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Five ways the UK can learn from Australia’s no interest loan schemes

carl packmanAs a response to the growth of high cost credit on the high street one scheme in Tenbury Wells, a market town in the Malvern Hills district of Worcestershire, has been set up to give financially excluded local people an opportunity to access no interest loans without having to enter the shops of payday lenders or pawnbrokers.

Despite starting in early 2013 it was given prominence recently in a BBC News item after a decision had been made to open another site in nearby Ludlow to provide credit to people in really desperate circumstances; the demand for the no interest loans scheme (Nils) had grown to the extent where one site was longer enough.

Jane Newton who works for Tenbury Citizens Advice Bureau picked up the idea while working in Australia. Indeed the Good Shepherd Youth & Family Service in Australia started the first No Interest Loan Scheme in 1981 with funds from the Good Shepherd Sisters. Since then Nils have become widespread in the country, run by 257 accredited local community organisations in over 609 locations to 125,000 people.

Similar to the Australian version, the Tenbury Wells scheme offers a maximum loan of £400, not in cash but in exchange for the purchasing of white goods such as washing machines, clothing such as school uniforms, or medical equipment. Repayments are agreed and paid over 12-24 months while loans are used to purchase products from outlets in the local area.

The scheme, the only one of its kind in the country, was initially the outcome of a philanthropic loan of £5,000 but now receives other funding including a small investment from Malvern Hills Council.

While financial institutions such as credit unions have been given a boost of late, not least from the Archbishop of Canterbury, who has become one of their chief advocates, it is still important to have schemes where people can pick up basic household items with no interest to pay whatsoever. Here are the five things that other potential schemes around the country can learn from Nils in Australia:

1. Nils can help the unbanked, underbanked, or financially excluded in a way that a payday lender cannot
One major upshot of the dire economic downturn in the UK was the growth of the financially excluded in the UK. In 2010 the Treasury’s financial inclusion task force found that there were 1.75m adults with no access to a transactional bank account. Additionally 7.7 million accounts were without credit facilities and a further 9 million people were without accounts that allowed access to mainstream credit. The underbanked and financially excluded were among the worst hit by the recession – seeing a rise in the controversial payday lending industry.

A survey of Nils clients in Australia found that they were three times more likely to be severely financially excluded (55%) than the average Australian (17%), however as a consequence of seeking finance from Nils the economic outcomes of more than a third of the surveyed clients improved due to increases in savings (33%) and financial independence (46%). A total of 82% of clients experienced a net improvement in social and economic outcomes with only 2% experiencing worsening outcomes.

2. Nils can reward people who repay on time with a matched savings plan
Good Shepherd Microfinance set up the AddsUp Savings Plan which is a matched savings plan open to people who have successfully repaid one Nils loan. Once $300 has been saved with the National Australia Bank then the bank will put in a dollar for every dollar saved, up until $500.

Given the loss of savings schemes in the UK, such as the Savings Gateway or the Child Trust Fund (CTF), similar enticements need to be restored in order to incentivise putting money away for a rainy day. Finding participating banks, or having the government endow accounts with matched savings (as was the case with the CTF), would give those most vulnerable people in society a renewed purpose for saving and reward them for responsible borrowing and saving behaviour.

3. Nils can provide information on energy efficient products
One way of ensuring ‘white’ goods and other consumables are energy efficient is to encourage recycling and the circulation of second hand furniture. The Good Money service, a community finance hub operating in Victoria, Australia, provides tips about buying energy efficient products, while also getting the best price on goods through a buying service. Australian Nils have started to do the same to ensure that their credit isn’t used to purchase environmentally harmful consumables.

4. Nils can help people start their lives again
Good Shepherd Special Nils Pathways loans can be made available to women setting up home after leaving domestic violence or after leaving prison. For example, women living in the Melbourne metropolitan and Westernport areas who have previously faced issues of household violence and have left those homes are immediately eligible for the special loans. This facilitates credit assistance that can help rebuild lives.

5. Nils can undercut the extortionate Rent to Buy sector
The Micah Law Centre in Australia, in a 2007 report, pointed out that the use of rent-to-buy products by financiers of lease agreements, instead of traditional loan agreements, has often been for the purpose of avoiding consumer protection laws that apply to loan agreements. In many cases this has led to high cost agreements and unfair contract terms. Given the rise of high cost rental shops such as Brighthouse in the UK, Nils can offer an alternative to extortionate installment purchases.

With the scrapping of the social fund and the confusion around budgeting advances under universal credit more people risk having to visit high cost credit lenders just to get by. But No Interest Loan Schemes offer an alternative to that. With a look at how they work in Australia, more local authorities in the UK could build support for this lifeline.

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