Loans for the Financially Excluded
One recent story I find quite interesting is the problems the Financial Inclusion Taskforce is having trying to encourage mainstream lenders to offer low value loans.
The government launched an initiative in late 2004 to try and develop methods whereby the financially excluded (people on low incomes in deprived areas) could get affordable credit. At the time it pointed out that a lack of low cost and low value loans meant that the financially excluded often turned to high cost doorstep lenders and even illegal loan sharks which ultimately made their debt problems worse.
A Social Fund exists whereby the Department of Work and Pensions (DWP) can give out crisis and budgeting loans and as part of the Financial Inclusion initiative the Treasury extended this by getting the DWP to administer a growth fund.
During this year the DWP began to work with the third sector (in essence non profit making credit unions) to administer the Growth Fund in deprived areas.
In December the Financial Inclusion Task Force gave an update on its work with the Growth Fund and said it was working well, but that the number of loans the fund had given out had been below its expectations.
The Task Force also said it had been exploring the extent to which mainstream lenders (such as banks and credit card providers) might move into the market for low value loans (£300-£600). It said, the response had been fairly negative, with all of the lenders approached saying that the reputation risk associated with charging a cost-reflective interest rate to the affordable credit sector is too significant (given the projected returns) for major banks to be prepared to get involved in the market, even through sub-branded subsidiaries.
To me, as the Task Force also acknowledges, it looks as though the only viable solution is to extend the number and coverage of the third sector and there will never be a mainstream solution.
