Issue 13

COMMUNITY FINANCE CAN CHALLENGE MONEY MARKET FAILURE

By Sharon Macpherson

When faced with some of the most crucial changes in consumer credit regulation in 40 years you could be forgiven for assuming this means an end to expensive sub-prime lending to low income households. On the contrary -high cost lenders are now tightening their lending criteria, reducing the supply of credit to consumers and further exacerbating financial exclusion.

At Scotcash we are confident not only that we can reduce the high interest costs paid by many low income communities but can also provide an ethical and affordable model of financial inclusion that could be replicated across the UK.

As part of our ambition to deliver over 60,000 affordable loans over the next ten years to low income households, we have started to see real progress in providing ethical alternatives. Scotcash is filling a gap left by mainstream lenders and embedding our services into local community advice providers and credit unions . The Scotcash model addresses the needs of low income communities in a sustainable way, demonstrating that it is possible to successfully provide financial services that many struggle to access.

Local authorities and housing providers across the UK have an interest in replicating the Glasgow model, but although the challenges are similar , there are often different approaches in response . Many local authorities now have financial inclusion strategies but are unable to bridge the gap between availability of affordable credit, access to money advice and sustainable models of provision.

In particular, although there are moves to modernise the credit union industry with an ambitious DWP contract worth up to £38 million, take up from local community based credit unions is patchy and many still make a loss on some of the smaller loans made to their members. Relying on one provider to solve high borrowing costs rather than involving other community finance providers can cause other problems .

Scotcash argues that the fundamental problem is that no one provider can address the financial needs of low income households - a mixed economy of provision is needed to bring about improved access and help vulnerable communities improve their financial outlook. Ten million people in the UK are currently dependent on high cost credit paying an APR of at least 200%. As a result of the changes in consumer credit regulation that figure is likely to increase.

The affordable finance gap is estimated to be around £3 billion per annum and is not being met by established providers. Credit unions are the major community finance provider but are only making loans totalling some £0.5 billion per annum. There is therefore a substantial gap between credit unions, limited to charging APRs of around 27%, and the sub-prime lenders, charging often eye watering rates.

That’s where Scotcash comes in: providing small sum credit at the same time as access to basic bank accounts, preventative debt advice and credit union savings accounts. In the financial inclusion sector, we have debt advice provided by Citizens Advice Bureau and savings and loans promoted by credit unions, but a lack of clear policies aimed at pulling all these together in a community banking approach. Changed arrangements would allow low income communities to access a bank account, get money advice before they face crisis and access affordable finance from a range of ethical providers.

Glasgow’s experience in focusing on an integrated model of community financial services has not only reaped benefits for its citizens but has contributed to economic growth, retaining almost £5 million in the local economy. But these benefits could be much greater if a new approach was taken to harness investment across the Third Sector. DWP are investing £38 million in credit unions and Scottish local authorities provide over £20 million per annum in funding money advice but there still many low income households falling through the gaps.

Across the UK, almost £2 million individuals don’t have access to a bank account, household debt levels are significantly increasing and large numbers of mainly low income households are having to switch to higher cost legal – and illegal – moneylenders. But Glasgow is focusing on ensuring all aspects of financial inclusion services are provided in a one stop shop approach. Scotcash experience in Glasgow has demonstrated that the key to helping low income households retain more of their limited income is to provide access to financial products and services in one package. This means different concerned organisations collaborating and not working in isolation .

Glasgow’s vision of financial inclusion could apply equally across Scotland and the UK, Scotcash considers the ultimate strength of the financial inclusion sector is its commitment and diversity. Collaborating and harnessing that diversity can help make each component element great.

Sharon Macpherson
Is Chief Executive Officer of Scotcash

By Sharon Macpherson

Issue 13

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