Balancing the books can be a tall order in today’s straightened times. Now a Dalston-based company that prides itself on ethical values is looking to roll out savings accounts as part of a service to help financially excluded people manage their finances.
The idea came to Faisel Rahman fifteen years ago while he was working at Grameen Bank, founded by microfinance pioneer Muhammed Yunus, in Bangladesh.
“I realized there were the same issues in the Bangladeshi villages as in the council estates where I grew up in south and east London, like access to credit and debt,” he says. And with them, the similar scourge of extortionate lenders and spirals of debt.
On his return to the UK, Faisel decided to put into practice the principles of microfinance – a tool of development that extends small amounts of credit to poor people so they can lift themselves out of poverty.
Since its creation in 2005, Fair Finance, whose mission is to ‘challenge financial exploitation and act as an ethical and socially responsible lender’ in the East End, has made business and personal loans of up to £5,000 to 4,500 people. It says it has helped thousands of customers avoid eviction and estimates to have saved them a total of £1m in debt.
While still a fairly small operation – turnover was a modest £690,944 in 2010 – Fair Finance received a massive boost a year ago by securing £2m in commercial finance. Today it has five branches across east London and 25 employees. In September it hopes to roll out savings accounts in order to offer what Faisel calls “the full complement” of loans, advice and savings.
Faisel tells me that people coming through the door fall into two categories. The first are people excluded from both conventional and alternative finance (including credit unions), for a variety of reasons: some have never had a bank account, while others are newly arrived in the country, meaning that no credit information is held by rating agencies.
The second are people saddled with unsustainable levels of debt, who come to make existing debts more manageable. This is caused not only by notorious pay-day loans, but also the more common ‘doorstep loans’ or Home Credit. Worth an estimated £3-5bn and charged at interest rates of up to 4,000 per cent, such credit is often the only resort for unemployed people and can lead to a spiral of debt.
One client who was helped in this way is Helmit Wirth. After his disability living allowance benefit was reduced he struggled to repay interest payments on £3,500 to banks.
Frequent phone calls and visits by bailiffs over three years had a “grueling effect”, he says. Fair Finance helped him obtain a Debt Relief Order, a cheaper alternative to bankruptcy for people with debts under £15,000 and low incomes, and he now has a clean financial slate.
“I am really glad about what they did for me,” he says. He also received advice on managing his personal finances, and adds: “I now understand the importance of budgeting, and living within my means. I won’t borrow from banks again”.
A different approach
Faisel explains what makes Fair Finance different to high street banks: “Unlike banks or building societies which have set products, we tear up the rule book and start from scratch by designing a bespoke product for the client that includes support and advice”.
The organization is a not-for-profit mutual organization, but rather than only offering services to its members, like a credit union, its remit is to help financially excluded people across London. There are no shareholders and any profit goes back into “designing better products”.
In contrast with credit unions, where money for loans comes exclusively from members’ deposits, the company raises capital from banks on a commercial basis. After struggling to convince UK banks, last year it eventually secured loans from Santander and French institutions Société Générale, and BNP Paribas. Under its future savings system, currently being tested, customers’ deposits will be made to high street banks.
Banking that works
In effect Fair Finance takes money from large banks and lends it to people the banks would not ordinarily touch. Its business models rest on relatively high interest rates and working with clients individually to tailor a personal repayment plan.
The interest typically charged on loans is 39 per cent, which, although more expensive than normal retail banking, is a reflection both of the high risk such customers pose and the extra time and effort that goes in to finding somebody’s data.
“If you are going to lend responsibly you have to educate people and this means charging a rate that covers all of the added costs,” says Faisel. “This is a good example of banking working. We show the banks they can make money from us, and then we lend to people they can’t.”
For customers who run into difficulties repaying their loans, there are ‘flexible arrangements’ available to meet change in life circumstances. But they are willing to use County Court Judgements as a last resort if a client ignores or avoids calls and letters.
As well as having saved customers approximately £1m through consolidating debts over the last four years, Fair Finance estimates that it helps 1,000 customers avoid eviction each year, while its business loans facilitate 100 people to come out of unemployment annually. In an area like Tower Hamlets, the third most deprived borough in the country where four in every ten children are in a workless family, these fairly small amounts of money can make a vital difference.
Miracles however are not among Fair Finance’s repertoire. For those who it cannot lend to or help reschedule debts, it offers basic advice and refers to other agencies instead.
One such client is Victoria Nabongo. Forced off work due to illness, she fell behind on debt repayments and her remaining income only covered food for her family.
“The bailiffs had directives to evict us,” she says. “It made my blood pressure rise and every time somebody came near the door my heart was jumping.”
Her low level of income made the debts unsustainable and she was advised to file for bankruptcy by Fair Finance.
“It was better than nothing,” says Victoria, who is now debt-free. “But it is very restrictive for people like me. I have to go to a particular branch to withdraw money as I don’t have a card.”
Despite its plaudits – crowned by Muhammed Yunus’ Nobel peace prize in 2006 – microfinance has come in for a bruising in recent years. Critics have variously rounded on its supposed economic impact, its claim to empower women and the degree of indebtedness it causes.
In response, Faisel says that microfinance should not be regarded as a panacea for eradicating poverty: “All we do is give people money. The rest is up to them. As it stands more than half of the world cannot obtain credit – access is better than none at all”.