Credit to the high street

Credit union

I have a new police borough commander in Merton and we hold regular meetings together. At one of these it transpired that a pay cheque shop in my borough was robbed with the culprit running off with a wad of bank notes.

The incident got me thinking about the increasing number of such outlets on our high streets today. The generic term for them is “payday loan” shops. As the economy suffers, so such shops blossom. As banks make it more difficult to borrow, so more people turn to payday loan sharks.

Four times as many people were using such loans in 2009 compared to 2006. Some 1.2 million people took out 4.1million loans in 2009 amounting to £1.2 billion. Sadly there are no restrictions on the interest rates payday loan companies can insist on.  Most of them charge 25 per cent for an advance repayable at the end of the month. A few charge 30 per cent which is equivalent to an APR of over 2,000 per cent. Borrowers tend to be young adults with below average incomes. Over 65 per cent of all borrowers from payday loan shops have an income of below £25,000.

Therefore the big worry is that such outlets are targeting poor areas of the country. So here in Merton there are no such shops in affluent Wimbledon Village, but there is a proliferation of them in Mitcham, an area with much higher levels of deprivation. A strong opponent of such shops in high streets is Walthamstow’s local MP, Stella Creasy. The main shopping area in Walthamstow is crammed with eleven such shops offering consumers a number of ways to grab money fast at exorbitant rates.

Creasy is calling on council leaders to be given powers to limit the number of such shops in their boroughs in the same way they could limit betting shops. Indeed the Mary Portas review suggested putting betting shops into a separate ‘Use Class’ of their own and it is interesting that Portas does not suggest this route for payday loan shops too.

While the payday lending industry also preys on the poor in America, Creasy must look enviously on the 17 states in the US that currently ban or curtail payday lending operations on their patch.

Some councils, like Manchester and Islington, have done their level best to copy those more enlightened states in America and ban loan shops from their borough. They have sadly, had to abandon the introduction of a byelaw to do just that given legal advice to the contrary.

There could be more hope in the introduction of a ‘super’ planning use class in which premises that residents believe have a negative impact on the high street can be controlled or even banned

But is banning payday loan shops really the quickest or most effective answer?

Pushing forward legislation to ban anything requires time and possibly parliamentary time. Even a private members bill will see free market politicians coming to the aid of the loan sharks and could take years to get government support.

A major report by Consumer Focus into this industry also concluded that there is no clear evidence that banning payday loans necessarily helps consumers avoid financial difficulties.

In a series of recommendations to their report, this statutory consumer champion instead recommended an interest rate cap for the sector; a limit to the number of loans per household; increasing financial literacy and an emergency borrowing facility from our mainstream banks.

There was one other recommendation from Consumer Focus that I believe holds the answer to this problem. This referred to social lending in general. The report called for ‘investment in social lending to provide an opportunity for consumers to save small sums of money against future financial difficulty and borrow at affordable rates in times of crisis’.

The report continued ‘credit unions provide a valuable source of affordable credit, but there are limits on their accessibility’.

This is where for me, credit unions hold the key to combating the dominance of payday loan shops. Because it is not about banning payday loan shops but about fitting out credit union shop fronts in our high streets to act as real competition to the loan sharks.

Before talking about how every credit union should be afforded a high street presence by every borough in this land we need to do more to promote credit unions to UK residents.

Worldwide there are some 53,000 credit unions in 100 countries with 188 million members.

We compare badly in the UK compared to the US when we talk about current credit union activity.

In the UK there are just 480 credit unions with some 900,000 members. That is a penetration of the economically active population aged 15-64 of just 2.25 per cent. Compare that with the US. Across the pond there are 7,400 credit unions with 91 million members giving an impressive penetration of the economically active population of 45 per cent!

The Association of British Credit Unions Limited is doing all it can to promote the industry. ABCUL claims that 25 credit unions across the UK now offer current accounts while some are offering mortgages, cash ISAs and insurance products.

So we now know there is an unsavoury proliferation of loan sharks with a physical presence in our high streets ripping off vulnerable people. We also know that banning them, even if possible, will take far too long to come to fruition.  From Consumer Focus we know that that credit unions hold one possible answer but we also know that credit unions in the UK are still at the fledgling stage and even in areas where they have a foothold no one knows how to get in touch with them.

So where do we go from here?

Today local authorities can establish and provide support to credit unions both under the ‘well being powers’ and under the power of general competence contained in the Localism Act. This provides a clear mandate to support the activities of local authorities that wish to establish credit unions, but councils are still under no obligation to do so.

A much more effective way to ensure credit unions are available to help those most in need of the services offered is the introduction of a statutory duty placed on local councils to establish credit unions in their area.

This new duty should include an onus on the authority to source appropriate premises in the high street and where possible the new credit union shop to be placed either next door to or on the opposite side from the loan shark shops.

In addition there should also be a duty to advertise the services of credit unions to the public.

So in much the same way that we as local authorities  are required to provide a statutory library service , or breaks for carers, or collect domestic waste , or promote educational attainment,  so we should do likewise for social lending.

It is only when we promote credit unions, the responsible alternative to payday loan shops, that we will see the demise of the latter. The best way to do that is to provide the physical presence of credit unions in the very high streets that payday shops inhabit.

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Stephen Alambritis is leader of Merton council, and sits on the  board of Croydon, Merton & Sutton Credit Union

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This article first appeared in the Municipal Journal

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Photo: mudricky

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  • Jacqueline Purcell

    A fabulous message at a time when this country needs solutions. I commend Stephen Alambritis.
    Jacqueline Purcell

    jacqueline.purcell@yahoo.co.uk

    Fellow Royal Society of Arts, London Region

  • http://twitter.com/JohnHitchin John Hitchin

    Whilst there is much in here to commend, I do have a couple of concerns.

    I’m a Director of another London Credit Union (London Capital), and we run a very low cost model with no High Street presence. We get 50% of our new members through word of mouth – and that proportion is increasing.

    It’s not to say that they shouldn’t be where people are – we do regular campaign days in high street locations – but we actually find that there two things things that really stop people using us over higher cost lenders.

    The first is speed: you can get money from a pay day lender in as little as 15 minutes. A credit union normally encourages you to start saving first. Credit Unions also don’t have the capital to invest in website and back office functions to the same degree as pay day lenders, and that turns many borrowers off using us quickly.

    Secondly, we have the majority of our money out on loan. We are encouraging as much saving as possible, but the demand for loans is exceeding it at the moment. The support we have had from two Labour authorities – Haringey and Islington – mean that we can borrow fixed amounts of capital from them over a fixed period. This increases our loan capital just at the point the residents of those authorities need it the most, and we are seeing the impact of that already in terms of growing members – and growing members means growing savings.

    So, I wholeheartedly agree with much of what Stephen Alambritis is saying, and I know from experience the value of local authority support. But there are a range of ways that individual and member owned credit unions can support their areas, and there are, as a result, a range of ways that local authorities can support those credit unions. It might be through helping them with a building (if that fits their business model), but it might be with some capital, or it might be through encouraging council and other public service staff to join the credit union through a payroll deduction scheme. These are the best ways to get guaranteed savings coming in, and anybody that runs a business knows that a more certain revenue stream is the best way to give you the confidence to invest and grow into new areas, and to help more people with their financial security.

  • Alan Edwards

    A statutory duty is a good idea. Can i also suggest a franchise type model for credit union organisation and processes that local promoters can adopt quickly.