A Community Finance Foundation: Helping the financial sector fulfil its civic duty

17^th April 2015

When we step back and review how our lives work one thing that becomes abundantly clear is that they are entwined with the financial system. On a daily basis, we depend on financial services to enable us to eat, work and sleep. In fact, we are dependent on them from the cradle to the grave, whether to support a family or start a business, become a homeowner or prepare for retirement, or provide that extra bit of help to make things meet in difficult times.

No other sector underpins our lives in this way, offering basic social goods and services and holding the power to shape our aspirations. With the capacity to be a truly transformative force in society, it’s fair to label the financial sector one of society’s great economic and social enablers, and ensure to meets the demands of citizens.

However, in its current form it is far from fulfilling this societal role as a large number of customers and communities are underserved by our mainstream financial institutions.

The facts speak for themselves: nearly 2 million people in the UK do not have a bank account; 8.8 million are over-indebted; 31% of the population report at least one sign of financial distress and 13 million don’t have enough savings to support them for a month if they experienced a 25% cut in income. This appalling state of affairs is compounded by the ‘poverty premium’, the £1,300 extra a year consumers excluded from financial services pay for products and services.

Put simply, if you are poor, life costs you more.

To reverse this trend and cater for society’s varying financial needs the financial sector must become inherently more competitive and diverse. In contrast to our current system, which is dominated by large organisations of the same (plc) business model, only a financial sector with a significant number of players with a diverse mix of ownership models can truly be considered a responsible, healthy, and responsive sector capable of meeting the UK’s economic and social demands. This would provide real competition and ensure the market works for the many and not just the few.

To achieve this, ResPublica have argued for financial reform to be more outward looking and geared towards ensuring that the wider needs of society are met by the financial sector. What we term a ‘civic approach’ to financial reform looks beyond simple financial stability, and assesses the overall ability of the sector to serve customers, help communities and support small businesses. In short, it asks the financial sector to adopt its civic duty.

Promoting and encouraging the growth of civic finance institutions, those which already assume their civic role within society, is a good first step. Community Development Finance Institutions (CDFIs) and credit unions are shining examples as they provide what is termed ‘community finance’, loans and credit at an affordable rate to markets under-served by mainstream finance.

The problem however, is that the UK’s community finance sector is small and falls far short of its potential. Only 2% of the UK’s population are members of a credit union (compared to over 30% in Canada, America and Australia), and as Callum Anderson from the Community Development Finance Association pointed out earlier in this series, despite lending £173 million in 2014 there is a £6.75 billion demand for community finance.

The potential for community finance is vast but it needs support to grow and move away from the grant dependant and unsustainable business models that underpin many community finance organisations. That’s why ResPublica are proud to support the Citizens UK proposal for a Community Finance Foundation, an independent charitable trust that will support and champion the sustainable growth of community finance. As David Barclay from Citizens UK’s Just Money campaign has argued, the Foundation would offer the sector financial and strategic support so that community finance organisations can reach sustainability, grow and meet demand.

The Foundation will strengthen the element of our financial system that wants to serves those excluded from financial services and offer products that help people build savings, avoid high-cost credit and pull them out of problem debt.  It will undoubtedly help the financial sector adopt its civic duty and we hope it forms part of the next government’s agenda for financial reform.