The Money Question

Thursday April 16 2015

 In his final column, the Moderator, the Rt Rev John Chalmers highlights the importance of affordable credit.

THE Moderatorial journey continues to be as interesting as it is varied. This month I can report that I have been part of two significant initiatives.

            The first: the launch of the Churches Mutual Credit Union; the Archbishop of Canterbury and I are among the first savers in a project that in the long-term could set a gold standard in the world of saving and lending. CMCU is a new kid on the block, but if it grows to the point that it can open its doors to church people across the UK; it could become a force to be reckoned with. That, however, is a long way off and to get there will require serious commitment from clergy, church employees and their families who are currently eligible to join (details at cmcu.org.uk). In the meantime, the people that we in the Church really want to help – remain outside of the circle of those who can access affordable credit. That is what has taken me through the doors of the Carnegie UK Trust and to a closely related second significant initiative.

            Too many complex issues in our day are being over-simplified for the sake of newspaper headlines or easy political point scoring; the result of shallow analysis is poor quality problem solving and nowhere is it more important to come up with right answers than in the sphere of economic activity. Following the 2012 report of the Special Commission on the Purposes of Economic Activity, the Carnegie UK Trust took up the challenge of examining more deeply the range of issues which fuel the demand and supply of affordable credit; their research so far is insightful.

            Credit is now a vehicle built into the fabric of modern life, but in credit markets, as with so many things in life, the poorest are most badly served and most easily exploited. Most of us do not realise how complex and challenging the credit market really is. When we hear the headline rates of interest being charged by the short term lending market and we see the trouble that people get into when these rates get compounded month after month, our hackles rise and our sense of justice is placed on red alert. We know why Jesus threw the traders and moneylenders out of the Temple – because they were exploiting the poor and extorting more than the market value.

            The same kind of principled concern for those suffering at the hands of high cost credit companies, has recently produced robust and effective responses in the form of new rules and regulations. These welcome interventions have significantly restricted the operations of many high cost credit suppliers and have dramatically altered the nature of the high cost credit market. Right now there are fewer companies operating in this space, fewer loan products being offered and fewer people eligible to borrow. It is estimated that the market for high cost loans will contract by £750 million per annum, [1] with 160,000 fewer people taking out pay day loans.[2]

            There are, however, other consequences of these changes in regulation which, once again, impact more significantly on the poor than on anyone else. You see, action to curtail lending in this sector, does not, in and of itself, reduce the need for short-term, life-saving access to money. Where will those shut out by new regulations now go to borrow money? Their demand and need for credit has not disappeared, so, the fearful question for the chattering classes is this – have we driven some of the most vulnerable members of society into the hands of loan sharks and other illegal lenders?

            This problem has long been recognised by public policy makers, but you have to read behind the headlines to understand the subtleties and, while we wait for the power of the Credit Unions to kick in (and that could be a long way off), we need to develop a much more sophisticated understanding of the high cost credit market, including how and why people use it.

            Let me ask you to put yourself in the shoes of someone who finds that they need to borrow £100 to keep their van on the road, this in turn means they can finish the job they are working on and they will get paid at the end of the month. I think I know what your reaction would be if you were told that that loan over one month would be charged at an interest rate of 791% APR (Annual Percentage Rate). What, however, would be your reaction if you were told that that loan would cost £20 over the month which that £100 was borrowed, but that it would keep the family together, put some food on the table and buy enough fuel to keep the van running – you might say that it was worth £20, that it was money well spent and if payday was half decent you might even say it was affordable.

            A charge of 791% APR on that one month loan is just another way of describing that £20 charge. I think that those of us who have never had to live that close to the margins have to be very careful of what we say about how others cling to survival.

            I wish that no one had to access money in this way; I wish that there was a universal definition of affordability and I wish that benefit rates and living wages meant that people did not have to live on the breadline, but they do and all of the above are contested issues. The solution, therefore, lies in addressing a vast range of underlying and overarching issues and this brings me back to the Carnegie UK Trust and my commitment to work with them to explore alternative solutions that take account of each of these issues.

            We have now broken through on the Credit Union front, but urgently we need to explore further models. Recently a progressive think-tank the Institute for Public Policy Research has called for the establishment of an Affordable Credit Trust funded with a levy from lenders themselves and the Centre for Social Justice published a report in which it has called on the UK Government to support social finance providers by investing in a new Social Finance Investment Platform pump-primed by government – these are among the proposals that now have to explored with some urgency.