Right, so a labour researcher has to apologise for making a joke about the Queen being a benefit scrounger (bottom of article), because it’s offensive to the highest in the land. But calling benefit recipients scroungers on a daily basis without checking if the actually are is fine. Oh my, what a world we live in.

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The Social Fund – A Eulogy

Among the flurry of votes in the House of Lords in relation to the Welfare Reform Bill (WRB), there was one amendment that received little notice – namely the defeat of a move to ensure that what’s left of the Social Fund will go to those intended, namely the poor.

Let’s then just give it a last farewell, although untypically for euologies, I’ll focus more on its short-comings rather than its advantages. The Social Fund was a lender of last resort for many who found themselves unable to stump up the cash for a new washing machine or a new bed. It’s crisis loans helped many to avoid homelessness or endanger their health. Its community grants enabled those who needed it to adapt their homes to a disability or a disease, so that they could stay in the Community.

Overall, the Social Fund was a force for good. But let’s not overlook that there were clear problems with it: assessing need and disbursement was slow, meaning that the loans and grants often arrived very late. In 2011, inspectors overturned nearly 42% of all decisions, indicating that the criteria for assessment are variable, resulting in insecurity for the applicants.

Far from ideal a situation. Still, it was there, and it was good to know it was there. In 2011, over 53,000 loans and grants were handed out. However, few will deny that there was scope for reform.

Life already became precarious for the Fund when the Welfare Reform Bill was announced. Few thought that the Social Fund would escape scrutiny, and many knew that “Reform” was more likely to be a death-sentence than a new lease of life. And a death-knell it was, even if the two thirds of the corpse are still on the life-support machine*.

In line with the 40% cut across all department dictum, 39% of the Fund were cut outright. 61% of the Fund’s budget, set aside for crisis loans and Community Care Grants will be devolved to local authorities, who have no statutory duty to use the money as social fund, but can do what they want with it. The amendment on the 25th of January sought to impose such a duty, but sadly, it failed.

It is just a question of time until most Local Authorities will have pulled the plug and spend the money elsewhere.

Therefore, let’s just take a moment to remember it’s passing.

But let’s take a longer moment to remember those it’s left behind. What will those people who need a new washing machine now do? Go without? Stop eating? Borrow from friends and family? Raid the Christmas money? Some will do this, or a combination thereof – budgeting strategies of those on low incomes are many and varied. Some will of course turn to the Provi, or Littlewood, or all the other high-cost lenders, mail order companies and legal loan sharks who have managed to convince politicians across the spectrum that they provide a necessary social service to the poor.

Hurray for free markets that ensure that people living of £60 benefits and without access to a bank loan can buy a washing machine at a mark-up price of £180 from Littlewoods, (45% more than for those of us with a access to a credit card).  Hurray for free markets that let people borrow money at usurious interest rates to buy a new mattress.

Well done, everyone. I really fail to understand the logic here: people who are already hard pushed to set aside money for emergencies have to take out loans that cost easily £80 per £100 borrowed**? And that’s a GOOD thing?

If you want to see a sure-fire way to entrench poverty, then this certainly is one. People who think this a viable solution demonstrate such a pitiful lack of imagination – the usual refrains of There Is No Alternative drowns out those with ideas and projects, it takes the wind out of efforts to develop affordable credit, to promote financial inclusion and to reform the UK Banking System. The TINA cries also prevent a serious discussion on benefit levels, income levels and cost of living, all things that are desperately needed in times when the gap between rich and poor continues to widen. Killing the Social Fund, even if it is in instalments, was exactly the step in the wrong direction. In the long list of failures to promote financial inclusion by successive governments, this is another sad item to add to it.

*Budgeting loans will be part of new Universal Credit system (details of how this Universal Credit will work shrouded in fog)

**quote retrieved on 30/1/2012 from the website for £100 loan repayable over 52 weeks. A loan of £500 costs £410 to repay.

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Basic banking – a basic right

The European Union has announced that it will recommend its member states to introduce a basic bank account to ensure that every adult who wants a bank account can have one. What sounds like good news is actually a step down from previous plans to introduce legislation that would introduce a universal service obligation for banks, meaning that every adult would have a right to a bank account, at least one without credit facilities. In other words, rather than enshrining this right account into law, the EU reckons a nudge approach will be enough. This is despite the fact that voluntary approaches in member states mostly fail to reduce the number of unbanked adults – and one such member state where it fails is the UK: despite progress being made through the voluntary commitment by banks, there are still 1.5m unbanked adults (opens as PDF) in the country. There are many reasons why the basic bank account will not go further in reducing the number of unbanked adults (the banking oligopoly; the mistrust many people have vis-a-vis banks; characteristics of the product itsef; the continued closure of branches, etcetc). One reason which is often overlooked, and which in my view may well lead to an increase in the number of the unbanked, is this: Most banks will refuse people with an undischarged bankruptcy a basic bank account, despite the fact that it doesn’t have credit facilities.

Banks are concerned about reputation – they don’t want to be associated with people with dodgy credit ratings. This hinders people’s recovery from a bankruptcy: not having a bank account comes with a huge premium attached as people are unable to take advantage of online payment, direct debits and other money-saving measures. It can stop people from having a job as cheques are phased out (and cheque cashing incurs a fee anyway), and employers are not too keen to find special arrangements for those who are unbanked. Given that individual insolvencies are at an all time high at the moment (the trend is thankfully falling, but in the first quarter of this year, there were over 12500 bankruptcies), this may well lead to an increase in the number of unbanked people.

The introduction of the basic bank account was a voluntary measure by UK banks to stem of regulation, and given the continued problem around product design and accessibility of BBAs, I think there is little commitment past lip-service from banks to actually cater to their client on the lower end of the income scale.

The only way to get banks to provide bank accounts to ALL that want one is through a USO that compels banks to introduce a sound product that enables people to access their accounts and make good use of it. Also, if all banks have to open an account, then the reputational problem is removed. The EU’s retraction on its commitment is a big step backwards in this regard. It’s time for the Government to do something about it, and for the Financial Inclusion Taskforce to stop relying on voluntary commitment.

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Independent thoughts on payday lending required

Yesterday’s amendment to the credit bill was unfortunately defeated – let’s just hope that it is down to silly party politics rather than a genuine opposition to capping the cost of credit (or, as the amendment suggested, just looking at it).

A real point of concern is that the hiatus will give the industry even more time to lobby and rally, repeating myths on the impact of a cap on the cost of credit, suggesting that they are responsible lenders who provide a vital service to the poorest, and that restricting their businesses would amount to punishing the most vulnerable in society.

I am not privy to the emails and letters that have been sent to MPs (but I do know that they have been sent). Nor do I get access to meetings or dinners where representatives of the high cost industry engage in conversation with policy makers on how to best regulate the industry. Some activities are slightly more public though, i.e mere mortals like you and I can pick up on them and realise that the industry is nervous. For example, in an article by Chris Blackhurst in yesterday’s London Evening Standard, Wonga was given a platform to express its concerns over the detrimental effects on introducing a cap on the cost of credit. The article also repeated the myth of driving people into the arms of illegal loan sharks, in essence agreeing with the defeatist view of the industry and opponents that, albeit a bit unfair, high cost credit is a necessary social service that we need in a capitalist society.

It’s a shame that the future editor of the Independent didn’t do a little bit more independent research and ask some more challenging questions – even if he didn’t have time to talk to Stella Creasy (or me for that matter), he could have done a little research to find evidence countering arguments for example here, or a list of facts compiled here, or  the views of consumer organisations listed here, just to balance some of the claims made by Wonga and the payday lending industry as a whole. While there are some payday lenders that are “better” than others in terms of credit checking and lending practice, and some have admitted that the industry needs to have better standards, overall the industry repeats the same mantra as the doorstep lenders: that they provide vital funds in emergencies, that people would otherwise not have access to such forms of credit, and that they aren’t that expensive given the short-term nature of their lending (to give some idea of cost, Wonga for example charges £129 for a loan of £400 – I wouldn’t call that cheap).

However, Payday lending is in fact highly problematic.  People take out a loan, and the sum repayable is taken out of their bank accounts on the next pay day. People can defer the repayment by notifying the lender, and they will “only” pay the finance charge (extending the loan, as this is also called). This rolling over can increase the costs considerably, so that the one month prices do actually look cheap – and it can create a debt trap. Opponents of price caps argue that these loans don’t present a problem as long as there are limits to number of times such a loan can be extended (i.e. repayment is deferred by a month, with “only” the admin fee payable at the end of each month). But limiting the number of roll-overs can be circumvented – which has been the case in the US (opens as pdf). In addition to this, there is even less evidence on the real cost of providing this product than there is in the doorstep market, i.e. we don’t know how much profit companies make. It is a huge market: it has grown to £1.2bn according to figures obtained by Stella Creasy. We know nothing about the composition of these profits, how much money they make on interest rates, how much on debt rescheduling and on penalty or admin fees.  Evidence from the US, where payday lending is prevalent, shows that lenders make 90% of their profit from fees.  Before people argue that payday lending isn’t problematic in the UK, and doesn’t charge exorbitant fees, should we not find out a little more about them? Would be nice if Mr Blackhurst would put these questions to Wonga…

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Introducing price caps in the UK – a discussion fraught with myths

The discussion around price capping for credit has warmed up again over the past few months thanks to the sterling work of Stella Creasy who is campaigning to introduce a cap on the total cost of credit in the UK.

There are many good arguments for the cap, which would prevent the usurious pricing practices that are in place at the moment, e.g. charging £85 for a loan of £100, for the sole reason that the banks won’t touch you. The Competition Commission in its inquiry to the home credit market has found that the cost is too high – but the measures it suggested to rectify this have not resulted in decreased lending costs.

Opponents to a cap bring some arguments forward that are in and of themselves logic – but there is not a lot of evidence to back these arguments up. Furthermore, they often confuse interest caps with price caps, two related, but different things. In this blog, I will briefly summarise the opposition’s views and set out why they are wrong.

Firstly though, a word on interest rate caps vs total cost of credit. Interest rate caps put a limit on the annual percentage rate that you can charge on loans, for example, a maximum of 20%. This is not a good measure, as APRs are confusing and not a good indicator of price. The longer the loan repayment terms, the lower the APR – but the higher the overall cost of credit, and vice versa. Also, interest rate caps can be circumvented as there is no clear agreement what costs should be included in their calculation – e.g. admin fees, early repayment fees and similar. Hence we are talking about a cap on the TOTAL COST OF CREDIT, a level which still has to be set, but would probably be somewhere between £25 and £35 per £100 lent. This is clear cost structure that people can understand and which is much harder to circumvent. This is what is currently proposed and opponents should be aware of this. Suggesting that Stella Creasy is proposing an interest rate cap is misleading and heats up an already charged debate.

But now for the arguments:

  1. Caps on the cost of credit would drive people into the arms of illegal loan sharks. A logic argument, but albeit a hypothetical one. As I have pointed out in my report Doorstep Robbery, the research suggesting that there are high levels of illegal lending in countries with interest rate caps (note that this research was NOT about a cap on the total cost of credit  is flawed. Furthermore, a report for the European Commission on interest rate restrictions in European countries (opens as PDF) on has also found that there is no empirical evidence for this link.
  2. A cap would put high cost lenders out of business. Again, a logic argument, but not one necessarily borne out by reality. The industry justify its charging of high prices with the high risk that they incur. However, payday and home credit lenders won’t share their pricing models, so we don’t know if their prices are actually justified by the risk. The aforementioned Competition Commission investigation is littered with blanked-out numbers in the name of protection of commercially sensitive information, so we simply don’t know if the high prices are really just down to the high risk profiles of customers, or if they are routinely overcharging their clients. Given the fact that companies keep on lending to the same people, it would suggest that clients do repay, and that their risk profile is actually not as high. Furthermore, companies like Provident Financial does operate in two countries with a form of price ceiling – namely Poland and Ireland. So, there is again no evidence that a price cap would necessarily result in the demise of the high cost lending sector
  3. People like home credit. A form of high cost lending that is often singled out is doorstep lending where collectors will come and collect instalments from their clients home. The Joseph Rowntree Foundationconducted research in 1994 that shows that people liked this element of home credit as it requires them to be disciplined and have the money ready at a fixed date in time. The Competition Commission’s report also found high levels of satisfaction, and clients were aware that they were paying a high price. So, why try and stop something people like? Two reasons:
    1. Firstly, home credit is for many the last option, especially for those without bank accounts. If you have not got an alternative, then of course you will like the services offered by the one company that will deal with you. If there were an alternative, e.g. the increased provision of affordable lending that offers exactly the same services but minus the expensive doorstep collection, would people really baulk at dropping off their money at an office around their corner if it would save them around £50 per £100 borrowed? Somehow, I think not. The question is how important the home collection element really is, especially in those areas where affordable credit is available.
    2. Secondly, the research conducted is quite old now, especially the one by the JRF – things have changed in the meantime. Recent research by Human City* shows that debt is high on the list of problems among social housing tenants, and that would like to see social landlords offer them affordable credit options. This new evidence should be taken seriously as it suggests that people are falling out of favour with high cost credit. With the expansion of affordable credit provided by CDFIs and Credit Unions, people also have more options available to them, and it would be interesting to see the choices people make in areas where affordable credit is established.

In short, the potentially negative consequences of a price cap might be hypothetically logic, but are not borne out by empirical evidence.

There are many more points that I could discuss here, but a blog is too short to deal with them all at the same time – I hope to do so over the course of the summer. Two points to finish though:

Firstly, there is an absolute need to limit the availability of high cost credit as more and more households struggle to make ends meet and to service their debt. If people can’t afford repayment of their existing (and quite possibly cheaper) credit options, surely throwing extraordinarily expensive credit at them will only add fuel to the flames – it’s a short-term solution, but one that could quickly lead to a debt trap, and will hinder personal recovery.

Secondly, the continued insistence by opponents of price caps that it would especially be harmful to doorstep lenders and their clients is a curiously defeatist point of view. Is home collection really the best way to serve the poor? It is unacceptable in my view that the poorest have to pay the highest prices both from a moral as well as an economic perspective: high cost lending is not a social service to the poor, it’s the outcome of a deeply flawed credit and savings system in the UK that does nothing to help people out of poverty. A cap on credit costs is a first step in rebalancing this system.

*In the interest of transparency, this research was supported by Compass who are campaigning with Stella Creasy for the introduction of a price cap.

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Story and data – how funders can help?

In a compelling blog post, Peter Wanless, CEO of the Big Lottery Fund, made the case for charities to use data in their applications for funding. It is self-understood that charities have to report on their work and their impact to their funders, and they also should do so to a wider audience so that we gain an understanding of what works. The hitch: generating meaningful quantitative data is complex and time-consuming. There is also no unified reporting system, so that charities have to generate a report for each individual funder, adding to their administrative burden. This comes at a time when charities are under increased pressure to keep their overheads down, so that the bulk of their funds goes to delivering their services. Gathering data, ensuring that it is the right data, and developing management information systems that capture this data in an efficient manner, thus often come second (or last). This is at least the story that I hear from MFIs and CDFIs when I talk to them about the importance of reporting. They also often tell me that available software is not good enough, and as a result they either cannot report what they want to, or their develop their own systems on a shoestring – and then report outputs rather than outcomes.

So, if funders want to see more data rather than stories, they have to help charities in getting there.

Firstly, they need to offer funds that allow charities to build fit-for-purpose management information systems. This can be a lengthy process as they need to decide which indicators to use, but it’s better to get it right the first time round rather than having to change it later.

Secondly,  funders should think about co-operating to develop coherent reporting standards for charities delivering similar services. There are examples of such unified reporting standards out there, for example in the field of microfinance and community finance (which, due to my professional focus, I am most familiar with) For example, the CDFA has developed its Change Matters Performance Framework for its members. This allows members to report on both, their impact, and their operational performance. In international microfinance, reporting standards such as those developed by the MIXMarket and Triodos Facet for example allow MFIs to use a reporting and tools recognised and accepted by funders.

The increased use of these tools is the result of a concerted effort of all stakeholders – researchers, practitioners, funders, and policy makers. It would not have been possible without financial support from funders. It might be worth for other segments of the funding world to start creating common indicators as welll – especially as some research that I undertook on behalf of the Imp-Act consortium (forthcoming) suggests that this support can be a trigger for MFIs to build the necessary systems – and to realise that sound reporting systems fit for purpose also allow them to trace progress against their own goals.

Now, for the next issue – how to develop indicators that help quantifying social outcomes…but that needs to be tackled at another time…

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A short introduction to my blog


I’m Veronika Thiel, a freelancer working in the field of financial inclusion and microfinance, offering policy and research analysis, as well as project management and training in social performance management. I previously worked for the new economics foundation, the Children’s Society and the Local Economic Policy Unit in London, and the Small Enterprise Foundation in South Africa.

The contents of this blog are my personal thoughts on issues that relate to social policy and development, both in the UK and further afield. They are my own opinions and do not represent those of clients or organisations I am affiliated with. Due to the nature of my work, post are most likely going to relate to microfinance, financial inclusion and transparency in banking and social performance management, but will hopefully also be about wider issues.

It is likely to be a relatively spontaneous blog, for when twitter isn’t long enough, so you will find typos as I concentrate on making the content & snappy interesting.

Feel free to contact me on twitter: veronikathiel or by leaving me a message here.

Picture & design to follow suit!

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