At one stage or another in our lifetimes we all need access to credit. Regrettably, access to credit is most expensive for those who can least afford it.
That we have not yet succeeded in solving this conundrum must be deemed a failure, in some combination, of markets, regulation and public policy.
For too long, short term credit has been stigmatised. The (desirable) regulation of payday loans has cut the supply of readily available, short-term - albeit expensive - credit to many people. But this has exacerbated the problem facing the poorest members of society, who still need access to such credit.
Our main-stream financial industry cannot meet that demand. Unless more affordable options present themselves, at scale, those most in need will continue to meet their borrowing needs elsewhere. That can mean friends and family, but it can also mean illegal lenders.
A new approach is needed, and a significant expansion of the community finance industry is one of the key solutions proposed in a new report, published today by the ‘Affordable Credit Working Group’. I have had the honour of co-Chairing this group, established by The Carnegie UK Trust, which brought together highly respected members of the financial, third and private sectors in Scotland.
Scotland should be very proud of its community finance efforts, being home to a strong credit union sector and an award-winning Community Development Finance Institution (CDFI). But these are far too small to service demand for affordable credit right across Scotland. Enabling access for more people means widening availability of such institutions and creating links between the mainstream commercial sector and community finance institutions.
The Group calls for a range of measures, from investment in that community finance sector and enabling workers to pay off credit union loans via payroll, to facilitating access for Scotland’s poorest borrowers to basic bank accounts. Scottish Government leadership will also be critical.
The primary goal is to enhance the availability and reduce the cost of credit. Our proposals could save hundreds of thousands, if not millions, of pounds every year in reduced interest payments in Scotland’s poorest communities. But additionally our hope is that more people will improve the management of their finances and over time move into mainstream financial markets.
But the starting point is giving more people enhanced access to, and control over, credit that they can afford. This will require, as spelt out in our report, access to the right type of investment to establish and then sustain such institutions. At the outset this will mean funding from trusts, foundations and social investors. But if commercial investors are to be interested –as is critical for sustainability - CDFIs must strive to become viable organisations with long term prospects without subsidy, and within a reasonable timeframe. For credit unions, growing the membership base is key and new partnerships with employers can help achieve this.
Scotland has a genuine opportunity to lead the way. The framework is there. The appetite is there. If we can find the development support and facilitate the partnerships, Scotland can create an affordable credit market for all.
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