Credit unions will play a vital role to help people manage crisis debt now and access the advantages of ethical loans and savings in the longer term, all while encouraging money to circulate locally to the benefit of the community.
With the economic fallout of Coronavirus ongoing, alternative finance is needed more than ever. For me, credit unions will play a vital role to help people manage crisis debt now and access the advantages of ethical loans and savings in the longer term, all while encouraging money to circulate locally to the benefit of the community.
According to the debt charity, Step Change, compared with the 2008 recession, low and middle-income households are more likely to be facing debts and struggling to pay for day-to-day essentials. Before the current crisis, in December 2019, 3.2 million people in the UK faced problem debt, and 9.8 million showed signs of financial distress. Additionally, more than 220,000 renters are at risk of eviction after falling into arrears during the pandemic, according to homelessness charity, Shelter.
Fair4 AllFinance’s recent report indicates that more than 6.5 million jobs could be lost in the UK with lower earners, women and young people most affected. In light of this situation, credit unions, as a valued part of the alternative finance landscape, need to rise to the challenge to help their members and grow their communities.
The sector is primed to offer alternative, responsible finance, especially with the crackdown on payday and other high cost lenders. Wonga, the company that became almost synonymous with high-interest loans, a so-called “legal loan shark”, collapsed in 2018 following a large number of compensation claims against their extortionate interest rates and less than thorough approach to checking that its loans were affordable for borrowers. It is difficult to believe that, before they were capped in 2015, interest rates were as high as 5,853%. Even with the increased regulation, at the time the company went into administration, rates could still be around 1,500%.
Other companies have continued to go bust or exit the market as regulation has, quite rightly, become tougher in ensuring consumers, many of them vulnerable, have the protections they need.
Credit unions are a breath of fresh air for those vulnerable to payday loan companies and other high cost credit. These ethical financial organisations can offer affordable credit to ease members out of an ever-increasing borrowing cycle and the burden of debt. This is essential with so many people across our city and beyond who are currently struggling, yet denied access to high-street bank finance. Even those borrowing larger amounts can be forced to pay up to 100% interest if they don’t meet the strict mainstream lending criteria.
At a time when so many are likely to have their financial circumstances adversely affected through no fault of their own, credit unions stand ready to help. They will achieve this by providing access to credit when it's needed in a responsible and supportive manner, taking proper account of individuals’ circumstances and stories.
What else can the alternative finance sector do?
In the business realm, there have been criticisms of the Government’s Coronavirus Business Interruption Loan Scheme (CBILs) with long waiting times and some mainstream lenders claiming that they cannot access the funding for their clients.
Therefore, Responsible Finance is calling on the Government to launch a £30 million Community Development Financial Institutions (CDFIs) fund to be used alongside the CBILs. CDFIs offer affordable lending to help low-income communities. As Theodora Hadjimichael, Responsible Finance CEO comments:
“A relatively small addition to the Government’s bold Covid-19 response, this would have a powerful effect, especially for microenterprises and small SMEs seeking under £50,000 which are often perceived as higher risk by mainstream lenders.” (Responsible Finance)
This example is a stark indication of the disconnection between what households and small businesses need and what’s on offer in the mainstream finance market. There’s a definite gap for alternative finance. Some credit unions offer business lending, including our own in Bristol, as well as supporting fellow co-operatives and social enterprises.
Credit union membership is vibrant with around 280 credit unions across England, Scotland and Wales and 1,434,492 people using them. However, according to Fair4All Finance, each year affordable credit providers offer £250 million of loans with high-cost short-term credit providers lending £3 billion. I strongly agree with their call for a dramatic scale-up of the sector as we look to build and extend financial resilience post-Covid.
Playing our part now and in the ‘new normal’
At Bristol Credit Union, we’re playing a leading role in bringing ethical finance to the mainstream. As part of this drive, we’ve just released our first-ever social impact report, which demonstrates the contribution that we have made to the city and wider region pre-pandemic. This work includes 900 low-cost loans made to people living in areas which fall within the most deprived 20% of the country and helping 277 people avoid homelessness.
In this Covid crisis, we stepped in quickly to offer zero-interest loans for NHS workers and made digital updates to our systems to limit branch visits. We have already helped more than 240 of our members with loan payment reductions or deferrals. I am proud that we have been able to offer support in this way, even though we are not required to do so as a credit union. But that’s what organisations like us do - go above and beyond to help our community - they are our families, friends and neighbours after all.
Without doubt, there are many challenges ahead for alternative finance, and to a large extent, the immediate priority is to offer a safety net in these turbulent times. But we also have a responsibility to think about how credit unions can help the community and the UK build back better.
As part of our commitment to scaling up the sector, we are currently working towards expanding our geographical coverage as well as working toward a merger with another credit union in the South West to enable ongoing support for their members and communities.
I am passionate about providing local people with a fair alternative to mainstream finance, whether it’s a bank loan or payday loan. There is a huge opportunity to raise awareness about alternative lenders and the benefits for members and the wider community. It’s time to demonstrate how effective the sector is and its untapped potential.
For more information about the work we’re doing and the benefits the credit union brings to our community, read our Social Impact Report.