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February 2, 2010

Better banking for those who need it most

With an astonishing capacity to ignore public opinion, the banks seem set once again to reward themselves handsomely at our expense. While the opportunity for wholesale reform of the banking system seems to be slipping away, there is growing support for a campaign that proposes some specific improvements to tackle the age-old problems of financial exclusion in our most disadvantaged communities. At the very least, surely our government should be able to deliver on this


Invitation to support the Better Banking campaign 

The Better Banking campaign is led by a coalition of third sector organisations. They came together during summer 2009 to run a campaign to address the problem of financial exclusion: the lack of fair access to financial services and credit to those who warrant it. The different areas of the third sector represented by the coalition reflects the far reaching implications of financial exclusion: it increases poverty levels amongst the lowest-income groups, which has a huge negative impact on those struggling with debt, poor housing, old age, ill-health, physical and mental disabilities, and social exclusion. Because third sector funds are spent helping those affected by these issues, financial exclusion indirectly drains third sector funds. Further, it also directly impacts on third sector organisations and small businesses serving or operating in less wealthy communities, negatively affecting the economy as a whole. To address the issue, we are campaigning for full financial disclosure by financial institutions, a cap on unfair credit rates for those who cannot afford them and obligations on banks to demonstrate that all who merit it have fair and equal access to credit.

Some worrying statistics:

The problem is not that financial institutions should be undertaking high-risk, unprofitable lending and are not. The problem at hand concerns others: potential borrowers who are financially excluded because of financial institutions’ inability to understand their needs, accurately assess the risk they represent, develop the products to service their needs, or to proactively utilize the market they represent.

– Approximately 5-7 million people cannot access credit, either because they do not have a bank account, or, for example,- they have no credit history: no overdrafts, no credits, no penalty payment charges, no late payment fees, no missed bill payments.

– Alternative credit comes from door-step lenders with interest rates of between 300% and 1,000%, or worse, from illegal loan sharks.

– Low-income households spend an estimated £1,000 more per year on basic essential services like electricity, financial services and telecommunications. This makes it harder to climb out of the cycle of poverty and indebtedness

– Because 6 lenders account for 90% of the home credit market, (with Provident accounting for 60%) there is little competition to drive interest rates down.

-Current sky-high interest rates on loans from payday lenders and Home Credit companies (up to 2,500%) mean that those who have no option but to borrow from these companies are left in a cycle of debt they cannot escape, and those suffering poverty become increasingly poorer. Because of a lack of competition among the Home Credit lenders, they can continue to charge such rates. A legal credit cap would mean that the excess profits these companies make would not be drained from the sections of society needing it most: profits in excess of capital of £75 million a year, for the last 10 years, but would be directed back into the community.

Small businesses and third sector organisations serving or operating in less wealthy communities are also constrained by lack of access to credit:

– some 25,000 businesses a year with viable propositions are unable to access finance. ,

– undercapitalization is the single most important cause of failure among small firms ,

– business failure rates among micro- and small enterprises are higher in the UK than in other OECD countries. 

The government has invested in a number of initiatives to address the problem . But there are massive gaps, relative to demand, in both coverage and capacity of third sector lenders:

– The current Growth Fund capacity target is £100m lending p.a. – in contrast, credit lenders lent around £1.3 billion to around 2.3 million customers in 2005, profiting around £500m in a single year.

– A forthcoming report from the OFT estimates the high cost credit sector may be worth up to £35 billion annually. 

What is the solution?

The coalition aims to encourage financial institutions to: be more transparent about how much they lend to underserved communities, increase the amount they lend to such communities, lend at reasonable interests rates and become more active in local communities.

1. Transparency

Financial institutions should disclose where their money comes from and where it is invested, with the data broken down by demographic group. This would allow government to understand the size of the problem and increase efficiency by targeting spending on the areas where it is most needed. 

However, this alone will only clarify the size and nature of the problem, without addressing it. Therefore:

2. Obligations to support communities

As one of only a handul of EU countries without a legal cap on interest rates, and interest rates on credit often at 2,000%, we are calling for a legal cap on credit interest rates.

3. Incentives for financial institutions

Financial institutions should be encouraged to engage with communities, third sector organisations and small businesses. 

1-3 together will expose the size and nature of the problem of financial exclusion, provide individuals and organisations with funds without extra cost for the taxpayer, and without extra risk for the financial institution, decrease poverty and increase economic growth, and encourage best practice amongst financial institutions. 

You can find out more and sign up as a campaign supporter at:

Should you have any questions, please contact the campaign co-ordinator Lucy Marples (, 0207 280 4926