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Enhancing Food Security and Physical Activity for Māori, Pacific and Low-income Peoples2.4 Fringe lender responsibilityTolotea Lanumata and Louise SignalSummaryThe participants in the ENHANCE workshop on money available in householdsidentified debt as a contributing factor to food insecurity amongst Maori, Pacific andlow income households. In particular, the credit practices of the fringe lending marketcreate a culture of dept dependency, escalating debt and stress in some households.Subsequent analysis of the New Zealand literature and the results of the keyinformant interviews reiterate the same concern. There is also mounting concerninternationally in the US, Canada, the UK and Australia on the impact of the fringelending market on low income and vulnerable communities.Fringe lenders are often: small, owner-operated, specialising in personal cash loans;lending at higher interest rates than mainstream lenders; loan small amounts andhave short term repayments; provide immediate cash with few credit checks.The draft Credit Reforms (Responsible Lending) Bill and the ‘Fairness in Lending’report by Finsec offer valuable suggestions for debate and action around responsiblelending in New Zealand which are very timely, given the current economic downturn.Action in this area is also particularly appropriate given the increased attentioninternationally on lender responsibility in the banking and finance industries.Recommendations from this research are as follows:• Introduce regulation of fringe lenders• Improve access to affordable credit for low-income households• Increase financial literacy for users of the fringe lending market.Problem DefinitionThe participants in the ENHANCE workshop on money available in householdsidentified debt as a contributing factor to food insecurity amongst Māori, Pacific andlow-income households. Debt reduces the amount of money available to spend onfood. The concern, however, was accumulating debt, and in particular the role of the‘fringe lending’ market operating in South Auckland and other low-income areas.Participants identified the need for the fringe lending market to be more responsible indealing with Māori, Pacific and low-income communities. It was argued that this couldreduce indebtedness and thus free up money that would have been used to pay offhigh interest loans, to buy food.The recent report ‘Beyond Reasonable Debt’ by the Families and RetirementCommissions indicates that a lot of New Zealand families are in debt and this is nonmortgagedebt. 1 Furthermore, a report by the Ministry of Consumer Affairs identifiedfringe lending market practices as detrimental to vulnerable consumers, particularlyPacific consumers. 2 Most importantly, it was found that the most common reason forborrowing was to meet everyday household expenses.43
Enhancing Food Security and Physical Activity for Māori, Pacific and Low-income PeoplesMethodsThe following databases were searched in December 2008 and February 2009 for theperiod since 1998: Index New Zealand, Scopus, Web of Science, Medline, Te Puna,and Google Scholar. The Ministry of Health website was also searched at this time.Terms used in the search were: food security or food insecurity; fringe lending, fringemarkets, fringe lenders, loan sharks, credit markets; and, low-income, financialresources, household spending, household income.Interviews with four key people with knowledge of the impact of the fringe lendingmarket on consumers were also undertaken between January and March 2009; twowere policy makers and two representatives of community organisations. A semistructuredinterview was used as a guide and participants were asked about theirviews on the fringe lending market in New Zealand and its impact on Māori, Pacificand low-income families. The findings was analysed according to the interview guideand the key themes that emerged.Literature Review ResultsThe international contextThere is a growing literature on the fringe lending market and its impact on lowincomeand vulnerable communities. There has been a rapid increase in the numberof fringe lenders over the last two decades in the US. 3 This increase is largely to meetthe unmet financial needs of low-income consumers who cannot access mainstreamfinancial services. In the US in 2000, the estimated annual transaction of fringeservices amounted to approximately 280 million transactions and gross revenues ofmore than $168 billion. 3Furthermore, there are more pawnshops than credit unions and banks across the US.Lack of access to the mainstream financial market (financial exclusion) forcesconsumers to resort to high cost fringe lenders. 4 5 The level of financial exclusion inCanada is similar to that of the UK at approximately 6 percent to 9 percent, while theUS is 12 percent to 13.5 percent, with low-income people as high as 41 percent. 5There is mounting concern in the US, Canada, Britain and Australia over the high costof credit in the fringe lending market. 6 Vulnerable people on low incomes are most atrisk, as well as those who are unemployed and living on social security payments,those with bad credit, and indigenous and ethnic minority communities. 6 Evidencefrom the US indicates that fringe lenders target and thrive in minority communities. 3 7 8The consequences of borrowing from fringe lenders can be costly and can generate orprolong financial hardship for low-income consumers. ‘The high cost of credit can infact impede their ability to overcome financial difficulties, and can deplete their incomeand ability to save’. 4 Not surprisingly, a large number of consumers becomedependent on fringe lenders and their high cost credit for everyday expenses turning‘occasional users into chronic borrowers’. 9A number of studies suggest possible solutions, not only to reduce dependence onfringe lending but to improve access of low-income households to the mainstreamfinancial market. The answers are similar. A few point out that short-term loans arean essential service for low-income consumers but argue for tighter regulation toensure that the cost of credit is reasonable and reflects the risks by consumers. 3 4Howell and Wilson suggest that in order for lending to be ethical all credit providersshould assess a borrower’s ability to repay the loan before providing credit. They44
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