Why access to affordable credit is Why access to affordable credit is central to financial inclusioncentral to financial inclusion

Paul Jones Paul Jones Liverpool John Moores UniversityLiverpool John Moores University

Financial Inclusion Forum - DunblayneFinancial Inclusion Forum - Dunblayne

Research at Liverpool JMUResearch at Liverpool JMUsponsored by The Co-operative Banksponsored by The Co-operative Bank

Would You Credit It? (2005)Would You Credit It? (2005)

aimed to identify how people learn about the use of aimed to identify how people learn about the use of credit, about where they obtain information and credit, about where they obtain information and about how they understand the terms and about how they understand the terms and conditions of the credit they use. conditions of the credit they use.

Access to Credit on a Low Income (2001)Access to Credit on a Low Income (2001)explored the choices made by low income consumers in explored the choices made by low income consumers in accessing creditaccessing credit

Access to Credit on a Low IncomeAccess to Credit on a Low Income

• Essential part of everyday life on a low Essential part of everyday life on a low incomeincome

• 90% of participants needed to borrow90% of participants needed to borrow• For essential items and to make ends meetFor essential items and to make ends meet• Little choice but to use alternative credit – Little choice but to use alternative credit –

excluded from the mainstreamexcluded from the mainstream• Significant minority found access to any form Significant minority found access to any form

of credit to be very difficultof credit to be very difficult

Factors influencing choiceFactors influencing choice• CostCost

- Alternative credit is expensive (60% know that it is!)- No, or very little, understanding of APR - No benchmark for making cost comparisons

- “Is 40% expensive? I don’t know, you tell me” - The cost is less important than affordability- Leads to paying excessive rates

• AccessibilityAccessibility– “It’s who will say not say no to a loan that matters”– Can leads to exploitation (cf lack of competition in

Home Credit Market)

Sources of CreditSources of Credit

• Mail Order cataloguesMail Order catalogues• Home CreditHome Credit• Pawn ShopsPawn Shops• Buyback StoresBuyback Stores

– "It's at your Uncles“

• Cheque Cashing Cheque Cashing CentresCentres

• Unlicensed money Unlicensed money lenderslenders

• Retail ShopsRetail Shops• TontinesTontines• Social FundSocial Fund• Credit UnionsCredit Unions• Banks and building Banks and building

societiessocieties– “You need a letter from

God to open a bank account”

Factors influencing choiceFactors influencing choice

• Ease and flexibility of Ease and flexibility of repaymentrepayment

• ImmediacyImmediacy• No credit checksNo credit checks• Tradition and cultureTradition and culture• Knowledge of the Knowledge of the

productproduct

• Simple and Simple and straightforward terms straightforward terms and conditionsand conditions

• ConvenienceConvenience• Ease of applicationEase of application• The human touchThe human touch• No stigmatisationNo stigmatisation

Victims of alternative credit?Victims of alternative credit?

Some do people do manage, despiteSome do people do manage, despite– High and often extortionate interest charges– Unfavourable terms and conditions

Yet for many, alternative credit Yet for many, alternative credit • Can lead to entrapmentCan lead to entrapment• Never ending cycles of borrowingNever ending cycles of borrowing• Major-over-indebtednessMajor-over-indebtedness

South Tyneside Case studiesSouth Tyneside Case studies

• ““I took an overdose because of the situation I I took an overdose because of the situation I was in, I had a complete breakdown because was in, I had a complete breakdown because of my debts”of my debts”, she explained. , she explained. “I had nowhere “I had nowhere or no one to turn to”, or no one to turn to”, she continued, she continued, “I had “I had more going out in loan payments than I had more going out in loan payments than I had coming in. I was not eating. I was living on coming in. I was not eating. I was living on bread and jam, I was desperate. I hid the bread and jam, I was desperate. I hid the debts from everybody, many times I would go debts from everybody, many times I would go to bed at 6.00 p.m. because I could not afford to bed at 6.00 p.m. because I could not afford the heating”.the heating”.

Would you credit it?Would you credit it? Information through social networksInformation through social networks Early introduction to alternative creditEarly introduction to alternative credit ““I don’t read leaflets”I don’t read leaflets” The unreliability of common mythsThe unreliability of common myths

If there is no signed agreement, must be a good deal Misunderstandings about terms and Misunderstandings about terms and

conditionsconditions Yet still little or no choice but to use Yet still little or no choice but to use

alternative creditalternative credit

Some discussion questionsSome discussion questions

• Is access to affordable credit the Is access to affordable credit the answer?answer?

• Is it the sole answer?Is it the sole answer?

• What are the key elements of an What are the key elements of an effective response to financial exclusion effective response to financial exclusion and over-indebtedness in low income and over-indebtedness in low income communities.communities.

Towards a strategic approachTowards a strategic approach

• Financial literacy education and informationFinancial literacy education and information• Money and Debt Advice Money and Debt Advice • Money managementMoney management• Assistance with budgetingAssistance with budgeting• Personal support Personal support • Access to affordable creditAccess to affordable credit

– But, a loan is not always the answer!

Building financial capabilityBuilding financial capability Understanding the complexities of alternative credit Understanding the complexities of alternative credit

marketmarket Financial literacy education valued but fails to reach Financial literacy education valued but fails to reach

the majoritythe majority Importance of one-to-one contact for financial Importance of one-to-one contact for financial

advice (50%)advice (50%) Financial literacy in the communityFinancial literacy in the community

Through community organisations Huyton MABS Financial Buddy Scheme Participative and building on past experience

Learning to budget when returning to workLearning to budget when returning to work

The role of credit unionsThe role of credit unions• Ideally placed to serve low income Ideally placed to serve low income

communitiescommunities• Modernised credit unionsModernised credit unions

– Immediate loans without savings– Benefits direct– Current account equivalents (budget accounts)– Doorstep collections a possibility– Realism in cost of serving low income consumers

– the APR rate issue– Partnerships with money advice agencies– Support services