Community Finance: Providing better financial services for individuals and small businesses

14^th April 2015

Since the financial crisis of 2008 there have been significant changes in access to credit. Much has been written about difficulties faced by small businesses, and the behaviour of banks withdrawing from small loans and (perceived) high risk investments. The same is broadly true for individuals seeking consumer credit whereby retail banks have largely withdrawn from small balance accounts,  and easy to access credit. Just as banks have tightened their lending criteria, access to other forms of mainstream credit have contracted considerably. The emerging credit gap has rapidly been filled by non-mainstream short-term providers, most notably payday lenders. The payday lending industry has boomed and peaked at over £2.5b in early 2013 when around 1.6m new loans were issued. But although providing a much needed service, public criticism of the high cost of credit, egregious behaviour by some payday lenders and concerns that the industry was harmful and exploitative required Government to act. The response was new regulation. In the course of 2014 restrictions were introduced to curtail certain practices and as of January 2015 a price cap was imposed, which limits the cost of credit. Early response to these changes suggests a rapid reduction in the size of the payday lending industry.

But it would be wrong to assume that by dampening this particular supply of short term, high cost, credit that demand – and personal indebtedness – will disappear. Or indeed, that this is entirely a good thing. People need access to credit as a crucial part of everyday financial services, just as they need access to other services to live in the modern economy. Credit is essential to help smooth consumption, for investment and to help build financial resilience against unforeseen shocks. What is critically needed is more responsible and affordable credit, with much more variety and competition among providers. The UK stands out amongst OECD countries as having an unusually concentrated supply of personal financial services, with the ‘big 4’ banks handling 75% of deposits and 85% of loans. New entrant banks, such as Metro bank, are an exciting part of the emerging more varied landscape, and peer-to-peer platforms, providing loans to individuals and small businesses, are another growth area. But much more is needed.

The Archbishop of Canterbury’s Task Group on Responsible Credit and Savings, which was convened in early 2014 in response to the criticism of payday lending, is firmly behind the importance of growing alternative providers and strengthening community finance. As the name of the task group suggests, responsible affordable credit (sensible repayment terms, fair interest and charges) is the goal, firmly balanced by building financial resilience through savings. Initiatives of the Task Group to-date have seen a focus on education and savings, and connecting churches to their local community finance organizations, in particular credit unions and CDFIs.

Building on this, the Task Group is now lending its weight to the bigger challenge of growing the alternative (non-bank) finance industry to help fill the credit gap and contribute to a more competitive and diverse financial system – one that is better placed to meet the credit needs of low income customers. Working closely with Government, ABCUL, CDFA and Citizens UK this work stream aims to help and add value to the many existing initiatives designed to promote the growth and development of community finance. One such proposal is the creation of a Community Finance Foundation. Such an organization would provide technical support, grants and loans to community finance institutions – CDFIs, Credit Unions and others. There has been a lot of recent focus on the value of Credit Unions and CDFIs and their role in providing credit where it is generally not available.  However, these community finance organizations will not grow without additional external finance, and in some cases technical support.  The Archbishop’s Task Force strongly supports the proposal to create a Community Finance Foundation (CFF). The utilization of fines imposed on banks by the Financial Conduct Authority would seem like a good starting point, but other sources of funds should also be sought. The proposition that the CFF, as the apex body for community finance, should be self-sustaining is key, as indeed is the principle that community finance organizations which benefit from funds should also be financially viable without subsidy. In this way the sector can continue to grow and thrive.

Christine Allison is a CSFI Financial Inclusion Fellow and member of the Archbishop of Canterbury’s Task Group on Responsible Credit and Savings. She previously spent more than twenty years with the World Bank working in Africa, South Asia and Eastern Europe.