Impact of economic crisis on living costs
There is a high demand from low-income individuals for loans to cover essential expenses, which not-for-profit lenders are struggling to meet. This article is part of the FT’s Financial Literacy and Inclusion Campaign. Russell Anderson, a retired coach driver, has learned to manage his finances carefully after a chronic illness forced him to stop working. Despite his limited income, he is able to cover his bills, including rent and fuel.
Anderson, who lives in rural Scotland, is having a harder time balancing his finances. The rising cost of fuel has made it too expensive for him to drive to his nearest affordable supermarket, Aldi, so he has to take a longer bus ride. Recently, Anderson’s cat got sick, and he had to pay £170 in vet bills. Unfortunately, the cat didn’t recover and had to be put down, but Anderson didn’t have enough money left to pay for the proper handling of his pet’s remains.
Anderson was declined by two commercial lenders due to his credit rating. He stumbled upon an advertisement for Scotcash, a community lender in Glasgow, and thankfully he was able to obtain a £100 loan from them. He expresses profound gratitude towards them for their exceptional assistance. He remarks that although his debt and loan requirements are not significant, no other lenders were willing to help him.
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Role of not-for-profit lenders in providing financial assistance to those in need
People with bad credit have limited choices when they require a small loan. Community lenders, a few non-profit organizations that help individuals facing financial exclusion from mainstream lending, can be helpful. However, the sector is struggling to cope with the increasing demand. They have a limited funding source compared to commercial lenders and have criteria on loan affordability, which more and more clients are unable to fulfill.
Simon Dukes, the head of Fair for You, is worried about how many people they have to say no to. They turn down 90% of the people who apply for loans from them. This makes it tough to find responsible borrowers.
People working in this sector need help soon. They want to do more and help more people. There is worry about winter because prices for things like energy and food are higher than usual, which means less money for families. This has not happened since six decades ago!
According to Sharon MacPherson, the CEO of Scotcash, the financial sector is highly unstable, thus making regulation, funding, and collaboration crucial. She highlights that many businesses failed during the pandemic, emphasizing that the future is uncertain. Individuals who are denied assistance by non-profit organizations may face higher risks. Buy now, pay later options have been under scrutiny for their strict affordability checks, and illegal lending by loan sharks should be the last option as it exposes individuals to exploitation.
Ways to reduce expenses and make ends meet during an economic downturn
Anderson needs to use Scotcash later this year for money to pay for his car and more electricity. Credit unions and CDFIs are a kind of company that helps people with money. They started in the late 1900s because people wanted help with money all over the world.
Responsible Finance is a group that helps people get loans in their community. Money from banks and grants help them do this. They gave out £228mn this year, which is 32% more than last year.
Alternative sources of income or financing for those affected by rising costs
In 2005, Faisel Rahman established Fair Finance, a company based in East London. He had worked in Bangladesh and saw how people were struggling with money. He wanted to make a change, so he started his venture. He saw that the same problem was happening in London. He knew it was important to get information to help people and be friendly and helpful too.
Over time, Rahman observed a change in the type of customers who apply for loans. From 2005 to 2010, the majority were individuals receiving benefits. However, by 2015, the main group consisted of people with fluctuating incomes, such as gig economy workers and those with zero-hours contracts. Typically, these individuals have less than £50 left at the end of each month.
Rahman states that we have not seen the complete consequences of the cost of living crisis. The Bank of England says inflation in the UK is very high. It was 9.4% in June and will go up to 13% by the end of the year. This means prices will be higher than before. Fair Finance looked into it and found that some people might not have enough money to pay for things later this year, even if they get help with budgeting their money.
Maggie, a Scotcash customer, had to buy food daily when her fridge-freezer broke in April, causing her food bill to increase. She discovered Scotcash through her local authority in 2018 and they provided a loan of £500 to assist her. Maggie suffers from health issues that limit her mobility and has taken out occasional loans from Scotcash since then.
Ttechnology can help alleviate some of the burden associated with an economic crisis, such as online shopping and money transfer apps
Campaigners and community lenders refer to the “poverty premium” which aggravates the issue. Pre-paid meters cause the most vulnerable to pay a higher cost for fuel, and insurance is unaffordable for some. Additionally, some individuals lack their own bank accounts or savings which provides them no room to save money. For instance, adding £2 or £3 to a prepayment card for fuel may imply not having the ability to save it.
According to MacPherson, customers are hesitant to use these products based on their past experiences. For individuals with limited finances, protecting their money is a top priority. Non-profit lenders provide valuable financial advice for those unable to obtain loans. They also offer a digital benefits checker to help people claim benefits they may not be aware of. MacPherson says that most people don’t know they can get help with the cost of living. This makes it harder for them to pay for things.
In May, Freedom Finance said that 1.9 million people were members of credit unions in the UK. This was a new record. By 2023, these credit unions are expected to give out a total of £1.74 billion in loans which is also a new record high. However, the amount of money that credit unions can lend is limited by how much money they have saved up from deposits.
Robin Fieth is the head of the Building Societies Association. He said that credit unions in the UK are much smaller than in the US. The BSA members told him it would be harder to help people during winter because they need more heat.
Initiatives that could assist people struggling financially due to higher living costs
As commercial lending options decreased, the significance of non-profit lenders has increased. After the financial crisis in 2008, “non-standard finance providers” emerged and charged exorbitant fees. However, the Financial Conduct Authority cracked down on such lenders in recent years. Maggie mentioned that she borrowed from Provident Financial, formerly the biggest doorstep lender in the UK. She ended up repaying almost double the amount she borrowed. Provident Financial closed its consumer credit unit in 2020.
Brian Brodie is the chairman of Freedom Finance. He said that it is harder to get loans now because people have to prove they can pay them back. This makes it safer, but it also means some people cannot get loans anymore.
People with bad credit scores sometimes get treated badly. This is a big problem in the loan industry. People who have more money can get things like credit cards or overdrafts with good rates to help them when times are tough. But people who don’t have a lot of money do not have those options. It’s not that they are not smart, it’s just that there aren’t good choices for them.
Charities are worried that the “buy now, pay later” option might cause problems. Credit providers who use this service need to make sure people can pay back what they borrow. People might be borrowing money from more than one place which could lead to too much debt. Around 5 or 6 out of 10 people use this type of credit for shopping and everyday expenses, but it is not a good idea in the long run.
The government plans to regulate the sector, but new laws are not expected until mid-2023. Once the laws are introduced, the FCA will have to consult on rules. Cath Williams, a manager in the government’s England Illegal Money Lending Team, said that more people are getting loans from loan sharks or illegal lenders. In 2010 there were 310,000 households like this. Now in 2023 there are 1.08 million households like this.
Williams said that people usually use them for things like washing machines or school clothes. But more and more people are using them to buy food and pay their electricity bills.
According to Williams, victims often think they are borrowing money from a friend, but when they cannot make the payments, they realize the truth. Loan sharks have become more technologically sophisticated in intimidating their victims. Williams shared an example of a convicted illegal money lender who used modified Snapchat images to suggest that they could visit the victims’ homes.
Getting away from an illegal money lender can be a lengthy process for those who are affected. According to the speaker, it takes about three years for victims to recognize that the lender is not a friend, seek help, and make a phone call to report the loan shark.
According to Williams, credit unions are struggling to meet the demand and the number of people they reject is increasing. This raises concerns about where these individuals will seek financial assistance. While some may turn to family and friends for help, others may resort to using illegal money lenders, especially as fuel prices continue to rise.
Investment Proposal:
Protecting the non-profit lending sector requires multiple solutions, but lenders believe that the initial step is to increase the available funds. One potential source is the dormant assets fund which currently holds £880mn from various financial assets, such as bank accounts, pension schemes, and untouched securities.
The Department for Digital, Culture, Media and Sport is using these assets for financial inclusion, social investment, and youth projects that benefit several community lenders. The government began a consultation in July to determine which causes to fund.
Stories from individuals who have managed to survive despite difficult circumstances related to economic crisis
According to Dukes, Fair for You has been able to expand its social impact considerably with the help of Dormant Assets funding in 2020. He believes that the current cost of living crisis emphasizes the need for investing in financial inclusion. Theodora Hadjimichael, the CEO of Responsible Finance, supports Dukes’ opinion and points out the difference in funding between fintechs and the non-profit sector.
MacPherson urged more local authorities to participate, noting that Scotcash is backed by Glasgow City Council and Glasgow Housing Association, now Wheatley Homes Glasgow. According to her, staying up-to-date with fintech trends and keeping customers engaged can be a challenge. Therefore, she emphasizes the need for the government to increase the sector’s proficiency.
If the Labour party is elected, Tulip Siddiq, shadow economic secretary to the Treasury, says they plan to reform legislation related to the co-operative and mutual sector. The party aims to double the size of this sector, but to achieve this, regulatory bodies like the FCA and Prudential Regulation Authority will need to be given a clear mandate to consider the needs of specific business models like mutuals, which are often overlooked.
According to the Treasury, they are helping households with a £37bn package, which includes a £1,200 direct payment to 8 million of the most vulnerable families. They are also providing almost £100 million of government funding to Fair4All Finance to support their work on financial inclusion, which includes providing affordable credit to people.
According to Rahman, implementing laws that urge regular lenders to aid local communities could have a beneficial impact. He cited the Community Reinvestment Act of the US in 1977 that mandated banks to provide loans in the same neighborhoods where they collected deposits. While he thinks that such legislation is not necessary, he finds it absurd that banks aren’t required to participate in battling financial exclusion or answer to the communities they serve. He believes that if people recognize this as an issue, they should also keep an open mind to alternate methods of resolving it.
