Sustainable Finance: The importance of inclusiveness
By Graham Skellern
Many people in vulnerable circumstances are being left out of the mainstream financial system in New Zealand. The Aotearoa Circle’s Sustainable Finance Forum wants to change this.
In its Roadmap for Action, the forum has outlined some far-reaching recommendations to make a sustainable financial system inclusive and embrace all sectors of society.
“Many people in vulnerable (financial) circumstances have not been made aware of the benefits and support available, and feelings of shame and fear can mean people are not proactive about seeking support,” the forum says.
“For consumers excluded from accessing finance from mainstream financial service providers, their only alternative can often mean accessing finance from payday lenders, where they often find themselves trapped in a long-term cycle of indebtedness.”
The Covid-19 crisis has increased the financial stress to those already at-risk and exacerbated vulnerabilities. The problem has been enhanced through the digitisation of the financial sector, as bank branches and other physical service providers close and exit communities. Financial literacy has become intertwined with digital literary.
The Commission for Financial Capability has estimated that 34 per cent or 608,000 households in New Zealand are experiencing financial difficulties, and 40 per cent or 447,000 households have little financial resilience, they may be falling behind in paying bills and face difficulty if they experience a drop in income. Forty per cent of those exposed do expect a loss in income.
The Safer Credit and Financial Inclusion strategy, a partnership between the Ministry of Social Development, Ministry of Business, Innovation and Employment and Te Puni Kokiri, comments that too many low-income New Zealanders have little choice but to take out high-interest loans (from the payday lender) that are unaffordable and unsustainable, often to meet their everyday needs. For many people and their families, this creates problems of debt and hardship.
John McCarthy, manager of the Tindall Foundation and a member of the forum’s leadership group, said the financial system needs to mature and become more diverse with collaboration across a range of different networks and systems. “It’s not just about sustainability in terms of climate change; it’s a system that supports a sustainable economy focused on the overall wellbeing of all people.
“Take the Ngai Tahu Whai Rawa savings scheme — they have a framework around collective ownership of assets and support for whānau to move forward. Or Good Shepherd Microfinance where small loans are provided to families with very low or no interest rates to help them consolidate their debt and get out from under the payday lender.”
The Ngai Tahu savings scheme has funds of more than $104 million with about 28,750 members, and withdrawals so far have reached more than $15 million. The scheme has goals of improving participation in tertiary education and levels of home ownership, and having sufficient funds for retirement.
“We need to fill the missing middle of the financial system,” McCarthy says. “We need to make available a more diverse range of ‘safe and ethical’ products and services that enables the vulnerable consumer to get finance from mainstream or registered lenders.”
McCarthy said Covid also highlighted the issue of digital access. “When banks and other financial institutions moved their services online, some people were excluded because they didn’t have digital access. They even ran out of credit on their mobile phone calling the bank. Everyone should have access, even if it’s the ability to call free.”
He said there is a need for co-ordination between financial institutions and social support agencies which provide pastoral care for people in vulnerable situations. “We can learn more about collectively managing people in vulnerable situations and support them so they don’t drop out of the financial system.”
A prime example is the Australian initiative, Thriving Communities Partnership, and its response to the bushfires. The banks joined with the utility companies and agencies to provide disaster relief packages and emergency support.
The forum’s recommended changes to improve the inclusiveness of current range of financial services and products are:
- Remove account and transaction fees for customers in vulnerable situations: The added cost of fees disproportionately diminish some customers’ savings, and being able to build up a savings buffer is a protective factor against future financial hardship and potential exclusion from mainstream financial services.
- Provide affordable digital access to all: Financial services and telecommunications sectors and community and social sector representatives should work together to identify actions to address affordability and connectivity barriers to financial inclusion — for example, zero-rated cellular data when accessing social services, similar to 0800 free-call numbers.
- Develop a better approach to co-ordination between service providers, the financial sector and support agencies responding to customers in vulnerable circumstances: Utility providers, banks and council receive signals that customers are facing hardship with overdue or unpaid invoices. There are no mechanisms to flag these early signals between service providers, and industry should develop guidelines for the sharing of information between providers.
Vulnerable customers face added distress as they continually repeat their story to various organisations. That, along with fear and shame, discouraged people from seeking help. This can lead to significantly damaging outcomes — unpaid utility bills can impact mortgages and drive customers into default or foreclosure.
With better co-ordination, banks and utility providers can work with customers to implement budgeting programmes or investigate other alternatives before initiating foreclosure.
- Provide innovative products and series targeted at underserved groups: Limitations on access to finance apply to new forms of business and finance such as social enterprise and impact or ethical investment, as well as individuals and households.
Pilot programmes initiated by non-government organisations, philanthropy and the Government are not scaled — the Government is not using its purchasing power to leverage opportunities to support the development of new forms of business and financing that can improve social, economic and environmental wellbeing.
The Government should increase funding for pilot microfinance and payment-for-outcomes programmes to allow them to reach scale and improve expertise. There should be collaborative research and development by public and private sectors and consumers to co-develop new products, services and institutions that provide access to appropriate forms of finance for currently underserved individuals, households and new business models.
- Scale financial mentoring, advocacy and budgeting programmes to all requiring access: Develop a training programme, diploma or equivalent, for financial mentors to increase the quality and consistency of advice — with the involvement of the community, treaty partners, government and non-government organisations.
Develop an independent funding body, financed by financial sector participants, that can scale-up a range of independent financial mentoring and advocacy programmes that are fit for different underserved communities.
- Address age and gender discrimination in the KiwiSaver Scheme: Employers can currently stop KiwiSaver payments when an employee reaches the eligible withdrawal age of 65, and this is common practice for many organisations, even though the employee is still paying PAYE tax.
This section of the KiwiSaver Act 2006 is outdated, as many people now continue working after they turn 65.
Our financial system’s ‘missing middle’
Hawke’s Bay-based Prometheus Finance was a socially-responsible micro-lender whose shareholders were a mix of local philanthropists and European ethical banks. Prometheus collected deposits from the public, paying a return above deposit rates but with a lower risk/return profile than equity investments.
These funds were lent to businesses which met Prometheus credit and ethical standards. It was a profitable business model but then needed to invest in growth to meet a sharp increase in compliance costs and related overheads.
In 2014, it had 0.3 per cent of repayments in arrears by more than three months, below banking sector norms. To commercialise and meet higher capital adequacy requirements for non-bank deposit takers, Prometheus required about $4 million in additional capital. Prometheus was neither a bank nor a charity and failed to raise the needed capital and went into voluntary receivership at the end of 2014.
The Sustainable Finance Forum says the inability to scale and achieve financial sustainability is an issue experienced by many organisations targeting socially-focused lending in New Zealand.
Currently, capital adequacy and compliance requirements do not differentiate non-bank deposit takers who provide socially responsible low-risk lending and those that are purely commercially motivated and reinvest capital in high-risk structures.
This means socially-focussed lenders face excessive capital adequacy requirements compared to their risk levels and are unable to scale unless they diversify into products with higher returns which may breach their ethical standards, says the forum.
This has led to a New Zealand financial sector dominated by commercial banks who serve the majority of customers, and at the other end, payday lenders who can be the only alternative for those unable to access mainstream finance.
This is the missing middle — a lack of alternative financial service providers to fill the gap between the banks and payday lenders.
The forum says in other regions such as Europe, social-focussed lending is a mature market — there is a track record to show these business models have low default rates and provide a return greater than deposit rate products.
Investors in these regions are willing to lend, creating scale and overcoming high compliance cost hurdles as they are familiar with the risk/return characteristics.
“New Zealand needs to create a similar environment to let these types of business models thrive and reach commercial viability — to fill the missing middle and provide a wider range of financial services and products,” says the forum.
The Aotearoa Circle
Her Excellency, the Governor General of New Zealand, Dame Patsy Reddy
Co-chair — Vicky Robertson
Co-chair — Sir Chris Mace
Sir Jonathon Porritt