CCR Magazine

CCRi banner ad
You are here  :Home arrow News arrow High-cost credit market failure, major government investment needed
Contact Us Newsletter Signup RSS Feeds

Latest News Headlines

Headlines

 
Commercial Credit News

Headlines

 
High-cost credit market failure, major government investment needed PDF Print E-mail
Wednesday, 26 July 2017
There is a market failure in the provision of credit for financially vulnerable people who have to borrow to meet their essential costs, according to a major new report - ‘The high cost of credit’ – by StepChange Debt Charity.  

Over one million people in the UK are using high-cost credit to cover their everyday household essentials. Half of this group are using it to pay for food and grocery shopping, a third for fuel and water bills, and a quarter to cover housing costs [1]. At present, the products available to this group often pose significant risk of trapping people in cycles of persistent borrowing which push them into deeper financial difficulty.

The charity is calling on the Government to follow the example of successful initiatives in the US and Australia, by introducing or underwriting the development of a new low and no interest loan scheme. This would provide safe, suitable and affordable credit to adequately meet the needs of those who have to borrow to cover everyday living expenses.

Are community lenders and FinTech the answer?
Community lenders such as credit unions and community development finance institutions (CDFIs) and FinTech solutions have all been championed as alternatives to high-cost credit. But the evidence shows that there is a major gap between the estimated £3.5bn demand and the £0.5bn supply that community lenders are able to provide [2].

Credit unions currently don’t have the scale to be the whole answer to the problem. At present the total credit union loan book is just 10% of the size of the commercial high-cost credit market [3]. They can also find it difficult to lend to the more ‘high risk’ vulnerable borrowers who are using high-cost credit for essentials, around 50-80% of credit union loan applications are turned down [4].

CDFIs tend to serve more vulnerable groups and there are question marks over whether they have sufficient reach. There are currently only a few across the country that specialise in lending to individuals. The clear indication is that credit unions and CDFIs alone cannot fill the provision gap for high risk ‘survival borrowers’.

Commercial providers and new FinTech employer based loans are also constrained in who they can lend to and tend to exclude more higher-risk borrowers. In order to meet the needs of this group it is essential to find another way to manage the risk other than price. This however is unlikely without some form of government backing to attract other investors and sources of funding to mitigate the risk of potential losses.

Lessons from the US and Australia
In Australia, Good Shepherd microfinance provides a range of programmes for those on low incomes including a no-interest loans scheme (NILs). This started as a local scheme in 1981 and following significant funding from the National Australia Bank and the Australian Government has become a nationwide scheme that helps over a 100,000 people a year. With average repayment rates of 95% percent [5], the scheme provides evidence that low income borrowers are not necessarily higher risk if the product has affordable, sustainable repayments built in.

In the US, CDFIs in particular have benefitted from access to substantial long-term funding at both state and federal level. A layer or funding provided by governments can act as a form of loan guarantee scheme which helps cover lenders for a degree of customer default. Calls for such a scheme have been backed by a CDFI trade body, the Community Development Finance Association.

Laura Rodrigues, Senior Public Policy Advocate at StepChange Debt Charity, said: “Without significant support from government in the form of a renewed Social Fund or through the provision of major capital backing for a no interest loan scheme, financially vulnerable households who need to borrow will still be left with financial products which don’t serve their needs and risk pushing them deeper into hardship. “The expansion the community lending sector and expanded provision by mainstream lenders would all be welcome and needed steps. However the gap between supply and demand means that what’s needed are bold and innovative ideas.”
 
CCRI
3 October - Guoman Tower Hotel, Central London 

CCRInteractive, in association with Marston Holdings , is the largest and leading one-day conference from the publishers of CCRMagazine – a truly national and international event for the credit industry.

This landmark event allows delegates to: Learn best practice of how to increase profitable sales in today’s economy. Understand the key compliance issues and how they will impact upon you. Discuss the legislative and regulatory framework and how it will effect you. Consider the potential effects of Brexit on your business. Discover the latest innovations in the market to improve your collections. Motivate your staff to achieve ever improved results.

To book to attend in 2017, contact Stephen Kiely  or Alison Lucas. To find out more about being part of this landmark event, please contact Gary Lucas
CCRI 

 Forums International Ltd

Forums International Ltd

 Attendance at your first meeting is free of charge, and please quote reference 'CCR2016' to receive the special 10% discount off of your first annual subscription.

Find out more here.

latest issue

CCR Cover

The latest edition of CCR Magazine, the leading editorial publication in the UK credit industry, is out.

Read the latest issue online

The Credit Excellence Awards

Awards 

Tuesday 3 October - Guoman Tower Hotel, Central London


Do not miss your chance to meet and network with the Winners and Finalists at the Credit Excellence Awards, in association with Hoist Finance.


To book your place to attend, please contact Alison Lucas.


subscriptions

CCR is the premier magazine for consumer and credit professionals. It provides an independent voice to the industry, breaking major news stories and running in-depth features.

As a magazine, it works with and campaigns on behalf of the credit industry to promote its importance as a centre of potential profit and business development to the wider business world.

Subscribe to CCR Magazine

CCR World Magazine


 

Providing information and analysis for thousands of senior credit professionals worldwide, every quarter.

Find out more

GTS Media Ltd
81 Cambridge Road
Southend-on-Sea
Essex
SS1 1EP

Registered in England No: 05483197