THE BLOG

The Myopia of Regulating Pay-Day-Loans

11/05/2012 15:11 | Updated 10 July 2012

Recently the government made a big fuss via the mainstream media that it was 'taking decisive action' in regulating pay-day-loans, loan sharking and companies such as Wonga.com. This industrial age thinking believes this is 'how to manage' an increasingly difficult problem. And it is an acute problem loan sharking has quadrupled in the last few years, locking people often the most vulnerable into a way of life most of us cannot even get close to conceiving.
But did you know that seven million people in the UK, that is 10% of the overall population, and 20% of the working population do not have access to conventional forms of credit, their only options are doorstep lenders, payday lenders and pawn shops, with rates from 4000% - 150%). Hence the rise in companies like wonga and cash-for-gold, which is usury for want of a better name. The market for extortionate credit is estimated at £10bn.

In many respects the Government view of how to manage this is myopic. Regulation does not make these organisations better or go away, and, more importantly they take money out of the local economy, thus not only impoverishing further the individual but also the community.
The fact is payday loansharking presents a design challenge, and one that is not solved by regulation. It requires us to look at the problem not top-down via 'management with the law' but through understanding lessons about how humanity thrives through, trust, empowerment, mutuality, and respect brought from micro-finance from around the world and being able to look at the problem holistically. So to be clear, how do we get 10% of UK's population who do not have any access to credit access to better bank or lending services designed for them? Meaning no more loansharking criminal rates of interest, that locks 7m people into a lifetime of poverty without parole.

Faisel Rahman comes from a Bangladeshi family and lives in Dalston, London. Inspired by working with the World Bank and Grameen Bank in Bangledesh on a large scale (in terms of capital invested) microfinance programme, he asked this question: why was it that the poorest people in Britain - the people most in need of some financial assistance, most in need of fair rates of interest - were also the people who were denied access to bank accounts? This is a land where people at the edges of society that banks deem untouchable can only get finance from loan sharks or money lenders. Of the 7 million adults in Britain on the margins of financial services; of these at least four million each week borrow from 'doorstep lenders'.
More significantly, it demonstrates the system failure of government and banking; spreadsheets cannot deal with the unpredictability, the messiness, of human lives. High street banks avoid what they perceive as unnecessary risk, and in so doing they contribute to an increasingly unfair society. This is demonstrated by Thamesmead an area in London of some 40,000 households - but not one bank. In fact to get to the nearest bank is a 45 minute bus journey.

What Faisel Rahman is doing is looking at alternative sustainable relationships between banks and the communities they serve. Through the company he set up Fair Finance, not only has Rahman helped people get out of extortionate debt, which requires more than the average input someone would get at a local branch of any UK high street bank, and has saved people millions in interest payments, he has helped over 150 entrepreneurs start businesses that otherwise would have been impossible and saved the taxpayer millions in social security. And saved Housing Associations in his area some £12.5 million, as the deal with loansharking is they get their money first, the rent can wait or it never gets paid. Rahman's team work with their clients, in fact tailoring and also counseling these people whose lives are often devastated by crushing spiraling debt.

Fair Finance works, and even provides investors with a modest rate of return. So why would the Government, champions of the BIG SOCIETY, 'Compassionate Conservatism' and, 'we are all in together', not embrace the practice of micro-lending as demonstrated by Fair Finance that could have a real impact on the lives of many disadvantaged in the UK? As of yet, we don't know - but Rahman demonstrates an alternative, more lightweight, more compassionate, humanistic view of the world.

Lessons in microcredit from another first world country
Rahman is not the only person trying to find a means to break the self-perpetuating cycle of money, banking, loan and sharking, with all its consequences. Maria Nowak has been working for nearly 20 years in France to develop what the European Commission argues is perhaps the most successful microcredit organisation in Europe focusing on helping people out of exclusion. ADIE, the organisation she created, is the 'association for the right to economic initiative'. Rather than using the benefits system that supports those that fall out of the market economy, the ADIE model looks at how the excluded are enabled to return and contribute to society, not as dependants but as wealth creators themselves. I like the idea that you treat people not as victims of society, but with the potential to give something back.
In 2003 ADIE had 5,000 clients, by 2006 it had grown to over 9,000, and as of 2007 it has 22 regional offices, 119 branches across metropolitan France, 350 staff members and 1,100 volunteer mentors. This rapid growth has been achieved without compromise on who they serve and why, if anything, ADIE has gone deeper into the needs of the socially excluded. For ADIE, microcredit develops human capital by building self-confidence and entrepreneurship. Now what high street bank claims to do that?

Summary
Both Adie and Fair Finance represent lessons in resilience and sustainability, that are built around the needs of the individual but also the communities they live in. They empower and they enrich. Therefore does it make any sense at all to spend any amount of money drafting legislation, which is treating the symptom not the cause? Loan sharking does not help people contribute to society. ADIE and Fair Finance are proven common sense yet transformational designs for a better society, they work as they are designed around the needs of humanity, not for the needs and wants of an industrial system that serves its shareholders greedy demands for cash. I wonder why no one in government or banking is listening?