Firstly, I need to put a few corners on this subject. I don't
think lending and borrowing is particularly un-ethical a concept. I
consider usury as a sin in the same way as I do coveting oxen (that is not at
all and what a ridiculous thing for an omnipotent super being to have rules
about). I struggle to see a moral difference a baker buying a bag of flour for
£1, who then sells me a loaf of bread for £1.50 and a finance company being
funded at 10% and lending at 15%. As a token of value for which we will swap
both work and products money is useful and so in any practical way, is real. So
if you're looking for an anarchist polemic against the horrors of
money...you've come to the wrong shop brother.
It is into this deeply practical world of
lending that Credit Unions are hoping to provide a genuine alternative to
Payday Lenders, their doorstep brethren and the distant (ish) cousins of the
illegal loan sharks. I like the principle and principles of Credit
Unions. Small, Local run for their members - they remind me of James Stewart imploring his townsfolk not to
withdraw their savings that are invested in each other’s houses. To take on the
numbers of customers who payday lends will be a massive challenge and in
meeting this challenge they will have to change. Will these changes stop them
being ethical? My thoughts form themselves into 4 areas where Credit
Unions might face uncomfortable decisions.
Low Rates and Customers who don't pay you
back.
Credit Unions take the money of their
members and invest it in the loans they provide for other members. The
Guardian article quotes a loan for £255 that pays back just over £260 which is
very obviously a good outcome for the borrower. However, what happens if
(through no-one’s fault - these things happen) a member is unable to repay.
Just one bad loan would need 45 good, completed loans to make up
difference. I'm not even talking about providing a return or profit. In a
Credit Union of 1000 members, 5% of members would have to borrow and repay the
same loan just to keep the members money safe. That's pretty risky
lending. Would it be
ethical to take that risk with hard up member’s savings? There are things you
can do to mitigate that risk - saying no to individuals who are less able to
pay you, charging higher rate of interest, have a well-run collections
department. But these are all things that high-street lenders do...
Lending to Need or Desire?
Short Term borrowing is at its best meant for emergencies, a
broken boiler, and car repairs. However, at their most controversial Payday
loans are used for energy bills, Xmas present and all inclusive holidays. Would
a CU lend for these reasons? If not how can they become an alternative? If they
do, allying your frugal principles to your actions becomes more difficult.
Small is Beautiful
Credit Unions have about 1 million customers. In 2012 the Office
of Fair Trading estimated there were 8.2 million payday customers. So
conservatively, Credit Unions would have to grow 3 times to become a national
alternative meet this need. That's
3 times the office space, 3 times the salaries. That many customers with modern
24/7 customer service expectations would need call centres. The regulator would
expect compliance monitoring and regular audits. This stuff needs paying for. Staff
needs organising and training. The same requirements for affordability
assessment and responsible borrowing apply to credit unions as well as regular
lenders. The skills of all these new staff would need enhancing. Good
outcomes for customers would need to be demonstrated, measured and
reported. All of a sudden
it sounds very formal, very corporate. It’s difficult to maintain values and
ethics when you don’t know each other by first name. To be big enough to take
on Payday do you lose what’s good about being small?
Funding
In 2013 there may be up-to £2billion of payday loans. For
Credit Unions to meet only 25% of that lending they would require a huge
increase in loans provided. Which would need money to lend, and as they are
member funded they don’t have any. Looking at the eligibility
rules for My Community Bank,
I couldn't join, so building a base of members large enough to invest will be
hard. There has been £38 Million provided from taxpayer funds recently
but even lending each and every penny of that won't compete with Payday. This
provides Credit Unions with a difficult question – Do you take outside
investment to build and grow? To do so means you can really take on Payday,
but if you do, and take on a responsibility to shareholders, how are you
different?
Who are your customers?
The alternative to external funding is to remain self-sufficient
which probably won't provide enough funding to replace Payday Lenders at a
national scale. But there is also a question of whether Payday customers
are Credit Union Customers. Credit Unions are paragons of upper working
class frugal virtue, its part of their selling point that they encourage
responsible and informed attitudes to money in general. This in turn
minimises the need for borrowing and increases the chances of saving.
However, "sensible" is the last word that I would use to
describe many payday borrowers. 30 years of un-mitigated consumerism,
easy credit and cavalier bankruptcy rules have created customers who
want their shiny things and they want them now.
Given the choice between opening an account, putting into place a
solid financial plan, borrowing just enough to augment some savings OR having
the money in your hand queuing in the shops 20 minutes later, is for a lot of
payday customers no contest. Having it now and taking your chances - is a
temptation that Credit Unions should never provide and so there will always be
a population that they will not be able to service while maintaining ethics.
In winning the Second World War the allies had to do monstrous things that would seem more in keeping with evil totalitarianism rather than the principles of peace loving democracies. In appealing to payday customers can Credit Unions avoid similar practices?