The ugly, the bad and the good of lower income consumer lending

Robert Choy is a lender-for-good. He runs Ngā Tangata Microfinance (Ngā Tangata), providing small, fair interest-free loans to those on lower incomes, helping them break the shackles of loan sharks and payday lenders or purchase productive assets. We’ve got a common hero – Muhammad Yunus – and he also shares a common hero with my mam – Clint Eastwood! Robert shares his experience with us.

Ngā Tangata Microfinance’s Robert Choy

 

Clint Eastwood’s classic 60’s movie portrays a bounty hunter, a mercenary and a bandit, depicted in the film’s now famous title “The Good, the Bad and the Ugly”. Could the enduring name of this epic Spaghetti Western resemble the credit environment we experience in Aotearoa today?

Visiting New Zealand recently, Nobel Laureate Professor Muhammad Yunus, considered the father of social business and microcredit, has said that “credit is a human right that should be treated as such” and “if we are looking for one single action which will enable the poor to overcome their poverty, I would focus on credit”.

Whether we agree with Professor Yunus or not, we’d surely promote a safe and fair credit environment within a responsible and educated society as crucial. Shameful to say, the current consumer lending environment in Aotearoa can best be described as ugly if you are on a low income, with limited financial choices before you, should you need to avail your rights to affordable credit.

Regardless of income level, crises or emergencies inevitably occur: the car will break down and we can’t get to work, the fridge will stop working, or children become ill and need to see a doctor. Once financial reserves and the generosity of family and friends are exhausted, and without access to mainstream credit sources, such situations force those on low incomes to take the only other available option: easy-access, high cost loan sharks, payday lenders or mobile traders.

Third tier finance companies provide loans with interest rates ranging from 20-40%, but the default interest rate can be up to 10% above that, with numerous extra penalty charges also added. Payday lenders provide only short term lending ideally, but at an outrageous cost, often charging at least 1.2% per day (or 438% annually). While truck vendors or mobile traders often charge no interest on purchases, their prices are inflated up to three times the norm, and administration and fees will ensure they reap more than 100% profit on every transaction. Unlike many parts of the world, in New Zealand there is no legal limit on interest rates or on the total cost of credit. Both these protections are critical to address the ugly environment of predatory lending facing our poorest citizens.

The resultant poverty trap is that of unmanageable debt, which is especially bad and tragic in its consequences for those on low incomes. High interest debt compounded by excessive charges rapidly becomes unmanageable, with unsustainable repayments causing stress amongst family members, limiting funds needed to purchase food and other essentials, and diminishing any remaining assets the family may have. It also negatively affects the wellbeing of the wider community, darkens the public perception of debt and contradicts the norms of social justice that we in New Zealand hold dear.

However, amongst the bad and ugly, there is good news! Ethical lenders such as ourselves at Ngā Tangata (with capital from Kiwibank and in partnership with local budgeting services to support clients with financial capability) are redressing the villainy of debt, creating an enabling tool to lift people out of poverty. Paying off their high interest debt and replacing it with a loan to NTM can at times release $20, $50, $70 or even more back into the family budget each week, providing money for essential food or necessities previously forsaken.  A fundamental aspect of our kaupapa is to facilitate clients successfully paying off their loans and being supported in the long term towards financial independence.

More good to report is that the Commerce Commission is taking increasing legal action against predatory lenders since the amendments to the Credit Contracts and Consumer Finance Act and the introduction of the Responsible Lending Code in 2015. In 2016 the Commission obtained fines against six mobile truck traders in excess of $500,000 and recently an online loan company was recently required to refund  $1.4 million in unreasonable fees to borrowers.

Our current lack of consumer protection against the ugliness of usury, predatory lending and the unmanageable debt it spawns, undermines the economy, and creates financial stress and hardship. Clearly these are bad outcomes for those already on a low income. While organisations like Ngā Tangata and other responsible lenders are endeavouring to make a difference, surely the greatest good in the interests of all, would be a financial system that is sound, ethical and socially responsible.

Access to credit – a fundamental human right. Powerful.

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