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David Cowan: How to get credit flowing into Britain’s deprived areas

David Cowan is a sixth form student in West Sussex who won last year's annual research and writing award organised by the Churchill Centre.

One of the biggest contributing factors to poverty is financial exclusion. High rates of interest and credit criteria from banks have made this so. During a time when banks are even more unwilling to issue high risk loans it is unlikely an individual stuck in the poverty trap will be able to escape. The New Labour government attempted to tackle poverty through numerous “welfare to work” programmes and other means of distributing wealth. Despite a decade of unprecedented economic growth before the financial crisis unemployment is now at a 16 year high and the inequality gap has widened to an intolerable level.

Capital has become a closed shop, denying access to the very poorest in our society. People stuck in the poverty trap cannot aspire to own their own home, start a business, or have access to other financial services. Currently, those who don’t have access to credit are forced to go to loan sharks, as is the case in the East End of Glasgow, and continue to live their lives dependent on benefits. Capital must be allowed to flow into deprived areas. The key principles a new settlement should be based upon are social justice and localism. The poor need to be given economic freedom. They just require the right opportunity. This is where the state can step in to advance the “Big Society”.

The new coalition could start a National Credit Scheme to help make credit readily available to people below the income tax threshold who are seen by banks as too high a risk due to their very low income. These people can be given the opportunity to have access to legal credit, thus taking them out of financial exclusion, so they can raise themselves out of poverty and improve their lives. It should be based on a loose decentralised framework. To oversee the implementation of the scheme would be a “National Credit Select Committee”, with the Minister for Welfare and Pensions assuming responsibility, to observe developments, make any necessary amendments to the scheme, remove unnecessary regulations and determine the size of the “credit budgets” granted to local Post Offices which would act as the providers of the scheme. This can also include increasing funding to Community Development financial institutions (CDFI), and allow them to be integrated into the scheme.

The individual will have to negotiate the size and terms of the loan with a local credit officer, based at the local Post Office. The local credit officer will also help formulate business plans, provide information, and advise them on how to create savings and manage their finances. They would be autonomous from central control, and the loans could be provided by locally registered private businesses, voluntary organisations or the local Post Office, which would manage its own “credit budget”.

The loan can be repaid over a period of time, determined by how much they earn and how much profit is raised, with low rates of interest. Should the individual concerned default on the debt then that amount would be taken off their benefits over a sustainable time period. This will act as an incentive for not defaulting on the debt. Equally, the individual will not be allowed to become unsustainably indebted. Once the individual concerned increases their income above the income tax threshold then they would be withdrawn from the scheme.

The businesses set up by the individuals would have to enlist labour from local welfare to work schemes, and give local residents the opportunity to buy shares in their business. The cooperative enterprise business model should be their blueprint. They would benefit from new “cooperative tax credits” so as to help them grow and develop, which would then eventually be extended to all cooperative enterprises. As a result, not only would financial exclusion be tackled but also a new generation of locally based cooperative enterprises can be born, which would decrease unemployment and boost the local economy.

The scheme would run for two years with a focus on helping individuals to set up basic cooperative enterprises, and then if successful the scheme can expand into other financial services for those stuck in the poverty trap. This has worked with the similar, but smaller scale, ANZ Progress Loan scheme in Australia, which aims to help low income earners to purchase consumer items like cars, where only 1 out of their 278 loans were defaulted in 2009. Microfinance schemes have had success in developing countries, and the work done by CDFI’s must be built upon.

The National Credit Scheme would enable the unemployed and low income earners to advance their freedom, take on responsibility and become social entrepreneurs. The ultimate aim of the scheme is to reduce financial exclusion for many people currently stuck in poverty, to stimulate growth in local economies, and to create a new generation of locally based cooperative enterprises. The individual, workers, and local communities can benefit as a whole from having this opportunity presented to them. This is one way towards building the “Big Society”.


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