2 February 2011
An evaluation of the DWP Financial Inclusion Growth Fund has been completed by the Treasury in partnership with the Personal Finance Research Centre at the University of Bristol.
The objective of the DWP Growth Fund was to raise levels of access to affordable credit by building the capacity of CDFIs and credit unions to serve financially excluded households. In doing so, the Growth Fund aimed to disrupt the role of high cost credit in the lives of borrowers. The Fund, launched in July 2006, is due to terminate in March 2011.
Since 2007 the size of CDFI personal lending loan portfolios has trebled, from £2.6m to £7.6m (Inside Out 2010). The Growth Fund is largely responsible for this increase, and has allowed many CDFIs to grow and expand their outreach, with many opening up several outlets, enabling the provision of affordable credit across wider geographies. There is no doubt that the discontinuation on the scheme will have a direct effect on the way personal lending CDFIs carry out their operations as well as a negative impact on their customers. Ten CDFIs, operating out of 46 outlets, were recipients of the Growth Fund last year.
Without Growth Fund support, the report found that an APR of 71.2 per cent would be required to cover operational costs and financial risks associated with Growth Fund lending. Average APR charged for personal lending CDFIs as reported in last year’s Inside Out was 31%. As well as hiking interest rates, another knock on effect of ending the Growth Fund could be a shift in the customer type served to the less risky putting the most vulnerable into the hands of high cost doorstep/payday lenders, or even worse, illegal loan sharks.
The research also found that:
- Eight in ten Growth Fund borrowers were in the two lowest income quintiles and 77 per cent of all applicants were not in paid work. One in five applicants did not have a current or basic bank account, and only four per cent of applicants said they were already a credit union member or CDFI customer at the time of their Growth Fund loan application
- The fund was successful in expanding the volume of CDFI and Credit Union activity, with DWP statistics indicating that 317,798 Growth Fund loans were made in deprived communities from July 2006 up to the end of September 2010, with a total value of over £137 million. Volumes of personal lending reported by Growth Fund CDFIs and credit unions increased by more than 200 per cent between 2004 and 2009
Download the full evaluation here