Institute of Policy Studies

Interest Free Loans for the Poor

WHAT IS IT?

People from low-income neighbourhoods sometimes borrow from licensed and unlicensed money lenders for needs like paying rent, children’s education and medical fees. Sometimes such payday loans trap them into a cycle of debt and deplete their already low assets.

We hope to establish an interest-free community lending initiative, intended to meet the short-term credit needs (urgent loans) of residents in low-income neighbourhoods and displace the need for licensed or unlicensed moneylenders.

The objective of the lending is not financial assistance or subvention (expected to pay back); nor is it microcredit for starting small businesses. The loans will not charge interest or require collateral (unlike moneylenders or pawnshops). 

WHY DO IT?

  • Fundamentally, this solution prevents insolvency and debt cycles faced by vulnerable groups by reducing their need to borrow from predatory lenders (licensed or unlicensed). It helps to meet the short-term urgent credit needs of marginalised and under-banked populations.
  • There is low operational costs as an entity like a credit co-op already has the capability to disburse loans. Unlike other programmes where funds are used to pay for manpower or operations, the community fund will continue to exist if loan defaults are low. 
  • The project also strengthens community through an opportunity to address a problem based on the community’s own design and sustained through their own decisions.

APPROACH

  1. Phase 1: Needs Assessment: IPS will conduct research to understand the credit needs of low-income families and their borrowing behaviour. Findings will provide a better understanding of why low-income families borrow, how much they borrow, who they borrow from, whether and how long they take to pay off their loans, and the consequences when they do not. 

  2. Phase 2: Co-creation: IPS will jointly facilitate a co-creation process with two SSAs to engage residents and potential borrowers from two identified neighbourhoods. We hope to implement interest-free community lending via two different models, group lending and individual lending respectively. The design process will help the team refine and make final decisions on the features of lending models such as eligibility criteria, group size, loan use and mechanisms for monitoring and enforcement of repayments. 

  3. Phase 3: Pilot Implementation: The interest-free community lending initiative will be implemented to low-income borrowers in two neighbourhoods through group lending by one SSA and individual lending by another SSA. The interest-free loan is intended to provide temporary relief to offset or lighten low-income borrowers’ financial burden and to deter them from going to unlicensed moneylenders, as well as to strengthen or extend community ties (in the group lending model).  

  4. Phase 4: Monitoring and Evaluation: The social service agencies will monitor the borrowers’ performance output, as well as financial and community outcomes (specific to group lending model). In addition, IPS will conduct evaluation research for the purpose of determining success and to understand implementation issues to refine the design and processes of the community lending initiative.

OPPORTUNITIES FOR PARTNERSHIP

  • Provide initial grant for the ‘community fund’ as well as the research and development costs.
  • Implementing agencies serving low-income families interested to disburse interest-free loans to their community.