauding the efficacy of informal banking networks, explains why such networks are liberating for average Jamaicans:

Politicians implicate themselves in formal funding programs for the poor and citizens know they are “behind the scenes.” Banks and pro-poor financial programs who meet with and work with Dons to implement projects also inform hustlas that their financial growth is within the purview of the local strongman. . . . These independent business people in slum communities exclude themselves by choice from commercial banks and microfinance programs on the perceived grounds that such programs may be a component of those politics significantly harmful to their social and economic interests. Jamaican banker ladies are aware of this sentiment and fill the gap by offering services people can trust.

Informal banking networks thrive because they imbibe working-class people with a sense of agency and belonging that’s rarely experienced in transactions with formal organizations. Interestingly, they also demonstrate the libertarian spirit of downtrodden folks who eschew being exploited by politics and crony capitalists. With their ingenuity, the working classes have taught us that under capitalism there is always an alternative.