Loans rescue minnows from sharks
Microfinance is a better bet than high-interest, pay-day borrowing, writes Christine Long.
Could a small loan be a catalyst for turning someone's financial world around? Providers of microfinance think so.
Muhammad Yunus pioneered the concept in Bangladesh more than 30 years ago, personally lending $US27 to women borrowing from a loan shark to buy bamboo to make tables. Once repaid, the loan was recycled to someone else and, to date, Grameen Bank, founded by Yunus, has lent $US7 billion ($6.7 billion) to give the working poor a hand up.
Today the same principles are providing Australians on low incomes or with a poor credit history a much-needed alternative to exorbitant pay-day lending.
Excluded from credit cards and personal loans, about 800,000 people "cycle" from one pay-day loan to another, some taking out as many as 20 in a two-year period.
In February, the government announced it would channel another $1.2 million into its Community Development Financial Institutions microfinance initiative, following a 15-month pilot scheme that saw $2.8 million in small loans extended to vulnerable people.
The loans - 1053 personal loans and 122 microenterprise loans - were made via organisations including Foresters Community Finance, the Fair Loans Foundation, Many Rivers Microfinance, and Community Sector Banking from $3 million in capital provided by philanthropists, Bendigo Bank, Westpac and NAB. As recipients repaid the loans, they received money mentoring, not to mention a big boost to their financial confidence.
A no-interest loan scheme (NILS) to help struggling Australians buy essential household items is yielding similar benefits.
Started 32 years ago by the Good Shepherd Sisters in Victoria, the loans, of up to $1200, have no fees or interest charges and are now available to Centrelink concession-card holders via 270 community organisations throughout Australia. Low-interest loans of up to $3000 at 3.99 per cent for three years are also offered via its StepUp program for larger expenses, such as buying a car.
Good Shepherd Microfinance chief executive Adam Mooney says that to ensure the loans don't entrench people in poverty, the potential borrower's capacity to repay is assessed; they are asked to find a quote for the item; are given a cheque to buy it, rather than cash, and receive the ongoing support of the community organisation.
As a NILS loan isn't considered credit, any default isn't recorded on a credit file. A default on a StepUp loan will be recorded, however. Fortunately, default rates are below 5 per cent. The circular nature of the loans means it's in no one's interests to write it off.
Mooney says Good Shepherd will help a client revisit their budget, or possibly extend the loan term, if they fall into arrears and only make the joint decision with NAB to write it off after 180 days.
It's an approach that has won growing support from banking partner, NAB, and the federal government, with NAB increasing loan capital from $10 million to $30 million, and government funding rising from an $18 million tranche in 2009 to $50 million in 2012. That in turn has driven a five-fold increase in NILS loans, from $2.8 million in 2006 to $18.1 million in 2012, with 23,000 loans granted in 2012.
Mooney says that over the next five years, Good Shepherd is aiming to reach 1 million people with its microfinance services, with the working poor on incomes of $25,000 to $40,000 increasingly in its sights.
For Many Rivers Microfinance, the focus is on the budding entrepreneur with a poor credit history or a lack of assets. In partnership with Westpac, it provides loans of typically 10.51 per cent for one year. So far, it has given wings to a range of micro-enterprises, including a lawn-mowing business, a driving school, and Tim De Wal's computer support shop (see above).
Garry Harris, a field worker for Many Rivers Microfinance, says apart from providing access to finance, it helps the client build a "sustainable business", assisting with business plans, cash-flow projections and bookkeeping guidance.
While credit checks are performed, it looks at what is behind previous defaults.
"The objective here is not to give someone debt, even though it's a loan," Harris says. Not every microfinance initiative lasts, however. Progress Loans, a partnership between ANZ and the Brotherhood of St Laurence, stopped making new loans in 2012. A review of the six-year scheme found it would not be financially sustainable without ANZ's "substantial and ongoing subsidy".
Handy little helper
Without the security of a house, Tim de Wal had little chance of getting a business loan from a bank.
"With anyone who's in small business and rents a house, banks won't even look at you," says de Wal, who lives in the NSW southern highlands.
Fortunately for the 47-year-old and his wife Marie, and their eight children, Many Rivers Microfinance agreed to lend him $8500 to open his computer support shop, Banjan's IT, in Mittagong.
"Without Many Rivers, I think we wouldn't be here," says de Wal, who came across the organisation when he was doing the New Enterprise Incentive Scheme small business program.
A previous IT shop in rural NSW floundered during the drought, but de Wal's research into this market proved spot-on. He paid off the one-year loan in 10 months, nabbed some large contracts, and has just opened a second shop in Goulburn with the help of a larger loan.