March 2, 2015—Sarah Livingstone, head of Nathan London’s financial sector development practice, typically works on projects to help the poor in places like Bangladesh and Uganda gain access to credit. She and other microfinance professionals recently looked homeward.
“Whilst not on the scale of the least developed countries, financial exclusion still exists in the U.K.,” Ms. Livingstone told fellow members of the MicroFinance Club UK, where she is director. She commented when introducing a discussion February 26 in London on how to make financing affordable for the poor while providing an adequate return for lenders.
The club heard from speakers representing charity-based lenders and a credit union. The speakers explained how they provide online services, hold down interest charges, and receive backing from socially conscious investors.
As many as 1.4 million people in the U.K. do not have a transactional bank account, Ms. Livingstone said, citing government statistics. Also, about 7 million with the lowest incomes are not served by mainstream banks and must resort to other lenders who often charge very high interest rates.
These include payday lenders, who advance small amounts of money to be repaid when the borrower next receives wages. Payday and other short-term borrowers who fall behind can quickly pile up exorbitant interest charges and penalties, and collection practices can be abusive.
The Financial Conduct Authority, a nongovernmental watchdog in the U.K., has imposed new strictures on payday lenders. A fee cap and other measures that took effect in January “are intended to ensure that borrowers never have to pay back more in fees and interest than the amount borrowed,” Ms. Livingstone said. The authority said when announcing the rules in November it expected some lenders would go out of business. And in late February, the U.K.-based payday lender Wonga Group Ltd. said it would cut one-third of its workforce.
“Whilst the cap will curb the excesses in the market, the recent redundancies at a leading payday lender demonstrate that it is a challenge to provide high-risk credit at a reasonable rate whilst maintaining operational sustainability,” Ms. Livingstone said. In the United States, the recently formed Consumer Financial Protection Bureau (CFPB) is scrutinizing practices and is likely to issue regulations. States are also reviewing the industry.
Panelist Philip Krinks, a former banker now an ordained minister in the Church of England, founded the charity St Martin’s Affordable Finance Development after the Archbishop of Canterbury called for credit unions and other ethical lenders to increase their activities and put payday lenders out of business. He teamed with Martin Hockley of Street UK, an established Community Development Financial Institution (CDFI), which wanted to scale up its lending, which it has traditionally conducted through face-to-face transactions.
Krinks and Hockley turned to online lending, which lowered processing costs and enabled an increased volume of loans, reducing overall expenses.
Lucky Chandrasekera, chief executive of the London Mutual Credit Union, has recently developed a payday loan known as CUOK. The interest rate is comparable to microcredit rates—which are high but not as much as payday lenders had been charging.
“Our product allows customers to pay back over a period of up to three months,” he said. “In the past, payday lenders have demanded repayment within a month, which many low-income customers could not afford. This led to the loans being rolled over, vastly increasing the charges.”
London Mutual also can “mobilize” its members’ savings and uses electronic processing.
Ms. Livingstone observed that the need to keep costs down is common to both the developed and developing worlds. Whereas in the U.K. and U.S. this is being achieved through online banking, in the developing world microfinance providers are linking with telecommunications companies to develop mobile banking services. What is important is that low-income customers are able to access affordable finance in the most convenient way.