Published on November 25, 2022.
By: Yanet Mengistie
In Canada, although there is distrust among financial institutions and the banking industry, the extent to which banks abuse their power is unknown. These institutions uphold policies that financially hinder their clients from wealth accumulation, especially minorities. That is why new disruptors are emerging in the financial world, such as digital banks. The Pan African Credit Union initiative (PACU) is one of these disruptors.
The PACUs mission
The PACU is a joint effort established by the Jamaican Canadian Association, The Lions Circle African Canadian Men’s Associations, and the Canadian Black Chamber of Commerce. The initiative seeks to establish a credit union, which differs from the traditional banking system in several important ways.
A credit union offers similar services as a traditional bank such as clients savings, chequing, and loans. However they are classified as not-for-profit. Profits from the credit union are invested back into union members’ accounts. Unlike banks, to join a credit union, all one needs to do is open an account. With an account, you become a member, and part owner of the union.
Members of credit unions like PACU secure a seat at the table with the board of directors, which earns them a vote on union decisions. All votes are equal regardless of how much a person contributes, unlike in traditional banking, where owners and stakeholders own shares of the banks.
The PACU is waiting on the government’s approval for recognition as an official credit union; its plans were reviewed by the accounting firm KPMG before submission.
The PACU plans to offer both personal banking needs such as savings, chequing, loans, and GICs accounts. In the future, they also plan on offering business accounts. They also plan on providing financial literacy classes to its members to create affluence in Black communities.
These classes include budgeting, credit management, and wealth building. The PACU is focused on supporting the Black communities of Canada to create the generational wealth for them that other groups have had the privilege of having for decades.
Bias in banking
A 2016 study revealed that redlining—denying financial services such as loans due to someone’s race, culture, or ethnicity in banks occurs through bankers’ unconscious bias. The sociologist discovered that at banks, employees who were tasked with evaluating a client’s eligibility for a loan, such as a mortgage, would approve loans to certain cultural groups over others, despite having similar credit scores and financial reports.
In the United States, data reveals this exclusion of Black people in loaning processes. According to KleinBank, from 2015 to 2016 out of the approved 585 loans, only one client for these approved loans was Black. In 2014, at Associated Bank, 92 per cent of conventional mortgage loans were borrowed by White applicants.
Ruoff Home Mortgage was found to be lending with the same bias; in 2015 and 2016 they were discovered to have 92 per cent of their 5,300 conventional home loans offered to White clients, despite the Indianapolis area having a large number of Black residents. The discrimination has become so monotonous that the United States Federal Justice Department got involved in the case with KleinBank and sued them for “redlining of majority-minority neighbourhoods.”
Canada does not have studies on data concerning mortgage loan lending and race. While there is data on who owns homes, there is no data on the races of loan applicants and their denial rate. Given that the United States and Canada are intertwined in many social and economic ways, data pertaining to racial systemic issues in banking must be investigated and addressed in Canada as well.
Banking at whose expense?
One of the reasons why the PACU is significant is because it operates outside of the traditional banking system, which demonstrates classism in certain policies. Financial institutes uphold policies that impact low-income groups. This is demonstrated by the excessive charges on necessities such as debit card swipe limits, saving or chequing fees, wire transfers, and insufficient fund fees. In Canada, with chequing account fees alone, Canadians pay $185 annually, which is one of the world’s highest annual chequing fees on average.
All these fees impact low-income people—unlike high-income people who can afford to pay these fees—those living paycheck to paycheck will need every dollar, let alone $185 annually. Those placed in dire financial situations may be over drafting an account—to charge them for this is an unnecessary punitive measure and appears as if the person is being punished for their situation.
It becomes difficult to escape these financial situations when dealing with fees. Banks create hurdles for those who struggle financially to make ends meet, low-income people who want to succeed, stalling, or even preventing their financial growth. This encourages low-income families or people who rely on credit cards or loan services like Payday Loans, to pay their expenses.
These Payday Loans and some credit cards will have high-interest rates pushing people further into financial debt. In 2020, Prosper Canada reported that for lower and moderate-income Canadians credit card debt and installment loans are their most common form of debt. As a result, low-income families spent 31 per cent of their income on debt repayment. Again, this proves that the banking system is inherently classist.
The rich get richer, and the poor get poorer while the banks profit off all of the excessive charges and interest rate repayments. This is why the PACU was established—to disrupt and offer viable solutions to banking policies that benefit only those financial institutions and clients.