Kathryn Smart was struggling to make ends meet at the start of England’s last lockdown. The 45-year-old typically earns Â£ 1,100 a month working at a debt collection agency in Sunderland, but has cut back her hours to help with home schooling for her six-year-old son.
Smart needed money to support her family, but knew she wouldn’t qualify for a regular loan. A bad experience with payday lenders several years ago left him with Â£ 3,000 in debt and a bad credit rating.
With a County Court (CCJ) contentious judgment also on her record, she Google searched for “Loans Offered to Borrowers with CCJs” and found Fair Finance, one of 50 community development finance institutions. (CDFI) of the United Kingdom.
While non-profit cooperatives have been around in the UK for 20 years, they are little known outside their customers. âI initially thought it was a payday lender,â says Smart. âI didn’t know this was a responsible finance company until I did a little more research. “
As Smart discovered, CDFIs are social enterprises lending to low-income businesses and individuals who struggle to access regular credit. Most offer financial education, as well as budget and debt counseling.
While the interest rates on personal loans are generally between 100% and 200%, this is a fraction of the rates of payday lenders. Smart got a Â£ 200 loan at an annual rate of 191%, compared to the 1,604% she paid for a payday loan.
She was able to borrow an additional Â£ 300 to buy clothes for her son, but only after the initial debt had been paid off, preventing the repeat loans that had caused her financial problems before.
Of the CDFIs in the UK, 10 offer personal loans, while the rest focus on small businesses. Five serve individual customers across the UK – FindFinance.org.uk can help you find one.
The organizations lend around Â£ 25million per year and serve around 35,000 clients who, on average, borrow Â£ 500 over five months.
Unlike credit unions which lend from deposits held in accounts receivable, they rely on government grants, private investors and philanthropists. In the UK, they are struggling to attract the investment needed to grow and serve more borrowers.
The business model has its roots in the United States, where it emerged from the civil rights movement of the 1970s. Banks had excluded African American communities as being at high risk, but protests led to the Community Reinvestment Act, requiring them to lend to people from whom they have received deposits. One way to do this was to invest in organizations like CDFIs, which were rooted in these communities and had earned their trust.
In the early 2000s, the UK Government-backed Social Investment Task Force was asked to identify new ways to tackle social and financial exclusion and CDFIs were proposed.
Most have been launched in disadvantaged areas – including Dalston, east London, Glasgow and Middlesbrough – in partnership with chambers of commerce or local authorities, and overseen by the industry body, Responsible Finance. At their peak, there were 80 in the UK.
But local budget cuts have pushed them down the priority list of their top donors. Some have closed, while others have merged.
Chief Financial Officer Theodora Hadjimichael believes that with more funding, CDFIs could play a key role in helping consumers and businesses through Covid.
She says members have “seen a few recessions and have been able to support businesses and people, so we’ve proven ourselves to get through these tough times.”
The real difference between CDFIs and other short-term lenders, she adds, is how they treat customers, as a CDFI’s priority is helping rather than accumulating profits.
âThey work with a client to provide flexible repayment days, understand the financial difficulties they might face in order to get the right kind of assistance. And that’s when many other types of services can come in handy, like budgeting and counseling, âshe explains.
Earlier this month, the FCA revealed that the number of financially vulnerable people had risen to 14.2 million due to the pandemic.
Hadjimichael says the demographics of CDFI borrowers have also changed. The most common clientele are usually women under 30 who live in social housing and depend on part-time work and benefits to get through the month.
But now it has spread to the self-employed and two-parent households who receive lower wages due to time off or fewer working hours. Many are homeschooled, which increases heating and food bills.
The increased demand for small loans has put additional pressure on CDFI’s funding pots. The group is now urging Chancellor Rishi Sunak to pledge Â£ 25million in Wednesday’s budget to replace money that would otherwise have come from the EU. He also wants the big banks to be required to match this funding.
Former Conservative Party Leader Iain Duncan Smith and MP Kevin Hollinrake, Chair of the All-Party Parliamentary Committee on Fair Banking, support calls for additional funding.
However, these arguments have focused on the financial support CDFIs can offer to small businesses, rather than individuals.
Peter Tutton, policy manager at the debt charity StepChange, says they can certainly play a role in helping low-income consumers increase their financial resilience, but cannot solve inequalities and debt problems on their own. ‘persistent debt.
âWhat CDFI cannot necessarily do is meet the needs of the most financially vulnerable,â he says. âThat is why we need to combine these alternatives to high cost credit with meaningful policy interventions. With 7 million people behind on the basics, or borrowing to make ends meet, the need is more pressing than ever. “
But Hadjimichael hopes the Treasury will see a role for CDFIs in helping consumers and opening up his wallet.
“This is obviously something that is higher on the government’s agenda now, and likely will remain so, given the level of financial distress and hardship many people find themselves in during Covid,” she said.
Smart is grateful that her search for a loan led her to turn to Fair Finance. âIt’s a positive company and I would recommend it over a payday lender – I would never do it again. “
This article was modified on March 2, 2021 because an earlier version referred to âbanksâ lending money on customer deposits; he heard that credit unions lend that way.