Monday, May 8, 2017

We need fair micro-credit solutions.

I have friends who, when bad luck strikes, have been forced to take out credit card loans. Every single article I have read or consumer advice show I have watched has warned me this is a terrible idea. Those friends however are disinclined to accept any direct financial assistance from my partner and I instead. I get that there are solid cultural reasons for this. I believe we can overcome, or maybe circumvent such reasons, with positive micro-credit systems.

We view direct transfers of money between friends as problematic. If your mate helps you out with a lift you might give them money “for petrol” as a way of diminishing the act of payment. If they help you fix your door (which friends have done for us) then you’ll often have a better chance of paying them with food or alcohol than you will putting money in their hand. The exchange of money can transform a relationship into employer/employee or service provider to customer. Those relationships can overlap with friendships but they also come with their own kinds of expectations. We are friends with our mechanic. But when he operates as our mechanic we expect a certain standard of service and he expects prompt payment.

The problem is sometimes we need money. In such situations we are culturally predisposed not to solve our problems in our communities with our closest allies. Instead we go to banks and when we lack the collateral to secure a bank loan we take out credit card loans, hoping we can pay them back before the above 20% interest rate kicks in. And we pay high fees for the privilege. When for some people repayments become difficult the crippling debt and fees serve to dig an impossibly deep hole, for others credit cards just add to the cost of living – not killing them but making life significantly harder.

The alternatives to credit card companies are worse. So called payday loans which provide instant short term loans of amounts like $6000 without credit checks, are loan sharks with fancy marketing. People end up with real interest rates as high as 68%, face late fees for not meeting repayments and end up facing constant harassment from debt collectors. Here are some resources that make for harrowing reading:

The ultimate lender of last resort is the pawn shop. Cash converters is the most famous. They are an unwitting but not unwilling fence of stolen goods half the time. Even when they pawn legitimately owned property that business model is based on undervaluing goods to those who bring them in. I remember seeing an elderly man being told how worthless his wedding ring was by some young punk in a Cash Converters Polo-shirt while I waited to check if they had any of my stolen property. That’s the ugly face of capitalism they keep out of the brochure. In addition Cash converters joins in the payday business with a lack of scruples that makes the other players in that industry look good. In  2015 they were reached a settlement to refund about 37.500 customers after charging them real interest rates as high as 633%!

If you are wondering if there is a solution you’ll be pleased to know that there sort of is. All the small dodgy lenders we’ve mentioned (like Nimble and the rest) can be considered micro-credit or micro-finance agencies. They are ways to provide small amounts of credit – anywhere between less than a 100 dollars to a few thousand. NILS, the No Interest Loan Scheme, administered by Good shepherd, is showing how micro-financing doesn’t have to be exploitative and can serve as a crucial step in staving off deeper poverty. For want of a grand for example a person may not be able to repair their car and thus can’t make it to work.

The NILS program is restrictive. The loans can’t be used for ongoing costs like rent or bills. This is so as not to put a loan in the hand of someone who might be able to obtain emergency rental assistance or defer their bill payment – better options really than a loan. It also ensures the loans aren’t simply bandaiding a problem that will re-present in a month. The size of the loans are also very small between $300 and $1200. That no doubt ensures the program helps the most people but there would be many people who need more than that. For example, purchasing a roadworthy car for less than $4000 is nigh impossible.

Participants also need to be on low incomes and healthcare cards. This ensures the program meets the deepest need however even people off health care cards can face the need for credit with a real uncertainty about when or if those circumstances will turn around. The Health care card cut off is reached with an income of about $500 per week with an allowance of $34 dollars per dependant child. Two bedroom dwellings in Bendigo ( a regional Victorian town) are at their cheapest at $220 per week, while in Fawkner (a once outer suburb of Melbourne and traditionally very working class) they sit above $300 (which is still more than $100 cheaper than a basic single person apartment in Carlton). ( It is easy to see how a family might be on an income above the Health care card cut off and still be in financial stress after rent.

We should also consider that it doesn’t make economic sense for people to focus on mere survival. Living beyond our immediate means can be good economics. A person might reasonably build or purchase their own home, or undertake study or obtain a bee hive and a couple of chooks, or get that sore back properly looked at or buy a push bike. These are all investments in a more sustainable personal economic future which lines of no interest credit would make a lot easier. The NILS program of the Good Shepherd might service only some of these occasions. Its not meant to replace exploitative micro-credit agencies all together. For that we may need to consider other options.

Crowdfunding can be a way forward. Peer to peer lending is specifically a type of crowd funding which aims to emulate the banking system with lower overheads. The outcome is both lower interest rates for lenders and higher returns for investors. In addition peer to peer lending can give investors more control over how their money is loaned out. One positive aspects of peer to peer lending is how it draws loans from a very broad range of investors thus reducing the impact of a single loan default on any one person. The platforms also provide anonymity to lenders and borrowers overcoming our cultural problem with money and friends. Peer to peer lending however is profit driven perhaps precisely because of that anonymity enabling us to make a profit off simply loaning money to someone. I hope peer to peer lending does bite into the major banks business but I also don’t expect it to fundamentally challenge the banking business model so much as run it more efficiently.

The other extreme are crowdfunding sites through which people give money away like  GoFundme and to a lesser extent Pozible (which has some rewards for givers). Theses sites don’t fully escape our cultural taboos about asking friends for money. There are people who, in financial stress, still wouldn’t use such a means of asking. On the flipside because the money isn’t officially loaned people may put a higher standard on why they would give it. Perhaps a car that needs repairing wont be enough to garner support.

I did say Pozible and GoFundme don’t officially loan money but they can still be understood as forms of credit. If I fund you when you need money and when your situation recovers you fund someone else and so on, including the possibility that I will one day be funded myself, then the gifted money acts just like a no-interest micro- credit scenario would. Money moves around to meet need and keep people away from loansharks.

There are other ways donations can form a kind of bank. Free Wheeling Fun in Bendigo takes in old bikes, fixes them up and then provides them for a donation to anyone who needs a bike, This concept of free-cycling minimizes expenses and waste at the same time. Baby gear; prams, cots, high chairs, clothes and toys , even non-disposable nappies; all are perfect for free cycling. They just take up space  once outgrown but they will be a real boon to someone else. What makes this sort of giving away into a form of micro-credit is the reciprocation. Upon giving away a cot, get a kids bike for a donation, then give that back because your kid is grown and ask a stuff-sharing community for a cot because its second child time. Or something like that. What doesn’t make this like a bank is that giving or taking is not tracked. While this means people may exploit the situation I suspect that doesn’t happen as often as feared. Rather I worry that people would be concerned about looking like they were exploiting the system and despite the opportunities in free-cycling will only turn to it after exhausting less savory options.

The enemy of positive, generous and non-restrictive micro-credit alternatives is a cultural view that we all must stand on our own. Nobody does stand on their own of course. We are supported by family and friends if we are fortunate. Less positively we are a part of histories of oppression and theft in Australia. For good or ill, any employment we have is embedded in a whole society that makes that employment possible. In so many ways the cliché call to stand on our own (in addition to conjuring an image unfair to people without use of their legs) is never accurate. If we can accept that, we can instead invest in fairer ways to help each other. Anything has to be better than interest rates that contribute to our growing income inequality.