Do-It-Yourself Financing

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In many of the more elaborate loan clubs, participants bid for the privilege of taking the pool. Whoever offers the highest interest rate wins, although each member can take the pot only once. The entire interest payment is immediately deducted from the fund and paid out to the other members. Rates can run as high as 20%, vs. about 14% for an unsecured bank loan. But the loan club may be an immigrant's only source of funds. "I would have spent months convincing a bank that my expansion plan made sense," says a New York City printer from Jamaica who wanted to add a color-lithography machine to his business. Instead, he borrowed $18,000 at 15% interest from a loan club to buy the equipment. As a result, his annual revenues have more than doubled, from $27,000 in 1986 to $59,000 last year.

The loan clubs are descendants of communal arrangements that originated centuries ago. In many countries, groups of people have long pooled their cash to allow members to bury their dead or to celebrate marriages. Modern-day clubs retain much of that social flavor. In a 1981-83 study of 50 people in Mexican and Mexican-American tandas (turns), Carlos Velez-Ibanez, an anthropologist at the University of Arizona, found that 17% cited family obligations such as weddings, baptisms and funerals as reasons for their participation. Each gathering of a keh, notes Sungsoo Kim, president of the Korean-American Small Business Center of New York, is a "great party with food and drinks and everything." Says Aurora Lares, who owns a Mexican restaurant with her brother in Santa Monica: "A tanda is for helping people and for making good friends."

No hui, tanda or keh can be successful without a great deal of trust. Individual members may not be acquainted with one another, but they must all know and believe in the organizer, called a keh-ju in Korean or a chu-hui in Vietnamese. She covers any defaults. As compensation, the first pool is traditionally hers; in a bidding club, she receives it interest-free. Even so, the organizer benefits from strong community ties. When a new Chinese immigrant asks to join a hui, for example, "it does not take much effort to establish his life history," says Tom Tai, director of the Chinese Business Association in Queens, N.Y. As a result, notes Chicago's Engstrom, the vast majority of loan clubs prove quite solid. Says he: "No one wants to risk their reputation in the community by refusal to pay."

People who have lost money in a loan club rarely complain to the police, but that may be changing. Last year 23 South Korean immigrants filed a class- action fraud suit in California to recover more than $407,000 lost in four keh organized by Soon Duk Cabling. Court documents show that Cabling partly financed several small businesses in San Francisco with money from the keh. When her stores started losing money and word of her financial problems spread, the loan clubs disintegrated. If the court decides to protect the keh deposits by ordering Cabling to pay up, the case, which is expected to come to trial later this summer, could set an important precedent.

Whatever the outcome, hard-pressed immigrants will go on joining ethnic loan clubs. For many, the informal banks represent a leg up on the American dream. Someday the language and cultural barriers that hold back immigrants may start to crumble. Until then, the loan clubs will no doubtprosper.