Last year as many as 3 million Aussies were “financially excluded”, research for National Australia Bank by the Centre for Social Impact reported. While most of us may worry about which credit card gives the most rewards, almost 17% of the adult population lack basic financial products such as a credit card, a savings account, general insurance and even a transaction account. Thankfully, there are now no-interest loan schemes (NILS) that can help out those in need.
A basic bank account, a low-cost credit card and a basic home and contents insurance policy can set you back by as much as $1800 every year. For 8.1% of the population, that’s over 15% of their annual income.
Financial exclusion is an issue where people are either severely disadvantaged in or prevented from getting fair, safe and affordable access to basic products. While Australia ranks well on the global scale in terms of access to a bank account (1st), savings (2nd) and credit (7th), financial exclusion here is on the rise, having grown 30% from 2.3 million adults in 2010.
Being excluded from mainstream financial institutions often leaves low-income earners no alternative but to use informal services such as payday lenders. While new protection laws for short-term and small-amount loans (including payday loans) kicked in on March 1, 2013, Adam Mooney, the CEO of Good Shepherd Microfinance, says “unscrupulous finance providers” continually find ways to get around the legislation. “It’s always a game of catch-up for the regulators,” he says. “Sometimes the finance providers strongly ‘suggest’ to clients that they must buy a financial literacy DVD for $300 as well as the loan and imply that it’s a condition of the finance. We’ve just seen enhancements to the small-amount credit contract (up to $2000) regulations last month that were needed to stop some rogue providers from creatively interpreting the law and inventing new fees.”
Though good progress has been made, Mooney says the area of most concern now is rent-to-buy contracts, where people are pay up to three times the cost of a fridge or washing machine by being talked into renting instead of getting affordable finance, such as a NILS loan from Good Shepherd, where no interest is payable and, unlike rent-to-buy, you own the asset at the end. Surprisingly, NILS has been around for 33 years.
When the Good Shepherd Sisters asked their lawyers and accountants to put aside $20,000 in 1981 so that they could lend to people on low incomes in the Collingwood area in Victoria – for the record, both lawyers and accounts said “don’t expect to see that money again” – it was a form of peer-to-peer lending. Thirty-three years later, more than 140,000 people on low incomes have taken out and repaid small loans.
The myth that people on low incomes can’t budget and aren’t able to repay a loan has well and truly been busted, as Good Shepherd’s repayment rates have been above 95% consistently.
While Good Shepherd is certainly not the first P2P lender, Mooney says it has certainly been the most impactful and scalable model in Australia. NAB has supported and extended it.
Good Shepherd’s microfinance products – which include a no-interest loan, a low-interest loan and an AddsUP savings plan (where savings up to $500 are matched dollar for dollar) – certainly meet a need.
But why should financial exclusion be a concern for you and I? Well, as Mooney rightly says, we are all vulnerable. All of us, including those on high and middle incomes, should know that, in addition to the social and moral case, there is a strong economic case for Good Shepherd’s work that will make us all better off.
“Independent modelling by Strategic Project Partners suggests that if the right people can get access to inclusive finance like NILS when they need it, a $50 billion uplift in household wealth is possible, driving a GDP increase of $20 billion and annual savings of $2.6 billion to government. This results from evidenced measured improvements in employment, welfare, health, education and crime.
“Interestingly, we’ve had clients who were earning a good income but a change in circumstances has had an impact on their financial situation. It could be a loss of a job or an injury that prevents them from earning an income. It can happen to anyone.”
For more details on low- or no-interest loans see Nils.com.au.