Australian microfinance “not at its peak”

Despite a “war against the evidence” for the benefits of microfinance, the sector predicts 2023 will mark the beginning of significant growth.

Despite Australia’s strong social security system, microfinancing is experiencing significant growth and offers a critical opportunity for the sector to reduce disadvantage, says microenterprise development organisation Grameen Australia’s chair Ian Neil SC.

“It’s certainly not at its peak now and I’m confident that it will grow,” Neil told Pro Bono News about microfinancing – the provision of small amounts of capital typically to low-income earners.

“The proof of that is not just experience overseas in places like America, which in many respects is not dissimilar to Australia, but it’s also demonstrated by the exponential growth that we have had here.

“We opened the doors in March 2022, started slowly, and by the end of August, we had lent out about $20,000. In total, by early December, we had cracked $350,000… That’s exponential growth and I would expect that to continue. We see no sign of that slacking off.”

Grameen Australia offers small loans, financial training and support to low-income earners, mostly women, who are seeking income through self-employment. It is informed by the global Grameen microfinance model, which has benefitted over 300 million people since being founded in the late 1970s.

The state of microfinance

Microfinance is on the rise around the world, both in the provision of loans and the number of borrowers, according to the 2022 Impact Finance Barometer.

The report, which analyses international financial inclusion trends, revealed that there were 156.1 million microfinance borrowers in 2021, with just over half (53 per cent) being women, indicating strong improvement post-COVID. Regionally, south and southeast Asia dominate the sector, accounting for 72.5 per cent of all borrowers.

“I’m extraordinarily optimistic about the future of microfinance in Australia,” continues Neil.

“It has proved now for decades to be a powerful engine to empower people’s lives, to help them create, for themselves, lives of value, dignity, purpose and meaning. There is a need for that everywhere in the world and in Australia.”

Despite its record growth, microfinance has been criticised for ineffectively addressing poverty, with reasoning including high interest rates associated with loans, predatory lending practices, and the effect of crises including COVID and natural disasters impacting household debt.

Other sources suggest that microfinance services, including Grameen, are rarely able to operate without government subsidies. Grameen Australia, a not-for-profit organisation, received $3.5 million from the federal government in seed funding as well as $400,000 from the Victorian government to launch the first branch in the state.

Neil suggests this funding helped to correct the country’s initial slow adoption of microfinance, which was in large part due to its strong welfare system.

“There was war against the evidence, I must say, but long an idea that Australia was a wealthy developed economy that didn’t need something like the microfinance that Grameen affords,” continues Neil.

“Here, of course, we have a relatively generous social security system, income support and other forms of assistance for people that are disadvantaged or in difficulty. There was an idea that there was not only not a need for something like Grameen microfinance, but that it wouldn’t prosper.

“I was very firmly of the view that [this] idea devalued the desire that so many people have to take control of their lives, and so it has proved.”

Microfinance and the for-purpose sector

“Microfinance is directed exclusively at this sector, no matter where it is deployed,” says Neil, adding that beneficiaries of microfinance – those typically excluded from the mainstream financial sector – tend to reflect the community the social sector serves.

One example of this intersection is non-profit Good Shepherd’s No Interest Loans (NILs) program, which has been supporting those experiencing financial hardship for over 40 years.

The community program enables eligible individuals and families to access interest- and fee-free credit for the use of essential goods and services.

Good Shepherd Australia New Zealand’s financial access and inclusion general manager Gunjan Pagare says the NILs program has “revolutionised the ethical microfinance sector”.

“No interest loans are essential for the community because they provide a lifeline when managing your budget or when unexpected costs feel too overwhelming,” Pagare told Pro Bono News, referencing the financial toll of rising interest rates for Australians, which don’t appear to be slowing down.

The popularity of the microfinance loan program is evident in it being available in over 600 locations across Australia, delivered through Good Shepherd’s partnership with 170 community organisations. The program is funded by the Department of Social Services in collaboration with NAB.

The national scheme was recently expanded in order to meet increasing demand, spurred on by the rising cost of living as well as debt from the growing use of Buy Now Pay Later schemes. Measures include extending the repayment term to 24 months and the credit limit to a maximum of $2,000.

“Traditionally, we have seen a lot of people on low incomes accessing NILs for household essentials. However, since increasing the income eligibility and widening the scope for loan purposes, we have seen an increase in NILs being used for health and wellbeing, education and employment, housing and transport [purposes],” continues Pagare.

“An increasing number of clients have turned to payday lenders to manage their finances, with one in three women and one in five male NILs applicants having Buy Now Pay Later debts. Where payday lenders and Buy Now Pay Later companies have monopolised the microfinance credit market, NILs [have] helped people get back on their feet financially and to feel confident.”