Brotherhood says lack of access to small bank loans a big problem for low income earners
25 January 2011
The Brotherhood of St Laurence is urging financial institutions to make the banking needs of low income families a greater priority, saying they need to offer more of the small loans required by struggling households, rather than forcing families to turn to credit cards or disreputable, high-interest lenders to cover day-to-day expenses.
And despite frequent trumpeting by the banks that they are looking after low income earners with low or no-fee transaction accounts, less than 30% of low income earners surveyed in a forthcoming report by the Brotherhood had made the switch to these accounts, due to the time, costs and uncertainty involved, lack of knowledge of such accounts, and their sometimes lower levels of financial literacy.
“It’s also time to address the matter of fees on transaction accounts and ATM fees, which unfairly impact marginalised Australians”, says Gerard Brody, Manager of Financial Inclusion at the Brotherhood of St Laurence.
These arguments form part of the Brotherhood’s submission to the Senate inquiry into competition in the Australian banking sector, to be presented by Mr Brody this morning at Victoria’s Parliament House.
After announcing reforms aimed at increasing competition in banking, the Federal Government referred the topic to the Senate Economics Committee for inquiry last October. The Committee is currently hearing feedback on the measures from a range of parties and organisations, including the Brotherhood of St Laurence.
Gerard Brody says the Brotherhood supports the Federal Government’s moves to enhance competition in the banking sector, but notes that the reforms, which focus heavily on increasing competition in the mortgage market, should be broadened to include other areas of banking.
‘With home ownership becoming more and more unaffordable, changes which stimulate greater competition between mortgage lenders, including cheaper interest rates and the ability to switch providers without penalty, will most certainly help more low-to-moderate income earners to enter the housing market’, says Gerard Brody.
Yet the Brotherhood says there are other key areas in which our banks are failing to provide affordable and fair financial products and services for those on lower incomes.
‘In recent years, banks have shied away from providing consumer credit for small amounts, instead choosing to focus on more profitable services. Lack of access to personal loans for under $5000 is a real problem for many households, who rely on such loans to acquire assets and make necessary expenditures, like fixing the family car or buying school textbooks for their children’, explains Mr Brody.
‘Often, in sheer desperation, these households are left with no option but to enter into complex contracts with
unregulated, high interest-charging money lenders, or to put day-to-day expenses on a credit card. These products are dangerous. They lack clear and realistic repayments options, and can plunge financially-stressed households into poverty via a spiralling debt trap that can be almost impossible to escape’, explains Mr Brody.
The welfare organisation also supports measures which would increase transparency in the setting of loan interest rates, and is encouraging the Reserve Bank of Australia to publish findings on the cost of capital for Australian banks, so that consumers could feel more confident that they are delivering fair and competitive products and services.
The submission from the Brotherhood of St Laurence forms part of the organisation’s national strategy for financial inclusion for all Australians, as part of its ongoing work towards an Australia free of poverty. The organisation believes everyone has a right to fair and affordable banking services, and that the financial sector should do more to meet the banking needs of low income earners, rather than simply catering for its more profitable customers. If the free market cannot deliver such services, increased Government funding in this area should be considered.
The Senate Economics Committee will release its report into competition within the Australian banking sector by 31 March this year.
GERARD BRODY IS AVAILABLE FOR INTERVIEW
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