Microfinance could help low income kiwis avoid debt traps

The report, ‘Global Insights for New Zealand Microfinance’ by Te Kunenga ki Pūrehuroa Massey University’s Director of Financial Education Dr Pushpa Wood and researcher Sam Till examined microfinance practices in both developing and developed countries, including Bangladesh, India, Mexico, the United States, Australia and Ghana. It identifies how these models could help address the growing debt burden faced by low-income households, particularly those excluded from mainstream banking services in Aotearoa.

“New Zealanders are carrying high levels of debt, and many are locked out of mainstream financial services. Microfinance can offer an ethical, sustainable alternative but only if it’s carefully designed to reflect our social, cultural and economic landscape, ” Dr Wood says.

Generally New Zealand microfinance providers provide financial support and no interest loans to individuals and families in hardship. The report highlights that while existing providers such as Ngā Tāngata and Good Shepherd are operating on sound foundations as not-for-profit organisations with government oversight, the wider sector remains relatively underdeveloped. New Zealand’s microfinance landscape is still small and lacks the scale compared to the international sector. The services provided here are narrowly focused on microlending rather than microfinance that aims to promote aspirational lending and technological integration provided in other countries which were studied.

The report identifies opportunities to expand current services to include microinsurance and low-interest lending options that sit between interest-free loans and high-cost payday lending. It also encourages policymakers to consider including regulated commercial providers such as banks as part of the solution, provided they operate at interest rates significantly lower than fringe lenders.

Research Assistant and Co-author Sam Till says microfinance shouldn’t be seen as a one-size-fits-all solution.

“It needs to be integrated with broader financial inclusion goals and supported by strong monitoring to avoid unintended harm,” Till says.

The report draws on lessons from countries that have seen both success and failures. While initiatives like Australia’s No Interest Loan Scheme have demonstrated strong client outcomes and sustained funding, other contexts such as rural Mexico or Cambodia reveal the social risks of poorly monitored or overly commercialised models. Over-indebtedness, lack of cultural fit and harm to women are identified as particular challenges if schemes are not carefully structured.

To guard against these risks, the authors call for a robust monitoring framework, including both internal auditing for larger providers and broader regulatory oversight to prevent mission drift. They also recommend encouraging partnerships between microfinance institutions and mainstream banks to help clients transition into more traditional financial products over time.

“We’re not suggesting microfinance can replace all other social supports. But it has a valuable role to play in helping people build financial resilience and avoid exploitative debt traps,” Dr Wood says.

The report concludes that while microfinance is not a ‘silver bullet’, it has potential to complement New Zealand’s social support systems, especially when it is community-led, flexible and culturally responsive.

Read the full report here.