December 2010 - Low-income urban Aboriginal people risk being caught in a cycle of poverty with the explosion of "fringe" financial institutions in Canada that charge excessive fees and interest rates, a new BC study finds.
"These fringe institutions risk catching people, and especially low-income Aboriginal peoples, in a 'debt trap'," said Dr. Paul Bowles, an economist at the University of Northern B.C. Bowles co-authored the report in response to concern raised in the northern BC city of Prince George about the proliferation of "fringe" financial institutions such as pawn shops and payday lenders.
"The study found that Aboriginal individuals are major users of these services, typically for cashing income assistance and other government cheques," said Bowles. People considered "too risky" by the mainstream banking industry can face interest rates of more than 800 per cent for services such as payday loans. This is despite the fact that all Canadians, with basic identification, have the legal right to open a bank account and cash government cheques at much lower costs.
The study was commissioned by the Prince George Aboriginal Business and Community Development Centre (ABCDC) and supported by the National Collaborating Centre for Aboriginal Health and NEARBC (Network Environments for Aboriginal Research, B.C.)
Addressing Urban Aboriginal Populations 'Living on the Edge'
Ray Gerow, president and Chief Executive Officer of the ABCDC in Prince George, said the study helps shed light on issues facing urban Aboriginal people who are "living on the edge but have not yet fallen off." He said most social service agencies in Prince George, as in other Canadian cities, tend to focus on those at the bottom of the socioeconomic range.
"Our office is starting to look at individuals in our community who are not yet living on the street. We have found there is little to no help or support to prevent them from falling."
"A blind eye has long been turned to the needs of urban Aboriginal peoples in Canadian cities. Low-income Aboriginal people are prey to a fringe banking system that society has legitimized."
Prince George has a population of 75,000 and is located in a region where approximately 13 per cent of the population is Aboriginal, the highest proportion in the province. Urban Aboriginal people in Canada are twice as likely to live in poverty than non-Aboriginal peoples.[1]
Bowles said studies on the role of fringe financial institutions and their relation to poverty have focused to date on large urban centres such as Vancouver, Winnipeg and Toronto, but that little is known about the issue in smaller, rural communities.
"We wanted to know who was using the services in Prince George and why," said Bowles. The report was unique in noting the high number of Aboriginal respondents in the survey, who made up 60 per cent of the total surveyed. Half of respondents were unemployed and relied on a range of government transfers. Aboriginal users reported lower levels of income than non-Aboriginal respondents, with 80 per cent citing annual incomes of less than $20,000. The survey also found "fringe" institutions were concentrated near low-cost hotels and rental properties, as well as service facilities catering to the homeless, youth, Aboriginal and low-income populations.
A Reinforcing Cause of Poverty
Bowles said studies tend to view fringe financial institutions as both a symptom and a reinforcing cause of poverty. Because they do not take deposits, fringe financial institutions are not subject to the same regulations as the mainstream financial sector. Federal legislation under the Criminal Code sets the maximum legal rate of interest for loans at 60% per annum, including the fees charged by institutions. Amendments to the code in 2007 allowed provinces to impose their own regulations.
In B.C., government regulated fees are capped at levels that ensure industry profitability, Bowles said. For instance, fringe financial institutions offering payday loans can charge rates of $23 for every $100 borrowed, meaning a client pays $64.40 to borrow $280 for 10 days - a nominal annual percentage rate of interest of 839.5%. As a result, this regulation is not sufficient to protect the public interest, the report finds.
Bowles said policy makers must provide alternatives while also addressing underlying causes of financial exclusion.
"We feel this information is important for designing effective policy responses," he said, from increasing awareness of rights to service at mainstream institutions, to creating institutions that specifically meet the needs of low-income individuals.
Unique Program Takes First Steps
Gerow said the Prince George Aboriginal Business Development Centre recently developed a new Financial Literacy program that can help "circumvent predatory lenders" and improve the Aboriginal community's overall socioeconomic situation. Based on information the Centre adapted from similar community economic development approaches (such as the "Embers" program in Vancouver's Downtown Eastside, the government-run Ontario Rent Bank Network, and Calgary's Momentum initiative), the program targets housing and financial literacy as key elements to advancement. It features:
- an emergency rent bank that can help provide individuals with stopgap rent loans in cases, for instance, where they may be receiving a government cheque after their rent is due
- financial literacy training to help people live within their budgets
- a matched savings program that encourages saving toward an asset, such as a sewing machine or tools, that can support economic independence
"We have a bit of captial and some support from more progressive institutions like VanCity Savings in Vancouver, the Vancouver Foundation and local initiatives and organizations. This allows us to support individuals who qualify for the program with an emergency rent bank loan for zero per cent interest," said Gerow. "We are not a social services agency. The rent bank is designed to help people who find themselves economically and socially on the edge but, with the right help, can maintain their lifestyle or move upwards instead of hitting bottom." said Gerow.
The program in May 2010 reported preventing 43 individuals from losing their housing between April 2009 and March 2010. Forty-seven loans were provided since February for a total of over $31,000.
Gerow said a blind eye has long been turned to the needs of urban Aboriginal peoples in Canadian cities. "Currently, the voice of urban people is coming from the social services side of the equation, which tends to be deficit based, focusing on problems rather than strengths. As a business centre, we are interested in strengthening a foundation that supports economic advancement to assist Aboriginal individuals, families, organizations and communities to achieve their full potential."