Indigenous Law Bulletin
|
|
Home
| Databases
| WorldLII
| Search
| Feedback
Indigenous Law Bulletin |
|
by Siobhan McDonnell
For discussions of Indigenous economic empowerment to transcend political rhetoric Indigenous people must be given access to credit. Individuals without access to credit are denied a range of economic opportunities and in particular the opportunity to invest in self-employment. Such economic opportunities are important as a means of breaking the cycle of inter-generational poverty, otherwise termed the ‘poverty trap’.[1] This paper details the problems that Indigenous people have in accessing credit and introduces the concept of micro-credit as a means of improving Indigenous peoples’ access to credit.
The problems faced by many Indigenous people in accessing credit are the same as those faced by poor people generally. One of the major barriers to the poor in accessing credit is the collateral requirement placed on borrowing.
Problems that poor people have in accessing small amounts of credit are highlighted by the growth in ‘pay day lending’ in Australia. Pay day lending is the practice of lending a small amount of money repayable on the customers’ next waged or welfare pay day. Fees charged for pay day lending range between approximately 235% to over 1300% per annum. The average amount borrowed is approximately $250.[2] People utilise pay day lending because they are ‘unable to access mainstream credit...for a number of reasons, including poor credit rating, unemployment or age restrictions’.[3] The large demand for pay day lending services seems to indicate that low income and disadvantaged groups do not have access to mainstream banking services.[4]
In addition to the problems faced by poor people generally, Indigenous entrepreneurs face a number of specific problems in accessing credit. Many Indigenous entrepreneurs have limited credit records and face language barriers. Most Indigenous communities lack savings, Commonwealth and state legislation prohibits the use of communal Aboriginal land as collateral, and Indigenous people have few employment opportunities in rural areas from which to accumulate equity.[5]
Further, financial institutions have limited information on Indigenous business and borrowers, and are unaccustomed to dealing with them. For example, there is no bank protocol for dealing with the problems of ‘proof of identity’ often faced by Indigenous people.[6] Often there are no Indigenous bank employees to assist with overcoming language and cultural barriers, and bank staff lack adequate cross-cultural training.[7] This creates serious problems for financial institutions in attempting to determine the credit-worthiness of Indigenous borrowers. As a result, they find it unprofitable to bear the risks of lending to Indigenous people, with Indigenous borrowers being viewed as a ‘burden’ that falls disproportionately on the major banks.[8]
Within Indigenous communities a lack of access to banking services, combined with cheque-based welfare payments, means that individuals have to rely on informal finance providers. For example, Indigenous people in many communities are dependent on cheque-cashing outlets which charge high fees. In such circumstances the income of Indigenous people becomes a captive market for these informal financial service providers, such as hotels, stores, hawkers and taxi drivers.[9]
Problems faced by Indigenous women in accessing credit are often more acute than those faced by the wider Indigenous community. Indigenous women are less likely to have personal collateral or a credit history than their male counterparts making the perceived risks of lending to them even greater.[10] Further, women in general are considered less financially attractive by lending institutions than men because they tend to borrow smaller amounts.[11]
While little has been written on Indigenous women entrepreneurs, a 1996 study by Dana of 76 Aboriginal women entrepreneurs provides some evidence of the role of Aboriginal women in the economy. This study suggests that Aboriginal women entrepreneurs invest in a range of commercial enterprises throughout Australia. The majority of these enterprises were involved in activities commonly associated with women, such as retail clothing stores, arts and crafts manufacturing, child care centres and beauty salons.[12] Similarly, research conducted by Arthur in the Torres Strait showed a number of women ‘petty traders’ engaged in self-employed activities, such as selling cigarettes or soft-drink from their houses.[13]
Of the Aboriginal women entrepreneurs surveyed, only ten accessed loans from commercial lending institutions. Of these, seven were employers. Dana reports that these employers preferred commercial lending institutions rather than government or Aboriginal and Torres Strait Islander Commission (‘ATSIC’) loans, despite the higher interest rate charged, because non-commercial lenders were paternalistic, attaching ‘too many strings’ to loans.[14] Reasons for not accessing commercial loans included an anticipation of rejection based on a lack of collateral and formal education or training, ‘intimidation’ in dealing with ‘white men’ (lenders), and a belief that lenders would be ‘prejudiced against Aboriginal people’ and women.[15]
Lack of access to adequate funding appears to be a significant factor affecting the ability of rural Aboriginal women entrepreneurs to operate businesses. Women with adequate access to capital operated full-time enterprises in the formal sector (such as a fully operational beauty salon) whereas women with less than adequate access to funding operated part-time or casual enterprises in the informal sector (for example, a beauty salon run on a part-time basis out of a woman’s home).[16] Dana’s work suggests that there are deficiencies in the sources of finance available to rural Aboriginal women, which impacts on the range of economic opportunities they can pursue.
Micro-credit is one model which may enable Indigenous people, and in particular women, gain access to credit. It is the extension of small loans of amounts of less than $25,000 to entrepreneurs too poor to qualify for commercial lending. The aim of micro-credit lending is to provide credit to entrepreneurs who do not have access to credit from other private or government sources. By targeting women, immigrants, welfare recipients, Indigenous people and low-income earners, micro-credit loans serve a client base that has been rejected by the formal banking sector.
The term micro-credit is used in two different contexts. First, as the process of lending small, short-term loans to individual borrowers for self-employment projects. Second, as a program which also incorporates a ‘peer-group lending model’. In the peer group lending model, borrowers form groups of approximately five borrowers. Each borrower is held accountable, as a guarantor, for each of the other borrower’s loans. If one borrower defaults the group as a whole must repay the loan. The process of borrowers forming groups by choosing their group members has been found to reduce the credit risks associated with lending and provides a mechanism for ensuring that loans are repaid such that it is financially viable (ie the micro-credit fund records a high repayment rate on loans).[17]
Micro-credit funds do not impose the standard barriers of collateral, personal credit history or full-time employment. Rather, they utilise alternative methods, such as peer lending, to ensure high repayment rates in the absence of collateral. Finally, institutional frameworks of micro-credit lenders vary. Some focus exclusively on providing credit, while others provide a variety of ancillary services such as business training and advice, childcare and networking. These ancillary services are particularly important in encouraging participation in micro-credit programs in a developed context. For example, the legislative requirements for entering into business in countries such as Australia are often more complex than those existing in less developed countries. As such micro-credit programs may need to provide additional training.
Micro-credit models have received a large degree of political support in developed countries on the basis that they not only foster employment and income generating small businesses but are also thought to empower borrowers. Aspects of empowerment commonly associated with micro-enterprise projects, such as their ability to develop self-esteem, leadership skills and economic literacy among members, has led to demand for these projects from Indigenous communities in developed countries.
An Australian Indigenous micro-credit model
Increasing interest in micro-credit models has led ATSIC to sponsor a feasibility study on the delivery of micro-credit to Indigenous communities in Australia. Conducted by Opportunity International, an international non-government organisation that specialises in micro-finance programs, the micro-credit model, if approved, would be based in Grafton and offer loans throughout the Northern Rivers region.
Opportunity International envisage that micro-credit loan recipients will be predominantly Indigenous women. However, the micro-credit model proposed will not utilise a peer group lending structure. While groups will be formed to provide support networks to enable borrowers, for example, to review each other’s business plans, group members will not mutually guarantee each other’s loans. Individuals will be lent amounts of between $1 500- $10 000, with an initial loan size of between $1 500 and $2 500 to be directed towards self-employment activities. Extensive financial literacy training and support will accompany each loan. If funded the Opportunity International project will provide a basis for assessing the ability of micro-credit programs to enhance Indigenous welfare.
It is the perceived benefits associated with micro-enterprise projects that have led to demand for these projects in Indigenous communities in other developed countries, such as Canada and the US. However, micro-credit models in Indigenous communities in these countries have not had a high success rate. Some of the reasons for the failure of micro-credit models in these countries include:
If micro-credit models operating in Indigenous communities in Australia are to enhance individuals’ welfare they must address these issues. It is also important to ensure that financial viability is not the only criterion by which micro-credit models are assessed. More important than financial viability is the ability of credit to enhance Indigenous peoples’ welfare.
One major impediment to the operation of micro-credit models in an Indigenous Australian context is the number of legal regulations, or ‘red-tape’, that potential Indigenous entrepreneurs must comply with. A survey commissioned by the Small Business Deregulation Taskforce[18] found that on average small businesses spend seven hours a week (or $7000 a year) on legislative compliance activities. These costs, estimated prior to the introduction of the Goods and Services Tax (GST), seem particularly prohibitive when interpreted in the context of micro-enterprises which operate with capital of less than $25,000.
Given the low level of literacy amongst the Indigenous population the legislative requirements of starting-up and operating a business may represent a serious disincentive to potential Indigenous entrepreneurs. Micro-credit programs may therefore have to provide additional training to entrepreneurs, which could further compromise their capacity to be financially viable. If micro-credit models are to operate effectively in Australian Indigenous communities, federal and state governments may need to look at ways of reducing the regulatory burdens faced by both small and micro-businesses, particularly in the area of taxation and the compliance costs associated with the GST.
Other legal requirements will also need to be addressed if Indigenous entrepreneurs are to benefit from micro-credit models. While micro-credit models are easily distinguishable from pay day lending schemes, the latter do present an ominous depiction of the pit-falls that consumers face when accessing credit. Thus micro-credit models should also meet the following requirements:
For micro-credit models to operate effectively in Australia, the implications of the legal regulations that potential Indigenous entrepreneurs must comply with will need to be addressed. A number of other requirements must also be met if Indigenous borrowers are to be fully informed about the credit contracts they are entering into. Micro-credit models that meet these requirements are much more likely to operate so as to benefit Indigenous people.
Siobhan McDonnell BEc(Hons) LLB (Hons) is a researcher at the Centre for Aboriginal Economic Policy Research (CAEPR) at the Australian National University.
[1] M A Stegman, Savings for the Poor: The Hidden Benefits of Electronic Banking (1999).
[2] Queensland, Department of Fair Trading, Pay Day lending - A Report to the Minister for Fair Trading (2000).
[3] Ibid 15.
[4] For a more detailed discussion of this point see S McDonnell and N Westbury, Giving Credit Where It’s Due: the delivery of banking and financial services to Indigenous Australians in rural and remote areas, Centre for Aboriginal Economic Policy Research (CAEPR) Discussion Paper No 218 (2001b).
[5] Aboriginal and Torres Strait Islander Commission (ATSIC), Submission by the Aboriginal and Torres Strait Islander Commission to the House of Representatives Standing Committee on Aboriginal and Torres Strait Islander Affairs Inquiry into Indigenous Business (1998) 22-3.
[6] N Westbury, ‘Improving Indigenous Access to the Delivery of Banking and Other Financial Services in Central Australia’ A Report to ATSIC and Centrelink, Alice Springs (1999) 20.
[7] Ibid.
[8] Ibid.
[9] J Taylor and N Westbury, Aboriginal Nutrition and the Nyirranggulung Health Strategy in Jawoyn Country Centre for Aboriginal Economic Policy Research (CAEPR) Research Monograph No 19 (2000) 48.
[10] P J Dana, Commercial Enterprise Ownership Among Australian Women: Economic Control Through Entrepreneurship (unpublished PhD thesis, University of Southern California, 1996) 55.
[11] C Howell, ‘Women’s world banking: an interview with Nancy Barry’ (1993) 4 The Colombia Journal of World Business 20-32.
[12] Dana, above n 10, 94-5.
[13] W S Arthur, Torres Strait Development Study 1989 (1990) 33.
[14] Ibid 117.
[15] Ibid.
[16] Ibid 167-8.
[17] For a more detailed analysis of the peer group lending structure see S McDonnell, The Grameen Bank micro-credit model: lessons for Australian Indigenous economic policy Centre for Aboriginal Economic Policy Research (CAEPR) Discussion Paper No 178 (1999).
[18] Commonwealth, Time For Business: Report of the Small Business Deregulation Task Force (1996) 1.
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/journals/IndigLawB/2001/69.html