Kevin Gulliver, director of Birmingham-based research charity the Human City Institute and chair of the Centre for Community Research, on the need for affordable credit.
Kevin Gulliver is the director of Birmingham-based research charity the Human City Institute and chair of the Centre for Community Research; he is writing in a personal capacity
Increasing debt, exclusion from mainstream banking services and predatory legal and illegal loan sharks are casting a long shadow over low income households in the UK.
In the absence of a mandatory living wage and improved welfare benefits – very unlikely under the present government – a ‘big bang’ in the expansion of affordable credit could offer financially excluded communities a lifeline.
This is the main recommendation of new research by Compass, the Human City Institute and money advice organisation Trident Inclusion ahead of the Finance Bill debate tomorrow. An amendment to the Bill – ‘High Cost Credit Lending’ seeks to cap excessive interest and tax indefensible levels of profits.
As Stella Creasy, MP for Walthamstow and high-credit campaigner, explains in the ‘On the Margins’ report:
“Access to credit is a crucial element of a growing economy. A fair, stable credit system allows people to plan ahead and shape their own futures. Yet in today’s economic climate, as the cost of living soars, wages are frozen and unemployment rises, more people are using credit just to make ends meet.
“As the government offloads the burden of public debt onto households, a new inequality is arising between those who can access affordable credit and those who cannot.
“With lower-income households often excluded from the mainstream credit market, they are increasingly turning to high-cost credit providers such as payday and doorstep lenders whose business models often trap people in cycles of expensive interest payments.
“For the 46 per cent of British people who are struggling to make it to payday, the exorbitant cost of such credit creates problems as 10 per cent say high-cost credit is worsening their debts.”
Low income people, already under pressure from changes in welfare benefits and retraction of local services, especially council support for money advice services, are turning in greater numbers to pay-day loans, rent-to-buy retail credit, home credit and pawnbroking as well as the more unsavoury and illegal loan sharks, as High Street banks withdraw from the low income, ‘high risk’ markets often associated with social housing.
The findings of the research, including a survey of social housing tenants, paint a bleak future picture for people excluded from affordable credit.
Most have to turn to high-cost credit, which is a driver of inequality beyond income since low income households have to pay a ‘poverty premium’ in terms of excessive interest and hidden charges. It also creates greater credit dependency, it exploits the poor and vulnerable and distorts credit markets. More than one third of respondents in the research had already had an ‘awful’ experience with legal loan sharks and half said they had been harassed by these lenders.
The scale of the debt problem is illustrated through case studies of indebted households on low incomes from the Trident Inclusion Money Advice Centre in Birmingham. Here, 200-300 households are advised each year on welfare benefits, debt, budgeting and dealing with lenders. Last year, the MAC’s welfare benefit advice alone increased clients’ collective incomes by £312,000 and £802,000 of debts were dealt with effectively.
Those taking part in the survey recommend a range of solutions: half want furnished tenancies to reduce their need for credit; more than one third want social landlords to provide employment directly, to create employment and training opportunities, and to help them save and start small businesses; one third ask social landlords to offer short-term loans and other affordable credit.
So a two-pronged approach is called for: while tackling unacceptable supply, in the form of ‘legal loan sharks’, through regulation and levies on excessive profits’, an expansion of affordable credit is badly needed.
There is considerable potential for achieving this ‘big bang’ in affordable credit through a network of social landlords, building on the ‘MyHomeFinance’ initiative introduced by the National Housing Federation, and creating more community finance institutions. This should be a key aim of the Social Investment Bank and embedded in ‘Big Society’ policy.
All of this needs to be achieved within a macro-policy development context including the creation of a US-style Community Reinvestment Act, requiring High Street banks to support low income communities more, helping repair in part their tarnished image in the wake of the international financial crisis.
18 Responses to “Need for affordable credit ‘big bang’ to aid low income communities”
Aaaaargh!
Ah, credit for those who can’t afford it. The thing that got us into this situation in the first place.
Surely it would be better to encourage people not to get into debt – amazing how many families in poverty still seem to be able to drink, smoke and have all the latest techie goodies and name brand clothing.
On the other side of the coin, I’d like to see the law changed so debts can’t be sold on or invested against. That would make the lenders a bit more careful.
Esio Trot
It is interesting, due to it’s omission, that Stella Creasy, the above report, and the Compass lobbying firm never refer to Roundtree’s research as part of their consideration of setting up a not-for-profit home credit lending organisation.
http://www.jrf.org.uk/publications/not-for-profit-home-credit
It found that, even with a subsidy and significant set-up funding, it would be difficult to provide a service much cheaper than the existing players. Even the big boys, Provident and S&U, who invest heavily in customer profiling, still have an attrition rate of 30%.
I suspect that if data sharing was easier, and enforcement of consumer credit debts being available to private, rather than court bailiffs, then the 30% rate would decrease significantly. As a result, interest rates could then be reduced as the good clients would not be paying for so many bad ones.
NB My connection knowledge and interest in this sector is due to my shareholdings in Provident and S&U. I also have/had shares in Cattles, but that’s another story.
Leon Wolfson
*hold his nose*
I haven’t smelt such rubbish in quite some time, and my front door is also the back door of a cafe!
As it’s quite clear, this isn’t talking about lending people money for houses they can’t afford. It’s about micro loans for setting up businesses and for emergencies.
I’m quite sure that the Tories are fine with poor people being one emergency away from being in hock to a company for years, but back in the real world, there needs to be both a cap on rates and an opening up of who is permitted to offer micro-loans – extending the facilities that say Cooperative banks can offer is one example of something I’d strongly support.
Aaaargh – Well, liquidity is important, but I’d agree…for micro-loans.
Daniel Pitt
Need for affordable credit ‘big bang’ to aid low income communities: http://t.co/xVswVgs #ConDemNation
LoveBirmingham.eu
Need for affordable credit ‘big bang’ to aid low income communities: http://t.co/xVswVgs #ConDemNation