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Money Times - August 18, 2016

Posted by Jill Kerby on August 18 2016 @ 09:00

 

MICRO CREDIT: THE WAY FORWARD FOR CREDIT UNIONS?

 

Credit unions have been roundly criticised for not lending enough over the last several years. Beset by a blizzard of bad debts after 2008, like the banks, many of them were forced to reduce or stop lending altogether by the Central Bank, their regulator.

At least 100 have been merge to achieve some kind of viable  economy of scale, while a small number of completely unviable others have been forced to close (thankfully, without any financially loss to members.) 

A few weeks ago, the best thing to hit the Irish credit unions in recent times -the Personal Micro Credit (PMC) pilot – was rolled out from the 30 CU’s taking part, to the 330 credit unions across the nation.

What began last November in association with the Social Finance Foundation, Citizens Information Board and MABS quickly caught the interest of the targetted members: people in receipt of social welfare payments who might otherwise be borrowing from expensive moneylenders who can charge them of 290% annual interest.  

The ‘It Makes Sense’ loan has been well publicised since it was launched last month, but is worth returning to now, if only because so many parents are trying to find the hundreds of euro per child needed to equip and uniform their school-going children for the new school year.

Instead of borrowing, say, €500 over 6 months from the moneylender and paying back as much as €500 the ‘It Makes Sense’ borrower will pay a maximum of 12% (12.68% APR) interest from their credit union and a total repayment of €515.72. The weekly repayment will be less than €20.

What  makes this scheme so attractive to the credit unions is that the repayments are guaranteed as they are deducted from the borrower’s social welfare payment at source. There is no question of a default, so it is, effectively a risk-free loan.

The pilot’s €700,000 budget was well spent and the new permanent scheme will generate multiple amounts if the estimated 360,000 people who use official moneylenders – a large number of whom would be in receipt of social welfare benefits – take out the new loan instead. The organisers have claimed that moneylending activity in their areas has fallen considerably since the advent of the scheme.

To qualify for an ‘It Makes Sense’ loan you must be over 18 and a member of a credit union though the new loan is available immediately to people who only just join their local CU. (Normally there is a loan waiting period so that you can establish a savings record.)

You can borrow between €100 and €2,000.  Loan terms are between one month and two years but you must be either in receipt of the Household Budget Scheme from which the loan payment will be deducted, or if your social welfare payment is paid into a bank or credit union account, via a standing order or direct debit. Loan approval is within 24 hours of application.  The maximum deduction from your weekly benefits cannot exceed 25% of its value.

You have to wonder why a scheme like this, to break the dependency of so many people on expensive moneylender loans didn’t happen sooner.

But innovation isn’t something that happens very readily after a big financial shock like 2008; instead, as we have seen with the banking sector in general, the hatches are battened down instead and lending tightens as balance sheets are rebuilt.

The success of this micro-lending scheme begs the question, ‘can the Credit Unions find a way to attract mainstream bank customers who are also having trouble raising loans or will have to pay higher interest rates?’

Cracking that nut will depend on how much initial risk the CU is willing to take since working people, outside of the public service, have no income guarantee and therefore no repayment guarantee to offer. 

However, it isn’t beyond the realm of possibility to factor in a post-employment social welfare payment into a micro-loans for this cohort of borrowers. That is, in the event that the member borrower of an ‘It Makes Sense’ loan loses their job or falls ill and ends up in receipt of a social protection payment, that their repayment (however adjusted to their new circumstance) is then paid directly to the credit union.

Meanwhile, the credit union remains that most financially attractive – and ethical – source of smaller personal loans and is streets ahead in the commitment to local communities.

 Where the CU’s lose competitive edge to the banks in not lending mortgages and in not offering the same range of banking services (debit/credit cards, on-line banking) but these are inevitable if the movement is to survive…and prosper. 

A list of all the participating credit unions (more are being recruited every week) is on the League of Credit Union’s webpage www.creditunion.ie and the ‘It Makes Sense’ Facebook page @itmakesenseloan

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

 

 

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