Talk Money Week 2023 – Why is financial inclusion important and what role does affordable credit play?

It’s Talk Money Week this week – a week designed to break the taboo of talking about money and improve people’s financial wellbeing. We’ve asked the Fair4All Finance team to share their thoughts throughout the week on ‘if you could do one thing…’ to improve financial inclusion.

Here’s Diana Kamil, our Head of Engagement.

Over 17.5 million people in the UK are in financial vulnerable circumstances. That’s millions of families who would struggle to deal with an unexpected bill or a loss of hours at work.

For many people a broken washing machine is an inconvenience. Between arranging time for installation and delivery and having to go into savings that were being built for something else, it’s a nuisance to the daily routine.

However for the 1 in 4 people in the UK that have less than £100 in savings and the 8 million people that struggle to access credit it’s a significant worry. How do you find £400 for a new washing machine when you don’t have savings or easy access to a credit card?

Having access to small amounts of credit can be transformative in allowing people to cover unexpected costs. But for people who can’t access mainstream credit, the options are bleak – particularly with the retreat of the traditional high cost credit market over the last couple of years.

When people don’t have anywhere to go the risk of them turning to illegal money lenders is higher than ever. Our research estimates that over 3 million people have borrowed from illegal money lenders in the last three years.

We spoke to people across South London, Glasgow, Preston and Port Talbot. The themes were all the same – borrowing from illegal money lenders rarely has a good outcome and never comes with consumer protections on the terms of your borrowing.

The pandemic drove a deeper gap in people’s financial wellbeing and saw uneven outcomes across the country. While many higher income households were able to save more, lower income families saw their savings eaten up by financial shocks caused by illness, job loss and in some cases bereavement related costs. And we all know that the cost of living has further heightening the impact on household finances.

While the complexity of the problem is beyond the ability or responsibility of any one industry to solve, there are things financial services and impact focused investors can do to support customers in the communities they operate in.

What other options are there?

Community finance providers – credit unions, community development finance institutions (CDFIs) and other purpose led providers – are a lifeline for many customers in accessing credit. They focus on spending time with their customers to understand their borrowing needs to ensure credit is the right answer. And they provide vital wrap around support like checking for additional benefit income that customers might be entitled to.

The impact of these customer centric operating models can’t be understated. For example in 2022 the two organisations Salad Money and Scotcash, identified an additional £368m in unclaimed benefits for their 68,740 customers.

Organisations like these have fantastic expertise in serving customers with complex financial lives, and they do this sustainably and ethically. They are supportive at every step of the borrowing journey and invest any profits back into the communities they serve.

In addition to having direct impact on individuals who use their services, community finance providers generate significant social value with the support they provide. An impact study for the organisation Fair for You concluded that £16.68 of social value is generated for every £1 that’s lent by this CDFI.

The demand for affordable credit overwhelmingly outweighs the supply. There’s clearly a need to fill this gap and scaling and promoting affordable credit through the community finance sector is one part of the potential solution.

Supporting growth and making a difference

Significant investment is needed to scale and promote affordable credit options through providers like Fair for You. Now is an opportunity to grow these organisations through new initiatives and looking at how blended finance can complement growth.

Banks with ESG goals and impact focused investors can utilise their capital to support the community finance sector. Evidence shows that a place based investment drives impact and can have a multiplier effect on driving economic value in local communities.

As these organisations are mostly not for profit or asset locked, this ensures the majority of profits are reinvested back into the mission of tackling financial exclusion.

Community finance providers, particularly CDFIs, need capital to scale and have historically found it hard to access commercial funding. There are opportunities for banks to consider a combination of investments and grants to support this sector whilst delivering on corporate responsibility and ESG goals.

In recent years we have seen some brilliant contributions from the mainstream finance sector including large grants from JPMorgan Foundation and NatWest group. We welcome this alongside commercial repayable finance to support sustainable growth of this sector and have been really encouraged to see the work Shawbrook Bank do in providing a lending facility to community finance organisations.

We have also seen some innovation funding approaches from foundations including City Bridge Foundation who have provided first loss grant capital to mobilise commercial funding and our work with Ceniarth family office to provide a guarantee to encourage direct investment.

We welcome banks, commercial funders, social investors and foundations working together to look at innovative solutions to address the growing need for credit.

Supporting community finance and purpose led providers means supporting customers to safe and ethical alternatives, creating local community benefit in the process and an opportunity to deliver on ESG focused strategy and goals.

We believe there’s a massive opportunity for the whole financial services sector to help increase the financial resilience and wellbeing of people across the country. Do it right and you can make a huge difference to the lives of millions of people.

If you are interested in our work please reach out to Diana Kamil at diana@fair4allfinance.org.uk.