Why access to affordable credit is central to financial inclusion Paul Jones Liverpool John Moores University Financial Inclusion Forum - Dunblayne

Research at Liverpool JMU sponsored by The Co-operative Bank Would You Credit It? (2005) aimed to identify how people learn about the use of credit, about where they obtain information and about how they understand the terms and conditions of the credit they use. Access to Credit on a Low Income (2001) explored the choices made by low income consumers in accessing credit

Access to Credit on a Low Income Essential part of everyday life on a low incomeEssential part of everyday life on a low income 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 – excluded from the mainstreamLittle choice but to use alternative credit – excluded from the mainstream Significant minority found access to any form of credit to be very difficultSignificant minority found access to any form of credit to be very difficult

Factors 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 Credit Mail Order cataloguesMail Order catalogues Home CreditHome Credit Pawn ShopsPawn Shops Buyback StoresBuyback Stores –"It's at your Uncles“ Cheque Cashing CentresCheque Cashing Centres Unlicensed money lendersUnlicensed money lenders Retail Shops Tontines Social Fund Credit Unions Banks and building societies – “You need a letter from God to open a bank account”

Factors influencing choice Ease and flexibility of repaymentEase and flexibility of repayment ImmediacyImmediacy No credit checksNo credit checks Tradition and cultureTradition and culture Knowledge of the productKnowledge of the product Simple and straightforward terms and conditions Convenience Ease of application The human touch No stigmatisation

Victims of alternative credit? Some do people do manage, despite –High and often extortionate interest charges –Unfavourable terms and conditions 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 studies “I took an overdose because of the situation I was in, I had a complete breakdown because of my debts”, she explained. “I had nowhere or no one to turn to”, she continued, “I had more going out in loan payments than I had coming in. I was not eating. I was living on bread and jam, I was desperate. I hid the debts from everybody, many times I would go to bed at 6.00 p.m. because I could not afford the heating”.“I took an overdose because of the situation I was in, I had a complete breakdown because of my debts”, she explained. “I had nowhere or no one to turn to”, she continued, “I had more going out in loan payments than I had coming in. I was not eating. I was living on bread and jam, I was desperate. I hid the debts from everybody, many times I would go to bed at 6.00 p.m. because I could not afford the heating”.

Would you credit it? Information through social networks Information through social networks Early introduction to alternative credit Early introduction to alternative credit “I don’t read leaflets” “I don’t read leaflets” The unreliability of common myths The unreliability of common myths If there is no signed agreement, must be a good deal Misunderstandings about terms and conditions Misunderstandings about terms and conditions Yet still little or no choice but to use alternative credit Yet still little or no choice but to use alternative credit

Some discussion questions Is access to affordable credit the answer?Is access to affordable credit the answer? Is it the sole answer?Is it the sole answer? What are the key elements of an effective response to financial exclusion and over-indebtedness in low income communities.What are the key elements of an effective response to financial exclusion and over-indebtedness in low income communities.

Towards a strategic approach Financial literacy education and informationFinancial literacy education and information Money and Debt AdviceMoney and Debt Advice Money managementMoney management Assistance with budgetingAssistance with budgeting Personal supportPersonal support Access to affordable creditAccess to affordable credit –But, a loan is not always the answer!

Building financial capability Understanding the complexities of alternative credit market Understanding the complexities of alternative credit market Financial literacy education valued but fails to reach the majority Financial literacy education valued but fails to reach the majority Importance of one-to-one contact for financial advice (50%) Importance of one-to-one contact for financial advice (50%) Financial literacy in the community Financial literacy in the community Through community organisations Huyton MABS Financial Buddy Scheme Participative and building on past experience Learning to budget when returning to work Learning to budget when returning to work

The role of credit unions Ideally placed to serve low income communitiesIdeally placed to serve low income communities 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