The Kirk and the Church of England are to join forces to create a network of lower-interest credit unions to take on controversial payday loan firms such as Wonga.

The Church of Scotland has declared its backing for the Archbishop of Canterbury, the Most Rev Justin Welby, who yesterday announced plans to force the firms out of business by competing against them. The Archbishop met with Wonga founder Errol Damelin to inform him the Church is to expand its own credit unions and set up others as an alternative to payday lenders.

However, within hours of the talks, the Church of England faced embarrassment after it emerged its pension fund has invested indirectly in Wonga.

It was reported the fund, which is said to have an ethical investment policy, had put money into Accel Partners, which fundraised for the payday loan firm in 2009. The Archbishop was said to be furious over the fund's alleged links with Wonga.

Lenders are being investigated by the Competition Commission following claims some companies are allowing people to borrow money with interest rates of 4000%.

Rev Sally Foster-Fulton, convener of the Church of Scotland's Church and Society Council, said the Kirk would work with the Archbishop in challenging the £2 billion industry.

Ms Foster-Fulton said: "The ­economics of our society are badly wrong. Payday lenders who levy ­extortionate charges and rates are exploiting the most vulnerable.

"The Church of Scotland is on the side of the most vulnerable in society because we believe that there is a Gospel bias to the poor.

"This concern is expressed in many ways, and our work to promote the mutuality and co-operation in financial services is an extension of that concern. We need alternatives for affordable credit for people on lower incomes, as well as a fundamental reform of our current economic system."

Ms Foster-Fulton said ensuring reasonable and responsible financial services are available to everyone in the wake of the 2008 banking crisis, especially those who are most marginalised, is essential.

She added: "I totally agree with Justin Welby that ethical financial institutions have to be able to compete with payday lenders.

"Part of that will be enabling credit unions to improve the service that they can offer their members.

"We're committed to working with the Church of England to see how a joint credit union project can best serve more people across both nations."

The Church's annual General ­Assembly last year called for a legally binding maximum interest rate for all kinds of consumer credit, to be set initially at an APR of 40%.

The Money Advice Trust received more than 20,000 calls in 2012 for help with payday loans, a 94% year-on-year increase.

The industry was referred last month for an investigation by the Competition Commission after the Office of Fair Trading uncovered "deep-rooted" problems.

Ms Foster-Fulton has said she is shocked at the way lenders are targeting the most economically vulnerable in society.

She said: "Granting people loans which they cannot afford to pay back, at interest rates of up to 4000%, is exploitative and has to stop."

The Kirk has already urged its 450,000 members to boycott payday loan firms.

Tom Greatrex, the Labour MP for Rutherglen and Hamilton West, who has campaigned on the issue, said there had been a proliferation of payday lenders in his constituency.

Mr Greatrex said he has encountered a growing number of constituents who are struggling with debt as a result.

He added: "I know from discussions with the churches in my constituency – of all denominations, not just the Church of Scotland – that it's something they are concerned about.

"I don't think this is just a response to what the Archbishop of Canterbury has said, but something all churches will be aware of. Anything they can do to encourage people away from payday lenders in favour of smaller credit unions is all to the good."

Mike Dailly, principal solicitor for the Govan Law Centre in Glasgow, which has launched a payday loan survival guide welcomed the Kirk's and Church of England's intervention.

He said: "Payday loans are a scourge on our communities, so I would welcome the intervention of the church. It's a legal issue but if you boil it down it's a moral issue as well."

On the revelations about the Church of England's pension fund, a Lambeth Palace statement said: "We will be asking the assets committee of the Church Commissioners to investigate how this has occurred and to review the holding in this pooled investment vehicle."

The Archbishop had earlier told Mr Damelin: "We're not in the business of trying to legislate you out of existence; we're trying to compete you out of existence."

The Wonga founder said his firm welcomed any competition that gives consumers greater choice in managing their finances.