Financial Exclusion and Over-indebtedness in Irish Households

8 March 2011

Financial Exclusion and Over-indebtedness in Irish Households

This study presents new evidence on both financial exclusion and over-indebtedness in Irish households based on data from a major EU-wide survey carried out in 2008. Financial exclusion refers to a household’s difficulty accessing and using financial services. The study examines four dimensions of financial exclusion:  access to a bank current account, access to credit, ability to save, and access to housing insurance.  Access to a bank current account is considered the most fundamental of these, as exclusion from basic banking services means that households can face difficulties carrying out everyday transactions such as paying bills, receiving earnings or welfare benefits, transferring funds, and purchasing goods and services.   In 2008 it was found that 20% of Irish households did not have a bank current account. The level of banking exclusion in Ireland was almost three times higher than the average for the EU15. The proportion without a bank current account rose to 40% among those with low education qualifications, 38% in households in the bottom income quintile, 50% among local authority tenants and 27% among those aged over 55 years.   While the levels of personal credit grew during the economic boom, in 2008 31% of households were found not have access to credit (credit cards, loans, overdraft facilities). Taking out those who said they did not need to borrow, 10% of households were defined as credit excluded. Over-Indebtedness Following the recommendations of the European Commission working group on over-indebtedness, the study defines over-indebted households as those which –

• Were in arrears on housing/rent payments or utility bills or  hire-purchase/loan repayments or other bills on more than one occasion in the preceding 12 months, and
• Considered their housing costs or  loan repayments to be a heavy burden, and
• Were unable to raise money to deal with an unexpected expense.

Based on this measure, some 5.4% of Irish households were considered over-indebted in 2008. The risk of over-indebtedness varied widely for different groups. It rose to 12% among households in the bottom income decile,  24% in households headed by someone who was  unemployed,  23% among lone parent households, and 22% among local authority tenants.  Almost 25% of over-indebted households were found to be ‘consistently poor’ compared to 4% among the rest of the population. Job loss, illness and drops in wages/hours were common triggers for over-indebtedness with 40% of over-indebted households experiencing a significant drop in income during the previous 12 months. Income shocks of this type increased the risk of over-indebtedness independently of income level. It is likely that over-indebtedness has increased significantly since 2008, although the detailed data used in this study are not available for any subsequent years. Limited figures are available in SILC 2009, and these show, for example, that the proportion of households with utility arrears rose from 7.5% in 2008 to 9.6% in 2009. Policy Implications The move towards a cashless society means that without further efforts to include financially excluded groups, these households risk becoming increasingly marginalised. A commitment to provide basic bank accounts to excluded groups was included as a part of the recapitalisation of the Irish banks in 2008. There is little evidence on progress on this commitment to date and it seems likely that increases in bank charges will exacerbate rather than reduce the problem.  Financial education policies can lead to more effective use of financial services and the development of such initiatives in Ireland has been recommended by the National Steering Group on Financial Education. The analysis suggests that lack of resources, rather than over-borrowing or high consumption, was the main factor behind over-indebtedness in 2008. Consequently, policies to tackle poverty rather than those that focus solely on responsible borrowing and consumer protection, are likely to be needed to impact positively on the problem of over-indebtedness. While there has been a strong focus on mortgage arrears in public discussion, the study shows that the majority of already over-indebted households in 2008 did not have a mortgage. Consequently, policies to deal with other forms of arrears (such as rent, utilities, etc.) are also needed to tackle over-indebtedness. Perspective of the Department of Community, Equality and Gaeltacht Affairs The research study was commissioned by the Social Inclusion Division in the Department of Community, Equality and Gaeltacht Affairs, as part of its remit to monitor poverty trends under the National Action Plan for Social Inclusion 2007- 2016. A spokesperson for the Department said "This is a timely study on two emerging issues which are likely to impact on poverty. The findings will be used to inform current policy initiatives on financial exclusion and household debt. This report also underpins the continued importance of tackling poverty and social exclusion as national policy issues. The challenge is to promote sustainable economic growth along with imaginative social policies, so as to enable citizens and communities to overcome the current difficulties."

Note to Editors: 1. Financial Exclusion and Over-indebtedness in Irish Households, by Helen Russell (ESRI), Bertrand Maître (ESRI) and Nora Donnelly (formerly ESRI), will be published online on the ESRI website at www.esri.ie at 00:01 a.m. Tuesday 8 March, and on http://www.pobail.ie/en/socialinclusiondivision. 2. The embargo is 00:01 a.m. Tuesday 8 March. 3. This study was commissioned by the Department of Community, Equality and Gaeltacht Affairs as part of a three year research programme to monitor poverty trends under the National Action Plan for Social Inclusion 2007-2016. The views expressed in this report are those of the authors and are not attributable to the Department. 4. The study is jointly published by the Department of Community, Equality and Gaeltacht Affairs and the Economic and Social Research Institute. A research briefing on the report is available in English and Irish. 5. The data came from the Special Module of the EU Survey of Income and Living Conditions (SILC) 2008. In Ireland the survey was carried out by the CSO and just under 5200 households were surveyed. 6. The study will be presented at a Conference on "Financial Exclusion and Over-indebtedness: Challenges and Policy Responses" on Tuesday, 8 March 2011 at the ESRI (9 am to 4pm). Further details about the Conference