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Credit, affordable finance and opportunities for social investment

September 2013

Over 5 million vulnerable households are affected by financial exclusion across the UK. Excluded from mainstream financial services, these households are having to pay between £800 and £1,000 a year in higher credit costs.

Access to affordable finance is emerging as an issue across a number of Big Local areas, both at the personal level and for people wanting to develop local enterprise. While personal debt is a difficult issue to discuss, many areas have decided to prioritise social investment as a way to address the problem. Some Big Local areas are planning to invest money into their local credit union or community development finance institution (CDFI) to increase the availability of affordable credit in the area.

In this case study we look at how Big Local areas can take big steps to combat financial exclusion.

What are the issues in Big Local areas?

Affordable credit and doorstep lending are issues that several Big Local areas want to tackle. Access to credit, extortionate interest rates, spiralling personal debt and resources flowing out of local areas are all growing problems. Small Change is Big Local’s national partner for social investment. Together, they and the newly appointed social investment reps will help Big Local areas to identify and implement opportunities locally. Issues in Big Local areas include:

  • payday lending and high interest rates
  • saving for a ‘rainy day’
  • dealing with the implications of how universal credit will affect people’s income
  • how people are going to receive rental allowances
  • dealing with debt
  • local cash points charging to withdraw money

Identifying the relevant opportunities for social investment can be a slow process but the issues are definitely striking a chord with residents. Of the 150 Big Local areas, Big Local reps have said that 27 areas are ready to get involved in projects and activities for social investment immediately, 61 would wish to do so in the next six months and 38 from further down the line. Leigh West, Par Bay, North West Ipswich and Custom House Big Local areas have allocated budgets for social investment in their Big Local plans.

Which affordable credit options are available?

Credit unions and CDFIs can be very effective working at a local level and they offer much better interest rates for people taking loans than national payday lenders. However, working without the same commercial presence as payday lenders, credit unions may not be able to give such quick approvals for immediate cash. To overcome this challenge and offer an equivalent service, some CDFIs and credit unions are developing sustainable models to meet the demand for smaller, short-term loans. These include Moneyline, My Home Finance and Street UK (CDFIs) and CUOK (London Mutual Credit Union and Partners Credit Union, Liverpool).

How to get started - working with the right social investment partner

One of the most important first steps for Big Local areas wanting social investment to be part of their activities is to identify a suitable credit union or CDFI to work with. Small Change has been working with Big Local areas to establish and build these relationships. For example, in one Big Local area the local credit union would have charged 12% interest for home improvement loans while the CDFI the area is now planning to work with will only charge 5% interest. The outcome of working with the right social investment partner means ultimately better opportunities for residents to access affordable credit.

An example of how areas can work successfully with their credit unions

Small Change is working with Big Local areas to develop long-term relationships with social investment partners over 10 years. The fact that Big Local areas are small and well-defined suits credit unions which also operate locally.

Sally Chicken works for credit unions in both Ipswich and Peterborough. She has welcomed working with Big Local areas because they also work at a local level and are embedded within the communities of which they are a part.

North West Ipswich Big Local established a relationship with Ipswich and Suffolk Credit Union, and they are now in a good position to start lending to individuals. Ironing out the agreement to work together has taken slightly longer than anticipated but having gone through this process successfully, the agreement can now be used as a model for other Big Local areas.

The credit union likes the resident-led approach of Big Local and that the Big Local partnership is a good reflection of the people living in the area. The credit union has worked closely with North West Ipswich to highlight some of the issues related to affordable credit and identified where it can play a role in improving the situation for residents. In particular, it has highlighted:

  • where doorstep lending occurs
  • the costs of being in debt
  • the number of people with poor credit ratings in the area
  • what the credit union can offer in response with personal lending opportunities.

Ipswich and Suffolk Credit Union will be able to offer a number of services to residents in North West Ipswich. These include:

  • prepaid debit cards
  • bank transfers and other processing services
  • ‘jam-jar’ budgeting accounts to help spread the costs of bills
  • work with schools to set up junior savings clubs.

Feedback suggests that these savings clubs are very popular. As Niamh Goggin of Small Change told us:

“People seem to really like the saving clubs. They want the feeling of putting money in for Christmas or special occasions, rather than ‘easy access’.”

The credit union is also looking at some projects it can get involved with in the longer term. One of these is to lend to small businesses, charities or community organisations. The credit union plans to work with both the Big Local partnership and another support organisation to strengthen this offer.

Ipswich and Suffolk Credit Union provides bank accounts to small community groups. Such groups might otherwise find it difficult to get a bank account without first becoming formally constituted, and they might even require charitable status. This could be a huge benefit to Big Local areas for the future in helping new groups to get activities underway without lots of unnecessary bureaucracy.

The credit union hopes that, over time, working with North West Ipswich Big Local will increase membership and will lead to an increased awareness of the services it provides. The team hopes this will increase the number of loans made in the long term and help to strengthen the credit union. In some areas, credit unions are also offering online membership and this is helping them grow.

While we are still at the beginning of establishing the relationship between Big Local areas and social investment, there is clearly huge potential with such a long-term approach. Individuals, enterprises and community groups all stand to benefit. Together, they will help to deliver enterprising and lasting change for Big Local areas.

Tips on how to make social investment work

Niamh Goggin from Small Change provided us with some handy tips on how to develop social investment in Big Local areas:

  1. Build a good relationship with the credit union/CDFI and dedicate time to developing this. CDFIs and credit unions may sometimes initially struggle to understand the resident-led nature of Big Local. It may also take time to communicate that Big Local is not just simply a grants programme but has broader aims to support enterprise and create lasting change.
  2. Work with residents to develop their understanding of how credit works with credit unions/ CDFIs; at the simplest level what people need are local services where they can deposit and save money.
  3. Ensure that credit unions/CDFIs have a good understanding of Big Local’s objectives.
  4. Expect to pay for any extras such as training in financial literacy; most credit unions/CDFIs are social enterprises but are rarely able to fund this kind of training themselves.
  5. If the social investment partner is being asked to move into a Big Local area where they previously had no presence, it is likely this will need to be funded in the form of a grant to get things going.
  6. Big Local areas’ relationships with their social investment partner should be sensible and realistic. Bear in mind that:
  • Credit unions can sometimes be very small
  • CDFIs are likely to cover bigger areas and can be more strategic but may not have the same local knowledge
  • If there is no appropriate credit union/CDFI locally, there are now some national options to consider. My Home Finance, related to the National Housing Federation, can work with local Housing Associations and may be able to offer equivalent services through these

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