The Rotating Credit System
Bonnet describes a rotating credit association as a group formed by participants “who agree to make regular contributions to a fund which is given in whole, or in part, to each contributor in rotation” (Bonnet, 346). West Indian immigrants from the Carribean settled in Brooklyn, New York, and formed rotating credit associations as a standard financial management system. The analysis evaluates the system’s strengths, weaknesses and its institutional position as a banking organization. The rotating credit association provided ample benefits for its members such as flexibility, social security, financial power. The system’s flexibility made it easy for members to join as the only prerequisite was proof of a source of income (Bennet, 347).
Moreover, members held the power to renegotiate terms to suit their context and financial position. For instance, members low on money adopted cost-sharing technique to allow them to raise funds through friends and family (Bennet, 349). Social security stands as a major strength of the rotating credit associations because immigrants developed a sense of community within the group. It is essential to note that most immigrants came from rural communities and required social support to cope in the hustle of New York City. Finally, the beneficiaries of the associations received financial benefits by saving small amounts of money otherwise squandered in trivialities like alcohol. Bennet reports that many members of these group paid down payments on homes and invested in businesses using the money provided by the associations (Bennet, 347).
While benefits attracted members to the rotating credit associations, shortcomings challenged the sustainability of the groups. The lack of rules and formal contracts to govern the institution increased the risk of members defaulting on contributions. Nonetheless, social systems in the group discouraged defaulters as organizers made such information public. Moreover, members ensured that suspicious individuals received their hand at the end of the rotation cycle to ensure they made all their contributions (Bennet, 348).
The rotating credit association received the same type of institutional ranking as traditional banks among its members. It is essential to note that most of the immigrants used similar banking systems in their countries of origin. Consequently, the associations created a sense of community experienced in countries like Jamaica, Trinidad and Guyana (Bennet, 355). Social security made the immigrants rely on the system rather than invest in traditional banking systems. Another factor that brought the system popularity as a financial institution was its ability to offer interest-free financing. While getting loans from banks required individuals to fill complex files, provide collateral and pay interest, the associations gave funding with minimal questions asked.
Illegal immigrants relied on the system to access funds legally prohibited by banks. The organization’s ability to provide financial power to its members made it as valuable as traditional banks. Some members received their hand and placed it in traditional banks with the intention of increasing their financial standing with banks (Bennet, 352). Consequently, the good financial reputation made it easier to receive …