Who’s holding the umbrella? Challenging Times; Positive solutions

Who’s holding the umbrella?

Niall [email protected]

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Challenging Times;Positive solutions.

Saturday 10th March 2012

Voluntary Action North Lanarkshire

Yes or No?


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Is a year’s loan of £300 at an APR of 70%+

affordable credit?

• It must be a common scene across the country.

Someone lends £30 to a friend in a pub and

says “If you pay me back next week and buy

me a pint we’re straight”. So the friend returns

back to the pub the following week, pays back

the £30 and buys a pint which costs £3.00.

Most people would think this is reasonable

enough. But the equivalent APR of this

transaction would be over

. If the pint costs £3.75, the equivalent

APR of the transaction would be over

A man walks into a bar….

Source: PFG CR report 2010


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14,100%

45,600%


om…you may find yourself living in a shotgun shack

“…Perhaps we should remind ourselves how we got here in the first place. Banks applied alchemy to junk to transform it into investment grade paper. The rating agencies were complicit. We investors were saps. Investment grade paper produced from junk turned out to be junk. Leverage compounded the risk. Confidence in the system crumbled. Our challenge now is to rebuild that confidence” Source: FT, letters 6/6/2008


omAlliance & Leicester, Bradford & Bingley, Dunfermline BS…

“You only find out who has been swimming naked when the tide goes out…and what we see at our financial institutions is an ugly sight”

Warren Buffet, February 2008

Flat-lining economy;8.4% unemployment – highest for 16 years;

1.04m unemployed amongst 16 to 24 year olds; 36,200 repossessions in 2011;

159,400 in arrears equivalent to 2.5% of mortgage;

£1,000,000,000,000 UK debt;Plan A or Plan B?


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Banking crisis becomes sovereign debt crisis

http://www.flickr.com/photos/fawbs/2945238477/


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From too big to fail; now too big to bail!

“Today’s crisis has stretched some state’s sinews to the limit. Both literally and metaphorically, global finance cannot afford another.” Andrew Haldane, Bank of England, “The $100bn question” March 2010


omCivil unrest, austerity, demonstrations, lurch to the right

“I think this is different: a) because it’s big; b) because it’s widespread; and c) because it is about solvencies, not just about liquidity. And solvency requires a totally different policy approach than just a liquidity problem”. George Magnus, Chief Economist, UBS, Feb. 2008

70% of social housing

tenants in bottom 20%

of UK income deciles

Source: Hills review (2006)

Disproportionately:Not on voters roll;

Thin files & poor credit history;Lowest income;

Poorest neighbourhoods;Pay most for food & fuel;

Lacking insurance;Pay the most for their cash.

The dirty end of the stick

“Cuts being proposed are draconian... People who had the least to do with the recessionwill pay the most”

Prof. David “Danny” Blanchflower, Speaking at David Hume Institute, Edinburgh, Oct. 2010


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More pain for the poor


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Social Rented Private rented Mortgaged Own Outright2010 36.30% 25.30% 11.20% 24.20%

2011 39.10% 29.00% 11.90% 25.10%

2012 39.90% 34.20% 12.40% 24.60%

2013 43.10% 35.30% 12.50% 24.60%

2014 41.80% 34.40% 12.70% 23.30%

2015 42.60% 33.60% 12.60% 24.20%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

Absolute child poverty rate by housing tenure 2010-2015 Source: IFS & FPI (Jan. 2012)

Insolvencies (individuals) 2001 - 2010

2001 2002 2003 2004 2005 2006 2007 2008 2009 p 2010

Total NaN 6827 8389 8780 9321 11897 13789 13924 19991 23541 20329

2500

7500

12500

17500

22500Highest concentration of personal insolvencies (2010) by town: (UK):

1: Glenrothes2: Kirkcaldy3: Livingston4: Washington5: Dunfermline6: Weston-Super-Mare7: Hamilton8: Torquay9: Boston10: Paisley


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“Our customers are scared of banks”. They just want cash,” says Ruth Walker, manager of Albermarle & Bond’s Barking branch.

Shares in the £164m company have risen by 27% in the past year, tallying with a 32% increase in its pledge book & increasing demand for unsecured loans.

Datamonitor estimates there are 12m “non-standard credit consumers” denied access to conventional loans due to bad debt history or reliance on benefits for income.”

Still an enormous demand for unsecured credit

Source: Financial Times 2 May 2011

“Pawnbrokers see influx of clients who fear

banks”

secured and unsecured monthly lending from Aug. 2007


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Monthly value of total sterling approvals for secured lending to individuals in £million (not seasonally adjusted)

Monthly amount of total sterling unsecured gross lending to individuals in £million (not seasonally adjusted)

Payday lenders – the clue is in the name!

1.587m applications to the social fund rejected in 2010/2011. (source DWP)

4m payday loans borrowing £1.7bn. (FT)

3m users of home credit borrow £1.5bn, (PFG reject 80% of “new”) (PFG)

24m “renters” apply for bank consumer credit 12m “accepts” (Big Issue Invest)


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The non standard borrower

• 10m UK adults in the non-standard credit market.• 3m using home collected credit .• About £30m issued by home credit every week. • young, low-income, women, w/children, social renters.• Around £80+ interest & fees on every £100 borrowed.• Collected weekly, on the doorstep; flexible & personal.• Customer likely to have thin credit files or poor history. • Ignored and unwanted by banks and standard lenders.


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“The UK non standard market, we believe, will increasingly be the domain of specialist lenders like ourselves, and in particular, we believe the small sum unsecured part of the market is the sweet spot”

Peter Crook, remarks to analysts at PFG interim results announcement, July 2010

PFG 90% + satisfaction. It works for the

customer

£50052 wks£910

272% APR


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Provident: a logical choice

20051.49m

20061.56m

20071.65m

20081.75m

20091.84m

20101.86m

c u sto m e rs2011

1.82m

PFG share price tracked against FTSE 100 last 5 years


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RBS

Unfurnished home, no credit, head to BrightHouse


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• Female;• aged 25 to 45; with children;• a household income of less than £18,000;

and there is a good chance she is • wholly or partly dependent on benefits; &• she may be a lone parent;• she probably lives within 3 miles of a store;• has no access to a car. • The average shopper pays £23 a week and has

an average of three and a half items out on loan through BrightHouse.

Grimsby

Bury Burnley

Cwymbran

Birkenhead Hanley

Pontypridd

Blackburn

Moneyline “Responsible Lender of the Year” 2011/12


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2008 2009 2010 2011

Moneyline (Jan. 2008 - Dec. 2011) loan book, gross lending & number of loans issued

Outstanding loan book (£) Gross Lending (£) No. of loans issued

Supported by the Social Business Trust partner Credit Suisse, Moneyline has:

• revolutionised its back office systems; to• improve efficiency productivity & capacity; • Already raised social bond in Wales, &• Now seeking investment to fund growth

Organisation & operations


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• face-to-face lending;• 45 minute loan interviews;

• Under 50% approved;• Flexibility (wanted, needed & appreciated) in loan repayments;

• weekly or fortnightly Direct Debit preferred by borrower;• If 2 x DD’s missed, DD cancelled to prevent additional charges;

• rounded-up payments, balance swept to (Bank of Scotland) savings;• Basic (Nat. West) bank account opened, in house, if needed;

• Debt recovered through Eligible Credit Deduction Scheme (ECDS).

Organisation & operations


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Viability Sustainability


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The only lender of its type in Scotland


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Scotcash:Meeting the needs of

Glasgow’s most excluded.

Scotcash : since 2007• 6000 loans written worth almost £3.2m;• 1500 basic bank accounts opened;• 350 savings accounts opened; £81,000 saved;• 3250 clients within in-house CAB service;• £7.6m client debt seen & £2.9m client financial gain;• 200 evictions prevented;• £1.7m saved in interest and fees.


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filling the space between for the non standard borrower

• £2 of every £3 that repays is from welfare benefits;• Significant by-products of debt & money advice, bank &

savings accounts, improved mental health & social capital.• Each loan is at least £60 per £100 less when set against

the most-likely higher cost home collected alternative;• 57% of customers below poverty line;• Award-winning, a trusted brand, a value proposition.


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Know your customer


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Women (73%)Lone parent (38%)Dependent children (62%)Under 34yrs (48%)Income under £200/wk (58%)Social renting (73%) & home owning (2%)Unemployed (63%)

They are familiar with home credit, rent-to-own stores, & the social fund.

They want small sums, repayable weekly;They like personal, flexible, service.

Not-for-profit but not above criticism


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• Be clear about the purpose;• Be right about the business;• Be open to scrutiny;• Be willing to change;• Be aware of the challenge.

Credit unions: need a balanced loan book


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UK Wide:16% Unemployed or unable to work;71% over 40 years old;14% lone parent families;36% renting from LA or HA;48% owning home outright or with a mortgage;32% with a net household income under £199 per week;74% members for over three years.Source: Membership Counts: Who uses credit Unions, PFRC, 2006, ABCUL

“the Chief Executive of the UK’s biggest credit union trade association suggests that even a 60% APR would not be enough to cover all the costs of lending to Growth Fund customers, within a 10% default target”

Mainstreaming Financial Inclusion (3/2010) Financial Inclusion Taskforce

The non standard borrower


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0%

10%

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Renting LA/HA or private

Owns home outright or with

mortgage

Female Dependent children

Young (under 40) Unemployed

PFG, Scotcash & Credit Union customers compared

PFG (Investor analysts Nov.2010) Scotcash (all loans to 2011) Credit Unions (ABCUL, 2006)

APRs : like looking at a thermometer to see if it’s raining


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Higher interest rates would be needed to put Growth Fund lending on a more stable commercial platform.

Assuming operational costs, risks associated with lenders, and average loan sizes remain constant, it is estimated that an APR of 71.2 per cent would be required to cover operational costs and financial risks associated with lending.

An APR of 108.2 per cent would be required to reach a commercial rate of profit of 12.7 percent on loan capital

• Money : retained (in households & communities)• Families & tenancies : stabilised• Children : nurtured• Social capital : developed• Physical & mental health : lifted• Over indebtedness : decreased• Saving : encouraged• Anxiety : reduced• Standard of living : increased• Quality of life : enhanced

Social & financial return on investment


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Yes or No?


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Is a year’s loan of £300 at an APR of 70%+

affordable credit?

Economy & Finance

Who’s holding the umbrella? Challenging Times; Positive solutions