Get Red Pepper's email newsletter. Enter your email address to receive our latest articles, updates and news.

×

Credit where credit’s due

Credit unions are more than ever the essential financial alternatives to traditional banks for the poor, says Mick Mcateer

January 16, 2009
8 min read

The perfect financial storm battering the UK economy is described by some commentators as the most serious financial crisis facing the western financial system since the first world war. So far, government and regulators have prioritised propping up the major banks and protecting the interests of households with savings to rescue our financial system.

We now need to devote just as much effort and resources to protecting the interests of financially excluded consumers. The financial system already fails millions of vulnerable households who are painfully exposed to financial crises and the level of financial exclusion is sure to deteriorate as the mainstream banks retrench and the economic climate worsens over the next year or two. Providing access to fair, affordable credit to deprived communities will be a priority and we need to reinvigorate the idea of mutually owned, community based financial institutions as an alternative to the mainstream financial services industry.

The government is rightly determined to prop up the banking system and protect the savings of middle England. This had to be done to restore confidence. However, half the households in the UK have very little savings (worth less than three-weeks average earnings). Around a quarter have no savings at all – this figure rises to 62 per cent in the poorest households.

Vulnerable households are also disproportionately affected by rising household utility and food bills and will find it even harder to build up a decent cushion in the form of savings to protect themselves as we enter a more unpredictable, uncertain time for the UK economy.

Moralising about ‘feckless, irresponsible’ consumers taking on too much debt, or not saving for a rainy day, only adds insult to injury. Many lower income households have no choice but to borrow to make ends meet or maintain even a semblance of a decent life in a modern consumer society.

Financially excluded households need access to fair, affordable credit to survive. But access to affordable credit is a serious problem for the three to four million households with low incomes or impaired credit ratings. Not commercially attractive for mainstream lenders, they’re forced to turn to the ‘sub-prime’ market or denied access to credit altogether.

These households pay a huge price for borrowing. For example, someone borrowing £300 for a year with Provident Financial (the home credit company) might expect to pay back £504 in total – an annual percentage rate (APR) of 183 per cent. In fact, APRs of over 1000 per cent for short-term loans are not uncommon in the sub-prime market (and these are licensed, regulated lenders, not the guys with baseball bats). In contrast, with a typical credit union they might expect to pay back £321 – an APR of roughly 12 per cent.

We haven’t begun to grasp just how damaging the impact of the financial crisis will be on vulnerable consumers. The new economic, commercial and regulatory environment will make it less attractive for mainstream lenders to lend to the ‘working poor’, adding to the traditionally excluded groups. Households considered a high risk will be hit hardest as lending is likely to be concentrated on ‘lower-risk’ households. There will be a significant reduction in mainstream credit funding for vulnerable households who will be priced out of market, denied access to credit or pushed into the sub-prime sectors.

Loan, sweet loan

There are only two ways of providing for excluded consumers. The government could force lenders to lend to them by treating banks as utilities like electricity or gas companies. This is an option but the government and regulators could find it difficult to square the circle of forcing the major banks to lend directly to riskier households, while at the same time putting lenders under severe pressure to act prudently and restore balance sheets.

The other option is for government to lend to the most vulnerable in society and to help alternative, not-for-profit (nfp) lenders. Nfp lenders such as credit unions and community development finance institutions (CDFIs) provide an affordable alternative to commercial sub-prime lenders for financially excluded consumers. But despite the apparent advantages of nfp lenders, they have achieved fairly limited penetration (exceptions being parts of Northern Ireland, Scotland and Merseyside) compared to the scale achieved by commercial non-prime lenders (such as home credit firms). For example, credit union membership in the UK reached around 400000 in 2005, a fraction of the number of households that need affordable credit.

Commercial non-prime lenders of various types lent at least £4.3 billion in 2005. In comparison, the total lent by nfp lenders (including the Government through the social fund) amounted to around £1 billion. Credit unions made around £257million in new loans in 2005, while CDFIs increased their lending and investment by around £77 million (only £3m of this was for personal loans). £688 million was provided through the social fund in 2006/7.

Commercial non-prime lenders are well entrenched in local communities as a result of their business model (based on door-to-door collections).Nfp lenders cannot compete effectively unless they have access to additional, sustainable resources to take them on at the doorstep.

To be fair to the government, it has improved the position of people facing repossession but the growth in financial exclusion is a much greater systemic problem that needs tackling. Credit unions and other community based lenders need money, they need it now and they need lots of it.

The additional funding could come from three sources. The most obvious is from central and local government. Spending just a tiny fraction of the taxpayers money used to prop up the major banks underwriting loans made by nfp lenders would massively increase the pool of credit for vulnerable communities.

The second source is the financial services industry itself. There is a strong moral and economic case for introducing a financial exclusion levy on the banks to make them pay restitution for the damage they have caused to our financial system. At the very least the UK needs its own version of the US Community Reinvestment Act so that banks are forced to become more transparent about the number of households they exclude.

The third option is for government to encourage new forms of social investment funds, which trades unions, pension funds and ethical investors could use to invest in vulnerable communities through ethically run, nfp lenders.

However, even nfp lenders have their limits. For many of the poorest households the only meaningful option is for the government to lend them interest-free money through the social fund.

Overall, there is no shortage of policy options for the government if it wants to protect the most vulnerable in society from the worst of the financial storm. But it’s now a question of will.

Case study: The Derry credit union

There are many very successful credit unions particularly in places like Northern Ireland and Scotland. But the credit unions that have flourished – as well as being well run financial institutions in their own right – seem to be in areas that have a real historical sense of community. For example, the Derry Credit Union in Northern Ireland has over 30000 adult and junior members and is a serious rival for the big banks in Northern Ireland.

It was formed in 1960 at a time when Derry was scarred by chronic, appalling levels of unemployment and deprivation. Very few people in working class communities owned their own home to use as collateral, which meant they had to turn to the notorious money lenders. The credit union met a very real financial exclusion need in one of the most deprived communities in Western Europe. But there is more to it than that. This is very much a personal recollection but when I grew up in the Creggan and Bogside areas of Derry in the 1960s and 1970s, it seemed that everyone’s parents belonged to the credit union. The credit union was ‘our bank’, run by our own community. And the struggle for financial self-sustainability seemed to be connected to the wider struggle for civil rights.

But we must avoid getting too romantic about community based lenders or the concept of self-help, which seems to be flavour of the month at the moment. The sense of community and spirit of activism that exists in places such as Derry is very difficult to recreate in larger, fragmented urban areas. If the success of credit unions in Ireland and Scotland is to be replicated in the UK more resources need to be pumped into the sector to make them successful.

Red Pepper is an independent, non-profit magazine that puts left politics and culture at the heart of its stories. We think publications should embrace the values of a movement that is unafraid to take a stand, radical yet not dogmatic, and focus on amplifying the voices of the people and activists that make up our movement. If you think so too, please support Red Pepper in continuing our work by becoming a subscriber today.
Why not try our new pay as you feel subscription? You decide how much to pay.
Share this article  
  share on facebook     share on twitter  

Interview: Queer British Art
James O'Nions talks to author Alex Pilcher about the Tate’s Queer British Art exhibition and her book A Queer Little History of Art

Cable the enabler: new Lib Dem leader shows a party in crisis
Vince Cable's stale politics and collusion with the Conservatives belong in the dustbin of history, writes Adam Peggs

Anti-Corbyn groupthink and the media: how pundits called the election so wrong
Reporting based on the current consensus will always vastly underestimate the possibility of change, argues James Fox

Michael Cashman: Commander of the Blairite Empire
Lord Cashman, a candidate in Labour’s internal elections, claims to stand for Labour’s grassroots members. He is a phony, writes Cathy Cole

Contribute to Conter – the new cross-party platform linking Scottish socialists
Jonathan Rimmer, editor of Conter, says it’s time for a new non-sectarian space for Scottish anti-capitalists and invites you to take part

Editorial: Empire will eat itself
Ashish Ghadiali introduces the June/July issue of Red Pepper

Eddie Chambers: Black artists and the DIY aesthetic
Eddie Chambers, artist and art historian, speaks to Ashish Ghadiali about the cultural strategies that he, as founder of the Black Art Group, helped to define in the 1980s

Despite Erdogan, Turkey is still alive
With this year's referendum consolidating President Erdogan’s autocracy in Turkey, Nazim A argues that the way forward for democrats lies in a more radical approach

Red Pepper Race Section: open editorial meeting – 11 August in Leeds
The next open editorial meeting of the Red Pepper Race Section will take place between 3.30-5.30pm, Friday 11th August in Leeds.

Mogg-mentum? Thatcherite die-hard Jacob Rees-Mogg is no man of the people
Adam Peggs says Rees-Mogg is no joke – he is a living embodiment of Britain's repulsive ruling elite

Power to the renters: Turning the tide on our broken housing system
Heather Kennedy, from the Renters Power Project, argues it’s time to reject Thatcher’s dream of a 'property-owning democracy' and build renters' power instead

Your vote can help Corbyn supporters win these vital Labour Party positions
Left candidate Seema Chandwani speaks to Red Pepper ahead of ballot papers going out to all members for a crucial Labour committee

Join the Rolling Resistance to the frackers
Al Wilson invites you to take part in a month of anti-fracking action in Lancashire with Reclaim the Power

The Grenfell public inquiry must listen to the residents who have been ignored for so long
Councils handed housing over to obscure, unaccountable organisations, writes Anna Minton – now we must hear the voices they silenced

India: Modi’s ‘development model’ is built on violence and theft from the poorest
Development in India is at the expense of minorities and the poor, writes Gargi Battacharya

North Korea is just the start of potentially deadly tensions between the US and China
US-China relations have taken on a disturbing new dimension under Donald Trump, writes Dorothy Guerrero

The feminist army leading the fight against ISIS
Dilar Dirik salutes militant women-organised democracy in action in Rojava

France: The colonial republic
The roots of France’s ascendant racism lie as deep as the origins of the French republic itself, argues Yasser Louati

This is why it’s an important time to support Caroline Lucas
A vital voice of dissent in Parliament: Caroline Lucas explains why she is asking for your help

PLP committee elections: it seems like most Labour backbenchers still haven’t learned their lesson
Corbyn is riding high in the polls - so he can face down the secret malcontents among Labour MPs, writes Michael Calderbank

Going from a top BBC job to Tory spin chief should be banned – it’s that simple
This revolving door between the 'impartial' broadcaster and the Conservatives stinks, writes Louis Mendee – we need a different media

I read Gavin Barwell’s ‘marginal seat’ book and it was incredibly awkward
Gavin Barwell was mocked for writing a book called How to Win a Marginal Seat, then losing his. But what does the book itself reveal about Theresa May’s new top adviser? Matt Thompson reads it so you don’t have to

We can defeat this weak Tory government on the pay cap
With the government in chaos, this is our chance to lift the pay cap for everyone, writes Mark Serwotka, general secretary of public service workers’ union PCS

Corbyn supporters surge in Labour’s internal elections
A big rise in left nominations from constituency Labour parties suggests Corbynites are getting better organised, reports Michael Calderbank

Undercover policing – the need for a public inquiry for Scotland
Tilly Gifford, who exposed police efforts to recruit her as a paid informer, calls for the inquiry into undercover policing to extend to Scotland

Becoming a better ally: how to understand intersectionality
Intersectionality can provide the basis of our solidarity in this new age of empire, writes Peninah Wangari-Jones

The myth of the ‘white working class’ stops us seeing the working class as it really is
The right imagines a socially conservative working class while the left pines for the days of mass workplaces. Neither represent today's reality, argues Gargi Bhattacharyya

The government played the public for fools, and lost
The High Court has ruled that the government cannot veto local council investment decisions. This is a victory for local democracy and the BDS movement, and shows what can happen when we stand together, writes War on Want’s Ross Hemingway.

An ‘obscure’ party? I’m amazed at how little people in Britain know about the DUP
After the Tories' deal with the Democratic Unionists, Denis Burke asks why people in Britain weren't a bit more curious about Northern Ireland before now

The Tories’ deal with the DUP is outright bribery – but this government won’t last
Theresa May’s £1.5 billion bung to the DUP is the last nail in the coffin of the austerity myth, writes Louis Mendee


1