Community Finance Sector Reporting – Q4 2022

1 March 2023

Each quarter we gather information from across the community finance sector, creating a snapshot and sharing insights and trends with those that take part. We also benchmark organisations with one another providing a useful look at how you may be performing in comparison to other community finance providers.

There’s more information about how you and your organisation can take part at the bottom of this article, but first let’s look at the headlines for Q4 2022.

Loan books are up 30% when compared to 2020

Average loan book size across 19 organisations increased by 7% when compared to the last quarter, sitting at c£7.1m in Q4 2022. The average net loan book across these organisations is at £6m
Accumulated gross loan books across all organisations at the end of 2022 was c£138m, up 17% when compared to Q4 last year and up 31% when compared to Q4 2020
Unsurprisingly, the majority of respondents indicated ‘Christmas’ as the main reason for loan applications in Q4. As reported last quarter, organisations highlight a continuing rise in debt consolidation applications – with over half of respondents noting an increase

‘There has been some demand to clear “buy now pay later” debts and apart from that the usual demand for uniforms and towards Christmas spending‘

Overall, loan values have increased but trends across organisations are inconsistent

In Q4 2022, within this snapshot of data, average new loan value was £926:

For credit unions with gross loan book equal to or below £5m, average was £1,158

For credit unions with gross loan book size above £5m, average was £896. For CDFIs, average was £645

Overall, loan value has increased by £84 when compared to Q4 2021, but decreased by £48 when compared to last quarter (Q3 2022)

‘Since October there has been a slight increase in the average loan size compared with the same period last year (£787 compared to £741). This is surprising as the average loan size has been generally falling for 2 years’

In Q4, most respondents saw their arrears increase

60% of respondents saw their arrears and default rates increase in Q4 2022
As with Q3 2022, the Cost of Living crisis continues to shape the narrative behind increasing arrears – as well as seasonality factors
Those who indicated their arrears had remained stable or decreased attributed this to improvements made to affordability decisioning, allowing greater flexibility to customers making payments, focus on automating reminders for customers when payment is due and implementation of workflow management system which allows more effective tracking of arrears

‘We have seen improvements in our arrears rates due to improvements made to our affordability decisioning engine. Though we have been mindful of the economic climate we are yet to see significant impact against our borrowers ability to pay’

In 2022 organisations doubled their lending compared to 2020

In 2022, these organisations issued 233,000 new loans to customers, totalling just under £115m. In 2020, the same organisations lent 148,000 loans (£81m) and in 2021 issued 172,000 new loans amounting to 98m
Combined lending across 19 organisations has increased by 57%when compared to 2020
In Q4 2022, combined lending volumes were up by c40% when compared to Q4 2021 but over half of our respondents issued a lower amount of loans when compared to Q4 2021
On average, participating organisations were issuing c1,381 loans a month in the last quarter

Demand for credit is rising, but declines are also increasing

The majority of respondents continue to highlight a rise in loan applications as well as an increase in declines
When comparing Q4 2021 to Q4 2022 there is only a 3% difference in the average new loans conversion rates across all organisations (58% in 2021 compared to 55% now)*

*Figures reported based on analysis of new loans and declines, organisations may have different understandings of this –we expect to address this in the next reporting

‘We expect to see greater demand for our services as the cost of living increase continues to impact our members. We expect the delinquency to remain around the current levels as people tighten their belts during the 1st quarter ‘

Lending expectations for Q1 2023 reflect widespread uncertainty surrounding the wider economic risks

Respondents are split on lending expectations for Q1 – with some expecting a decrease due to seasonality, stricter lending criteria and customers being reluctant to borrow and others anticipating an increase due to success of new products and patterns of accepting new members
Once again we see the majority of respondents reference the Cost Of Living crisis in their responses and the prevalent effect this has on lending expectations
The majority of respondents believe demand for credit will continue to persist but decline rates will rise

‘Anticipate new lending will decrease in line with seasonal trend. We also expect the cost of living crisis to reduce the number of “larger loan” applicants as many are nervous about further cost rises and implications on household budgets ‘

For the majority of respondents, arrears are expected to increase in the next quarter

Over half of respondents expect an increase in arrears due to:

Customers overspending during the holiday period
Disposable incomes being at their lowest
Insolvencies in mis-sold IVA products
Mispayments and BNPL debts from Christmas entering repayment period
Energy and mortgage costs sets to rise

Organisations also note their efforts to keep arrears steady by:

Recruiting additional loan support staff
Continuing to improve decisioning tools
Regularly updating underwriting processes
Suspending interest and saving requirements
Reducing repayments

‘There will most likely be further deterioration as the cost of living crisis bites and the activities of debt agencies, insolvency firms are stepped up further’

Continued support for those customers in vulnerable financial circumstances

92% of new loans issued in Q4 2022 were equal to or below £1k compared to 88% in Q4 2021
On average 61% of new loans issued were to social housing tenants in Q4 2022 and 47% were to lone parents with dependent children*
In 2022, participating organisations have reported issuing 31,000 loans (£21.3m) to lone parents with dependent children and 28,000 loans(£20.6m) to social housing renters

‘Since my original loan, that I have now paid, I have managed to easily save money coming straight out of my child benefit payments and find everything so smooth and easy’

Benchmarking within the community finance sector

We provide all organisations that take part in our insights survey a detailed report of our quarterly sector analysis and findings, along with an individual report benchmarking their organisation against the performance and position of other respondents. This includes key performance metrics and can be a useful tool in your strategic planning allowing you to measure your performance and processes against others and identifying areas of best practice and improvement.

Our sector reporting also enables us to be as informed as we can be, supporting and informing our work and close relationships with trade bodies and other sector organisations – the more insights and information we share with each other, the more we can work towards successful outcomes for the sector.

If you would like to take part in future reporting, please contact the team at Programmes@fair4allfinance.org.uk