A personal micro-credit scheme is proposed by the Dept of Social Protection whereby people who might otherwise have to go to moneylenders will be able to access small loans quickly and with just minor credit checks.
A pilot scheme could be in place by September making loans of up to €1000 available through post offices and credit unions.
Government sources say there will be a significant involvement by the Money Advice And Budgeting Service (MABS) and St Vincent de Paul to ensure people don’t seek loans they cannot afford.
The scheme has been welcomed by the St Vincent de Paul as it will expand access to affordable credit to those who can least afford the interest rates of the moneylenders who are often their only option for an small loan when the need arises.
Typically clients would be low to middle income earners or people on social welfare who may have been refused loans by the banks. The aim is to break the hold of the moneylenders both licensed and illegal who often charge up to 260% interest making it impossible for hard pressed borrowers to ever clear their debts.
These loans are expected to have interest rates of up to 12%.
The need for a personal microloan scheme
Despite the economic recovery, poverty is still at a very high level, and many people not only can’t save for occasions or unexpected events, but are forced to go into debt for day to day living expenses.
The CSO figures show that 650,000 adults live in a “credit constraint” household.
360,000 people borrow from moneylenders.
The demand for microloans is expected to be up to 293,000.
Microloan schemes do work
A report by George Gloukoviezof of UCD shows that microloan schemes work. It mentions similar schemes abroad such as; Scotcash, which has been operating since 2007 making average loans of £531 typically repaid over 42 weeks, and StepUP Loans, a partnership between Good Shepherd Microfinance management and National Australia Bank which has a default rate of just 1%.
The report also cites Microbank Spain, which since 2007 has been catering for families with annual incomes below €18,000 and operates through 5,700 branches of the mainstream Caixabank.
The report proposes that loans of up to €2000 should be made available here depending on repayment capability and estimates that up to 360,000 people could benefit from such loans.
Effects of the scheme
The main effect will be in providing an alternative to moneylenders for people who have no other access to credit, due perhaps to unemployment, pre-existing debt or poor credit ratings.
A huge number of people use money lenders and the number could rise as high as 400,000 if nothing is done.
While most of these loans are relatively small, averaging at €500, the consequences can be far reaching with exorbitant interest rates and roll over loans, not to mention the bullyboy tactics of some of the less scrupulous illegal money lenders.
Welcome side effects of the scheme will be boosts to the country’s Post office and Credit Union networks both of which are in need of revival.
Personal impacts of microloans can include:
- Reduced borrowing from moneylenders
- Significant savings on high cost borrowing .
- Improvements in financial situation
- Improvements in money management skills and self-confidence
How it will work
The Personal Microcredit Scheme will be spearheaded by the Dept. of Social Protection and overseen by the Social Finance Foundation which was set up with €72m in funding from the banks with the aim of providing lending to financially excluded groups.
Borrowers can expect to get an answer to their loan application in under an hour at a Post Office or Credit Union.
Financial and budgeting advice would be available and recommended from organisations such as MABS, to ensure the borrowers would be able to cope with the loan.
People on social welfare would be required to have the repayments taken from their social welfare under the existing Household Budget Scheme administered by the Post Office whereby deductions are taken from social welfare payments to pay bills.
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No doubt news of this scheme will be further bad news for the money lending sector as it comes shortly after the recent case won by a Donegal couple against a major moneylender, the fallout from which could see thousands of people having their borrowings from money lenders wiped out and receiving compensation.
The Donegal couple had loans from Provident Personal Credit, but were illegally offered new loans before they paid off the old ones.
The couple complained to the ombudsman, won their case, and got compensation.
Now experts say that up to 100,000 people who are estimated to have had their moneylender loans illegally rolled over into new loans could be in line to have them written off and receive compensation.
In 2013 the Central Bank found that a quarter of the more than 360,000 customers of moneylenders were offered new loans before they had cleared their existing one.