On a trip to the antipodes you expect to find things a bit upside down. You look out on the underneath side of the universe and see mammals that lay eggs. On my recent trip there, I discovered that the microfinance world is a little upside down, too.
The biggest microfinance program in Australia, Good Shepherd Microfinance’s No Interest Loan Scheme (NILS) is mind-bendingly different from most microfinance operations. In the first place, it charges no interest or fees – technically it’s a repayable grant. Secondly, it is explicitly designed to assist people to obtain consumer goods, such as a refrigerator, washing machine, or laptop, not to operate a business. And thirdly, far from addressing the informal sector, most of the borrowers are recipients of some form of public welfare support.
The NILS program makes over 20,000 loans a year through 650 locations across Australia. Its loan capital is provided by National Australia Bank (NAB), one of Australia’s four main banks, and its operating budget is mainly supplied by the government. In fact, NAB has pledged $130 million in loan capital.
To understand the rationale for this scheme, it helps to realize that NILS is aimed at people on the very bottom rung of a continuum that goes from financial crisis through resilience and into wealth (see below). The people NILS assists have financial lives so fragile that a setback like a broken car or washing machine can make their lives unworkable. They cannot support interest-bearing loans, but a no-interest loan can allow them to solve an immediate crisis without making things worse. In the Australian context, they are close to the poorest of the poor.
From a public sector perspective, this program helps families stretch their public assistance funds by paying for lump sum expenses that would otherwise be hard to manage with public assistance payments that come in monthly.
From the banking perspective, the $130 million contribution NAB has made will last many years, given that high repayments allow the funds to be loaned out multiple times. In effect, the loan capital is the equivalent of a much smaller charitable grant paid out annually for as much as a decade.
From an operational perspective, it is the link to public assistance (known in Australia as Centrelink) that accounts for the program’s scale. The assurance that Centrelink funds will be available to repay the loans allows them to be made by staff in hundreds of community organizations who would otherwise not have the training to underwrite a loan.
But what about self-sufficient microfinance, operated on a business-like basis? Adam Mooney, CEO of Good Shepherd Microfinance, has outlined the rungs of a Financial Inclusion Continuum that shows that as they move up the ladder, people can and do access services on closer to commercial terms.
Good Shepherd Microfinance offers two of those products, the StepUP loan and the AddsUP matched savings account. Unlike NILS, the StepUp loan is an actual bank loan, although at below-market interest. The savings match in AddsUp must also come from public funds or charitable contributions. The organization recently signed an agreement with Australian insurer Suncorp to offer insurance – most likely home-content and/or auto insurance – as well. Further up the continuum, people are able to access market-based financial services, including credit cards and eventually investment products. According to Good Shepherd CEO, Adam Mooney, a report released in March, Life Changing Loans at No Interest, showed that four out of five NILS clients experience economic mobility, meaning they are moving away from crisis and hardship, towards stability and resilience. In addition, most NILS clients stopped using payday lending.
The relationship between the products of Good Shepherd Microfinance and Centrelink (and other forms of public assistance) demonstrates the challenge of delineating the roles of public assistance and financial services in places where there is a social safety net. People receiving public assistance still need financial services to manage risk, smooth consumption, save, and make investments such as those in education. It is possible that financial services can play a key role in enabling people to emerge from public assistance. Good Shepherd Microfinance believes it has evidence to support this case. Therefore, it is important for public assistance to be designed in ways that allow for and even encourage the use of financial services, not, as in some instances, disqualifying people if they receive a large lump sum or accumulate savings.
Agreement around the Financial Inclusion Continuum adapted to the local context would provide an excellent basis for public and private policy making and partnership in every country.
Image credit: Aristocrats-hat
Figure source: Good Shepherd / Daymark, 2012
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