Micro credit schemes in Ireland − a new way forward?

Access to loans

Many thousands of Irish householders will soon be able to easily access loans of up to €1,000 as part of the government’s plan to remove the reliance that many citizens have on moneylenders.

This new scheme will enable those seeking a loan to apply quickly and easily and receive a decision within an hour, following some basic credit checks. The plan is latest brainchild of the Department of Social Protection.
Around 40,000 new loans will be rolled out every year from the country’s credit unions and post offices in a concerted effort to offer a realistic alternative to loan sharks and other moneylenders.

The interest rate on these new loan products will be capped at 12%. This can be compared to a typical private provider rate, which can hit extortionate levels of up to a massive 188%.

This new pilot scheme is very specifically targeted at earners falling into the low- to middle-income bracket and who may have had their loan application rejected by a mainstream lender such as a bank.

Safeguards

The loan repayments will be safeguarded by the fact that they will be deducted directly from the borrower’s social welfare benefits, which are administered via the Household Budget Scheme. Sources close to the government report that both St Vincent de Paul and MABS (Money Advice and Budgeting Service) will be closely involved with the scheme to ensure that people do not apply and get approved for loans they simply can’t afford.

The scheme will be overseen by the Social Finance Foundation, which will work in conjunction with the government and the nation’s banks to endorse responsible lending practice.

The Social Finance Foundation was founded using a funding contribution from the banks of €72m. Its primary aim is to provide affordable lending to groups identified as being ‘financially excluded’.

It is thought that the average level of loan applied for under this new micro credit arrangement will be in the region of €500. It is hoped that the scheme will also help to regenerate both the credit unions and the post office.

Credit unions

The ILCU (Irish League of Credit Unions) believes that these micro loans will serve to enhance the credit unions. The new strategy announced by the government comes in the wake of revelations that a large number of people may shortly have their borrowing written off and receive compensation.

The financial crisis hit Ireland hard, leaving many people in debt, many with IVAs (Individual Voluntary Arrangement) and in no position to borrow.

It may seem counterintuitive to suggest that people who already have debt should be given an easier route to borrowing more money; however, the reality is that only the very privileged can go through life without resorting to credit of some sort. As people dealing with debt are highly unlikely to have any savings to fall back on, applying for credit may be their only option. This vicious financial circle has been worsened by a significant reduction in the number of providers and a severe limitation on the level of credit available.

Mainstream lending

A large number of consumers are in the unfortunate position of being unable to access mainstream lending because they are simply in too much debt to qualify for a reasonably-priced loan and may even have been declared bankrupt or have an individual voluntary arrangement. Expect and impartial advice on debt can be found obtained from the charity StepChange.

The requirement to have at least some savings before applying to a credit union meant that many families were ruled out at any early stage in the process. The irony is that it is typically these low income households that are likely to have the most compelling reasons to apply for credit.

For the insolvent and those on a low income, there are few options left to raise money through normal credit channels. Family and extended family resources have long been exhausted for many by now. Finding relatively small sums to meet emergencies is often not possible, except by borrowing from moneylenders. Money lending thrives in a supply vacuum and borrowers turn to money lenders when conventional credit is no longer available.

It is now clear that there is a very great need for a lending stream that is easily accessible by low income families and individuals and that has at its heart social concerns rather than profit.

It makes sense that the credit unions should play a pivotal role in the new scheme. These are local institutions, with invaluable local knowledge, and they have access to the required funds and advisors who are financially astute

Credit unions also have the wherewithal to conduct the processing of the loan and would take on 50% of any debt resulting from the person in receipt of the loan defaulting. The other 50% would be taken from the National Personal Micro Credit Guarantee Fund.

For practical reasons, the lending ceiling is likely to be capped at a given percentage of each individual credit union’s overall lending. Loans under the new scheme will also be overseen under a different regulatory framework. As most of these micro credit loans will be under €5,000, they will be given payment priority in the event that something should go wrong. It is envisioned that even those people who have defaulted on their mortgage repayments should still be allowed to access the scheme. Potential recipients should still seek advice from a source such as http://www.carringtondean.ie/ should they need clarification on any points.

To conclude, in part because of the current economic climate, many people who would not historically have needed to borrow money for essentials now find themselves in a position where this is their only option. This is on top of groups that have tended to struggle with their finances and a micro credit scheme would seem to be an ideal way to address both the social and financial aspects of this issue.