12 September 2024: Government can unlock billions in affordable credit for UK businesses and people on low-incomes
New analysis shows that the government could unlock more than £3bn of affordable credit for people and businesses across the UK by passing a Fair Banking Act.
A Fair Banking Act – modelled on a successful precedent from the US – could transform access to affordable credit in the UK, according to new research published today by a coalition of charities, financial institutions and policy experts. The potential increase in affordable lending for consumers could be equivalent to the amount owed to illegal lenders every year. This could help to pull the rug out from under the illegal money lending market by providing a safe and affordable alternative for people struggling with unexpected essential expenditure or a sudden drop in income.
The UK faces a credit crisis, with millions turning to high-cost lenders and loan sharks to make ends meet. Meanwhile, hundreds of thousands of viable small and medium-sized businesses – the lifeblood of local economies are unable to borrow what they need to grow and thrive. Businesses in the most deprived areas of the country, and those led by women and people from ethnic minorities are the most likely to be affected.
The new report from the Fair Banking for All Campaign, Unlocking access to credit: The impact a Fair Banking Act could have for the UK, shows how the government could help to transform this picture by passing a Fair Banking Act, as part of a wider national financial inclusion strategy. The legislation would support a major increase in the number and scale of credit unions and Community Development Finance Institutions (CDFIs). This could lead to a 13-fold increase in the amount of affordable credit that these sectors can provide for UK businesses and people on low-incomes, who may have been turned down for credit from larger banks.
Additional lending to small and medium-sized enterprises (SMEs) could lead to a £3.9bn increase in the turnover of SMEs across the UK. This could create and maintain 10,000 jobs, sparking inclusive economic growth in the parts of the country where investment is needed most.
Theodora Hadjimichael, chief executive of Responsible Finance which represents CDFIs in the UK, said:
“Community Development Finance Institutions (CDFIs) invest into underserved places and people, unlocking potential for businesses, social enterprises and households. For economic growth to happen, we need lenders that get to know businesses and understand people’s lives, make fair lending decisions that take these into account, and offer affordable finance.
“In 2023, CDFI lending reached a record high of £287 million, creating and safeguarding over 12,000 jobs. 99% of the businesses which borrowed from CDFIs had previously been declined by another lender, and most are based outside London. However, the demand for affordable finance from businesses which can’t yet meet traditional lenders’ criteria is much greater. We need incentives to ensure that growing demand for affordable, ethical, credit can be met. That’s why Responsible Finance is part of the campaign calling for a Fair Banking Act”.
Jesse Griffiths, chief executive of Finance Innovation Lab, which is coordinating the campaign for a Fair Banking Act, said:
“What these new figures show is that the government does have the levers at their disposal to address the credit crisis. Through effective legislation, they can help a huge number of people who are trapped in debt to loan sharks and high-cost lenders. At the same time, they can help thousands of small businesses. It’s hard to see how they can achieve their ambitious goals for economic growth without doing all they can to help these kinds of businesses, which are really the backbone of the economy”.
What next?
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The research, background and methodology are available here: https://financeinnovationlab.org/our-work/grow/fba-impact/
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The Fair Banking for All Campaign is an alliance of 25 organisations, including civil society organisations, anti-poverty groups, fintechs and purpose-driven banking institutions such as cooperative financial institutions and CDFIs.