Informal loans rate high
New Zealanders are among the most likely in the world to have a bank account but have a higher reliance on "informal" loans than many nationalities, according to a report on financial exclusion.
The report, commissioned from the Centre for Social Impact (CSI) in Sydney by BNZ's parent bank NAB, comes in the run-up to the foundation of a microcredit scheme here designed to break the stranglehold third-tier lenders have on some of the country's poorest people.
Details of the scheme are expected to be announced this week. It is likely to be similar to the NAB-funded no and low interest rate loans scheme operating in Australia, though the identity of the bank which will provide the funding here remains under wraps.
The Global Snapshot of Financial Exclusion 2014 report shows New Zealand fares well in some areas of financial inclusion - the ability of people to operate within the mainstream banking and finance markets. It showed 98.7 per cent of people have access to a bank account, the highest of all the 23 countries surveyed.
It credited New Zealand banks with having done a good job of designing simple, low-cost products that encouraged financial inclusion.
New Zealand also had a high proportion (60.4 per cent) of people with access to "formal savings". Only Sweden scored more highly among the 23 countries.
But where New Zealand lagged was in the number of people relying on "informal" lending outside of the mainstream bank, building society and credit union system.
"The one negative feature of the New Zealand data is the high rate of informal lending. There is no regulation in place in New Zealand regarding interest rate caps or payday lending restrictions, although the debate is beginning to emerge on these topics," the report said.
Research by the World Bank, which provided the numbers for the report, suggested 11 in every 100 loans in the previous year in New Zealand were from "informal" moneylenders (see chart). This appears to include businesses outside of the mainstream banking sector like finance companies. But CSI researcher Chris Connolly said the "informal" lending tag covered a wide variety of types of lending including high street payday lenders, online "instant cash" lenders, and door-to-door moneylenders.
The focus on the ratio of formal to informal lending is designed to show which populations are most exposed to the parts of the lending industry most likely to adopt predatory charging behaviour.
The New Zealand ratio was higher than in Canada and Australia, though notably lower than Britain and the US where industries like payday lending were born.
New Zealand is currently overhauling consumer lending laws to rein in some of the abuses happening at the lower end of the market, though we're stopping short of following South Africa and some of Australia's states in introducing interest rate caps.
A recent report from the Commerce Select Committee on the bill said: "Whilst restricting interest rates may offer consumers protection from one form of high-cost credit (short-term, high-interest-rate compounding loans) we consider that it may also have unintended consequences. They include restricting access to credit for consumers, and also that the interest rate which is the upper limit coming to be viewed as a target or ‘reasonable'."
The CSI report concluded there was a clear link though between the size of the informal lending market and toughness of regulation of lower-tier lenders.
In particular, it said, countries where strict regulation is accompanied by low caps on the costs of credit have an "excellent ratio of formal to informal lending", and it said that a recent European Union study had concluded that there was no obvious correlation between the volume of consumer credit available in a country and interest rate restrictions.
Dr Claire Dale, spokeswoman for Child Poverty Action Group and a trustee of Nga Tangata Microfinance Trust, said loan sharks would be laughing at the proposed law changes, and that only an interest-rate cap would result in an improvement in the lives of those dependent on lower-tier loans.
The select committee report noted both Labour and the Greens backed interest-rate caps.
Sunday Star Times