Scaling Up Affordable Credit Report of a seminar held at Coutts & Co London, 15 January 2004 Debt on our Doorstep 1 Contents Introduction .............................................................................. 3 Mapping where we are Karen Wood, Preston Road New Deal for Communities, Hull. .... 4 Jenny Rossiter, Church Action on Poverty ................................. 4 Where do we go from here Mandy Aitken, Impact, Sheffield................................................ 6 Shaun Spiers, ABCUL ................................................................. 7 Pat Conaty, New Economics Foundation .................................... 8 Liam Edwards, Money Advice and Budgeting Service, Ireland . 10 Bringing it all together Bob Paterson, Community Finance Solutions........................... 11 Andrew Chaplin, CHANGE, London........................................... 12 Stephen Moir, Natwest / Royal Bank of Scotland Group .......... 12 Comments and Discussion....................................................... 13 Attendance list ........................................................................ 15 Report prepared by Catherine May (Oxfam) and Jenny Rossiter (CAP) 2 Scaling up affordable credit: Seminar report, January 2004 Introduction In January 2004, a seminar was held in London to discuss the possible policy options and institutional structures needed to scale-up access to affordable credit for those households excluded from mainstream financial services. Representatives from voluntary sector organisations, trust funds, academic institutions, government departments and the banking sector were present. The diverse nature of the participants enabled the issue to be fully explored from the needs at community level to the possible policy and implementation mechanisms at a national level. Information regarding how other countries (Ireland and the USA) respond to the problem was also provided by two of the speakers. The purpose of the Seminar l Explore whether a major expansion of affordable credit would be an effective means of combating extortionate lending and tackling poverty, and its links with wider Government strategies in relation to financial exclusion, child poverty etc. l Engage in creative thinking as how such an expansion might take place l Examine what are the obstacles to be overcome and inputs required from the public, private and voluntary sectors to enable this to happen The event was held under Chatham House rules – no comments made from the floor of the seminar are attributed to any individual participant. Background to the Seminar Up to 6 million UK citizens are considered non-eligible for credit from mainstream banks, building societies and shops. This means that 6 million people are unable to access extra money as a cover for when a crisis happens, and necessity means that expenditure outweighs income. When an emergency happens, such as needing to call an emergency plumber or replace a cooker there is no potential to borrow from a bank or credit card company. At these times of crisis 3 million people turn to the doorstep lending industry (Cooper 2003), where credit is more easily available for those on low incomes, but where interest rates can be up to 800% APR or higher. These high rates of interest are often the cause of further poverty and debt. These loans are often relatively small (under £500) and short-term and include covering the financial gap faced by people between the final benefit payment to the first paycheque when moving from unemployment into paid work. Opening remarks Niall Cooper, National Coordinator of Church Action on Poverty and chair of Debt on our Doorstep opened the seminar by welcoming participants and explaining Debt on our Doorstep’s history. The campaigning network - Debt on our Doorstep, (DOOD), is now four years old. Church Action on Poverty, (CAP) one of the founders of DOOD, first became interest in the whole area of unsustainable household debt and affordable credit following a local project based in the North-East of England which focussed on debt, social exclusion and poverty. No-one would have imagined how important the issue would turn out to be four years on. A recent Government White paper acknowledged the links between child poverty and family debt, revealing there is now a growing acceptance of debt as a social and financial obstacle to inclusion. However, there is still a great need to make the link between policy and the practice on the ground. Affordable credit is needed by millions of people; how to ensure that this access is made available was the reason for organising the seminar Debt on our Doorstep 3 Mapping where we are Karen Wood, Financial Exclusion Project, Preston Road Estate New Deal for Communities, Hull. The Preston Road Estate in Hull has received £55 million in government grants over the last 10 years – there are currently 86 sponsored projects in and around the estate, which is now a New Deal for Communities area. Karen Wood is the co-ordinator for the Financial Exclusion Project. Background to the project On the Preston Road estate there is a of high level of unemployment, especially amongst young men (32%). According to local research there is an increasing number of doorstep lenders and 33% of people living there have no bank account. The Preston Road Financial Exclusion Project aims to: - Give people, living in poverty, on the estate a voice (for example through poverty hearings) - Increase financial literacy - Develop a local Credit Union (CU) - Increase access to mainstream services – for example ensuring those without relevant ID can get a bank account Since its founding 18 months ago the CU has over 1,000 members, 500 of whom are interested in taking out loans. The average owed to doorstep lenders per household is £486 and on average this is paid off at the rate of £16.56 per week. These lenders are: - Retail catalogues companies - Doorstep money lenders - Cheque cashing companies and - The government’s Social Fund Local research found that: - The cut in people’s benefits to repay the social fund often leads people to borrow from doorstep lend- ers to ensure they can make the re-payments - At Christmas time 10% of household expenditure goes on luxuries and presents, and 90% on bills/ emergencies Reflecting on the reality of the Preston Road estate in Hull the concluding points of this presentation were that: · There is a need for joined-up thinking amongst agencies. For example in the Hull NDC project, there has been a promotion of selling computers to families at £5 a week. It should be realised that this is not a priority for people who are already struggling to make debt payments. · Telephone debt advice is pointless if someone’s phone has been cut off for not paying the bill in time. · The onus of avoiding huge debt should be on the company to act responsibly, not the borrower. · Policy makers must realise that people make decisions in the best interest of their family. Jenny Rossiter, Policy consultant, Church Action on Poverty This presentation gave an overview of the current options available for those households excluded from mainstream financial services. The current gaps in provision were also high lighted. Recent Government initiatives to address financial exclusion include: · Basic Bank accounts & Universal Banking Services 4 Scaling up affordable credit: Seminar report, January 2004 · Saving Gateway · Community Finance Learning Initiative These initiatives have demonstrated that the voluntary, private and public sectors can productively work together in partnership to tackle financial exclusion. It has been a good first step, but these initiatives are not sufficiently joined up and are not directly linked to providing access to affordable credit for those who need it. Currently affordable credit is available from three sources · Private Sector/Banks · Public Sector · Community/Voluntary Sector Affordable Credit from the Private Sector: · Sub-prime Sector - which is prohibitively expensive. While legislation may tackle some ‘unfair’ prac- tices, it will not make it affordable. · Mainstream Banking Services – Do not provide affordable credit to people on low incomes · Bank Partnership Agreements – Do provide savings and loans to some people via third party agree- ments – for example: Cambridge Housing Association & Cambridge Building Society, Prospect HA and Bank of Scotland. But these schemes are limited to specific locations and reach relatively small num- bers of people. · Support for Community Development Finance Initiatives (CDFIs) and Community Reinvestment Trusts (CRT) – many banks now have Community Banking Teams and provide grants/loans to CDFIs and Credit Unions. · Preferential Terms – sometimes banks give reasonable and flexible terms to credit unions and CDFIs These demonstrate some very good examples of partnership agreements with banks and voluntary sector organisations to deliver affordable credit. These examples are relatively isolated and small-scale but they do provided interesting models that could be scaled up. It was noted that as both housing associations and banks have a physical presence throughout the country and are therefore well placed to provide (in partnership) extensive affordable credit schemes. Affordable Credit from the Public Sector: The Social Fund – the total Social Fund allocation for loans is around £600 million per annum. Of this the average loan is £400 per person given to around 1 million people per annum, interest free. However the criticism of the Social Fund is