1) Familiarize yourself with the traditional huei system.

A traditional huei is created by an individual in need of money. This person is called the leader, or sometimes initiator. The sequence of activities begins when each member contributes the cap amount. This amount is loaned to the huei shou. At the next allocation date, one month after the huei is set up all members except the huei shou bid for the loan. The person who bids the highest receives the loan.

2) Why would one participate in a traditional huei and what are the potential risks and rewards?

• Cut out the intermediary. This would result in a higher interest rate for the depositor and lower interest rate for the borrower.
• Traditional huei system revolves around family and friends, people who you know and trust. This is a way to help each other out and strengthen the community.
• Financial system was not as developed. Some people simply did not have access to loans and this dampened growth.
• More flexibility: the borrower can choose when he wants to take his loan and he has the possibility to quit the huei easily by refund his loan to the others.

➢ Potential Risks: o Loans are unsecured and are given based on trust. o Hard to collect in case of default. Loans are relatively small and not worth engaging in legal access. Legal ambiguity and no paper trail to back up claims. o Context based: There is the risk of losing friends and family. o These types of loans attract money from the underground economy, because they are informal and done in cash.
➢ Advantage: o Cheaper
• No hidden fees.
• No compounding of interest rates. o Faster compared to traditional banking. “It took a long time to arrange a bank loan, while a huei could be initiated very quickly and informally. o Appropriate for people who do not have a good credit history.

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