There have been heated debates over recent months about the impact the high cost payday lending sector was having on financially vulnerable consumers and neighbourhoods. Payday loans are relatively small, short-term, uncollateralised, high interest rate loans that borrowers must either repay or renew by their next payday. They are considered as alternatives or additional means of accessing credit for borrowers with limited access to bank credit. These loans are even used by people with high credit ratings. Other high cost lenders include pawn broking outlets, weekly payment stores, log book loans, on line and the doorstep credit market.
The rapid growth in this sector has reinforced concerns that it has moved into the vacuum left by high street banks and building societies. Some critics have accused the ‘mainstream’ financial sector of abandoning consumers who are considered high risk or low profit. Justin Welby, Archbishop of Canterbury, and a former banker, recently called for the sector to be put out of existence. At the same time he argued that greater support was needed to promote credit unions (CUs) and other not-for-profit affordable lenders. His call symbolised a growing sense of anger over a sector that has mushroomed in size during the recession and at a time when a growing debate on the cost of living crisis were being articulated by Labour Leader Ed Miliband.
So how is the CU sector responding to these challenges? There are around 400 CUs of various shapes and sizes in the UK, some staffed by volunteers, while others employ highly experienced staff. The sector retains strong cross-party support and is benefiting from the Department of Works and Pension’s (DWP) Credit Union Expansion Project. This funding pot of £38 million is intended to expand the sector, enabling it to recruit 1 million more consumers by 2019, modernise CUs and help them be more financially sustainable.
CUs, Community Development Financial Institutions (CDFI) and other community-based lending services have made a significant impact on the city of Birmingham in the past 4 years, resulting is a doubling of loans to local residents and adding an estimated £50m a year to the local economy. Credit unions are seen as solution to many of the issues facing the 9m adults in the UK who do not have access to suitable banking. Surprisingly, these membership-run financial institutions are the only financial organisations in the UK that have an interest rate cap, which is why on a like for like basis, credit unions loans are priced below the mainstream banks and other lenders. With no arrangement fees or exit fees, it is not hard to see why more people are starting to find CUs offer a genuine alternative.
As Chair of Citysave, a leading CU, I can see at first hand the really positive impact CUs can make. A good example of this is an innovative partnership with Birmingham City Council (BCC), Moneyline, Advance Credit Union and Street UK to open a pop up loans shop in a prominent position in the city centre in the run up to Christmas. The cabin was located in the midst of a number of high cost lenders, in fact 14 of these were estimated to be within 100m of the cabin. The funding for the cabin was provided by BCC’s Illegal Money Lending team through the proceeds of crime recovered, and is matched by resources from Citysave.
This innovative partnership is part of a much bigger campaign to challenge high cost lenders and ensure that Birmingham residents are able to access fairly priced and ethical financial services. BCC launched its Birmingham Fair Money Manifesto which set out its four key commitments: a call for better regulation of high cost lenders; to support the growth of credit unions and responsible lending; to engage with banks so that they widen their services to residents and to seek powers that will enable BCC to manage the growth and operations of high cost lenders across the city’s neighbourhood.
Further useful links:
Image Source : http://commons.wikimedia.org/wiki/File%3ACoins_1.jpg