Stopping the Loan Sharks 


May  2000

How a US-Style Community Re-investment Act could reduce financial exclusion in deprived areas.
Over two million adults on low incomes in this country do not use any kind of financial services.  A recent report from the Social Exclusion Unit showed that these are mostly the unwaged, those living on benefits and social housing tenants.  According to the British Banking Association less than 2% of applicants are turned away by the Banks when they apply to open an account: -it’s a case of voluntary exclusion.  A common feeling is that bank accounts are not for ‘people like us’. When they run into financial difficulties, people often close their account as a way of avoiding getting into debt again.  Access is often a problem too, as in many deprived areas financial services like banks, building society and insurance offices are being withdrawn.  According to the British Bankers Association, the number of UK bank and building society branches fell by a quarter between 1988 and 1998.  Now the demutualised Building Societies are closing their branches wholesale.  

The recent New Economics Foundation report called Financial Exclusion in London’ showed that the greatest withdrawals had been in the wards with the greatest degree of social exclusion.  This pattern  is repeated all over the country. The plight of people living in these areas is often exacerbated by the practice of ‘red-lining by postcode’ whereby credit or other financial services are systematically refused to people living in certain post code areas regardless of their personal circumstances.  This rules out telephone banking, direct line insurance or any on-line transactions.  Credit cards are often refused by the small traders in these areas because of the charges.  Despite their public expressions of concern for the disadvantaged, the Banks prefer to concentrate on high value added services for their affluent middle class customers. This is sometimes called the ‘flight  to quality’


  Loan Sharks use strong

   arm methods 


So where do people on low incomes go for credit?  They go to cash converters, pawn shops or money-lenders.  According to the Public Studies Institute’s report, ”Money Lenders and their Customers” about three million people in this country are in hoc to licensed money-lenders.  Many others are so poor that even the money lenders won’t touch them. Some then fall into the clutches of loan sharks who are prepared to use violence and intimidation to ensure repayments.  The interest rates charged are often astronomical. What is being done to combat financial exclusion?  The Post Office in partnership with the Co-operative Bank, the Alliance and Leicester Bank and LloydsTSB have now made it possible to bank at its 15,000 branches.  Barclays Bank are currently piloting a scheme in Cornwall in 200 rural sub-Post Offices.  At the moment, the Government is computerising the Post Office network.  The use of Automatic Credit Transfer will then enable it to cut the costs of paying benefits substantially.  

Co-op Banking in

15,000 Post Offices

When the project is completed in 2003, the Post Office will then have a branch network ten times the size of the biggest of the High Street banks. However despite all this gee-whiz talk, the Government is still closing large numbers of sub Post Offices in deprived areas. Will the semi-privatisation proposed for the Post exacerbate this problem as the new ‘leaner and meaner’ Post Office PLC chases higher value-added markets to improve its profitability?  Where there are no banks, cash machines can be a help.  But the provision of ATMs is another contentious area. In reality, the Banks would like to get rid of a lot of their cash machines.  The capital cost of these machines can be as much as £100K and the cost of installing and maintaining the telecomm link means that a high foot-fall is necessary if they are to be really profitable.  That’s why Barclays and other High Street banks have been trying to put up the charges for using them.
Market forces may force the Banks to think again.  Some of the large petrol chains have now applied to put ATMs in their forecourt convenience stores.  These would be loss-leaders but could provide a very serious threat to the clearing banks’ customer base.  Using satellite technology can cut costs.  The Co-operative Bank is experimenting with extending its network of cash machines into small Co-op convenience stores using roof-top dishes.  However all these measures are at best palliatives and a poor substitute 
So how are we to combat financial social exclusion in deprived areas?  The Community Re-investment Act 1977 in the US could be a model here.  The Act seeks to encourage financial institutions to “fulfil their obligations to meet the credit needs of their communities". It requires the regular evaluation of their community lending performance.  Government regulators must take this into account when mergers, acquisitions or branch closures are being proposed.  Interested parties such as community groups and other financial bodies can challenge any proposal.  This does work.  When the Chase Manhattan and the Chemical Bank wanted to merge in March 1996, a $18 billion community development and lending programme was announced to ensure public support.   

To date, the US Treasury estimate that over $300 billion of credit has been provided to low or moderate income neighbourhoods.  Equally importantly, the lending has been found to be profitable. The banking regime in the States is different from the UK.  Some critics say that the CRA would not work here.  In July 1998, Labour MP Tony Colman introduced his Community Re-investment Disclosure Bill as a Private Member’s Bill. This Bill required banks and others to divulge details of their lending and financial services by post code and to ensure that red-lining does not take place.  This modest proposal did not become law.  Patricia Hewitt, the then Treasury Economic Secretary said that the government would not legislate along US lines.    

A Treasury report entitled Access to Financial Services was published last November.  This is part of the National Strategy for Neighbourhood Renewal and the report was produced by Policy Action Team 14. Their task was to look at  ways of developing credit unions and making it easier for people living in deprived communities to get insurance cover.  The role of Banks, Post Offices and others in providing financial services in these areas was also examined.  The goal was to “develop a strategy to increase access to financial services for people living in poor neighbourhoods".  Unlike their US counterparts, the report’s authors explicitly reject the idea that the Banks have obligations to serve all sections of the community and adopts a mainly free market approach.  It makes about 40 recommendations.  Many of these are about improving product design and delivery methods so as to cater for the special needs people living in deprived areas.  Risk assessment methods are examined and reasons for market failure are touched upon. The rest is about exhortation to good practice and modest changes to the regulation of Credit Unions. 
The report does not deal with disclosure of information and excludes any form of compulsion. It suggests a five year programme for monitoring outcomes. During this period, it is hoped that the number of bank accounts will have increased so that there will be fewer households without accounts. The FSA Credit Union framework and legislative changes should mean a substantial increase in Credit Unions. A steady growth in Insurance with Rent schemes should have taken place. ThePost Office will be fully computerised and there should also be more alternative channels for banking services.  By 2005, all benefits should be paid by automatic credit transfer.  Low income household usage of the banks and insurance companies should be at similar levels to other social groups. In conclusion, it states that “if the recommendations are all  taken up, it is possible to envisage a time when financial exclusion as we know it will   have disappeared  entirely”.  We shall see!  But how will we know that these things have  happened (or not)?  Disclosure will still be purely voluntary.  Everything is to be done by  consent.
The experience in the United States has been that that doesn’t work. That is why  they introduced the Community Re-investment Act.  It is now an integral part of the banking  scene accepted by Democrat and Republican administrations without demur.  Now most  Banks have community development departments and play an active part in the  communities in which they trade.  When the New Labour government was elected in 1997,  one junior minister hinted that CRA type legislation was in the pipeline.  This was hastily withdrawn, as it was not seen as “business friendly”.  But in the meantime, there was a flurry of activity amongst the financial institutions looking into community finance initiatives.  These were dropped later but it does show what the threat of compulsion can do.  The Government should make it clear that if the City institutions greedily continue to chase profits at the expense of deprived communities, then the Government will introduce a Community Re-investment Act to make them carry out their community responsibilities.  The funds and expertise so released could then be used to promote Credit Unions, Mutual Guarantee Societies and other kinds of Urban Regeneration Programmes.

This article was published in THE CHARTIST May 2000

recent publications

Cartoon: London Borough of Barnet