Archbishops, credit unions and NFP banking

welbyOne of the more interesting things that happened while I was on holiday was the news that the Archbishop of Canterbury, Justin Welby, wanted to take on the payday loan companies. The agenda was pretty swiftly overtaken by the news that the Church of England had inadvertently invested in one of the biggest payday lenders, Wonga, something the Archbishop’s people should have done their homework on. But that’s an unfortunate mis-step in what’s been a longer and better campaign than the media has generally reflected.

Welby was talking in the House of Lords about credit unions before he was Archbishop, and backing local unions in his diocese of Durham. He’s spoken about the need for local banks, as the national banks won’t consider it worth their while to provide finance to more deprived parts of the country, and recently opened a credit union for clergy. He sits on the Parliamentary Commission on Banking Standards. His thoughts on payday loans companies are just the bit that caught the media’s attention.

As I’ve written about before, payday loan companies are enjoying a field day at the moment as wages stagnate and the cost of living rises. There’s been plenty of outrage about them and their aggressive advertising to poorer communities, but it’s been hard to clamp down on what is an entirely legal business. And if you ban them, you risk pushing desperate people to murkier sources of short term lending.

So here’s where the Archbishop comes in with the characteristically Christian idea of subverting the market with good. Rather than banning or attacking the payday lenders, just offer something better. “I’ve met the head of Wonga” he told Total Politics magazine. “I’ve had a very good conversation and I said to him quite bluntly we’re not in the business of trying to legislate you out of existence, we’re trying to compete you out of existence.”

The credit union movement is also doing well in current times, so Welby’s idea is to promote that alternative. He suggests that credit unions could use church halls, lowering their costs and making them accessible to more people. He is encouraging church members with financial expertise to offer their skills and volunteer. He sees it as a decade-long project, meshing the deep local knowledge that all churches have with the social aims of credit unions. I’d like to hope the church will put its money where its mouth is too and provide some seed corn for new local lending.

This is all exciting stuff for the Church of England to be involved in, especially given its propensity to shoot itself in the foot over the big issues of the day. But I made another connection too. Donnie Maclurcan of the Postgrowth Institute argues that not-for-profit enterprise will eventually come to out-compete for-profit business. It’s a powerful idea and one that he is co-writing a book about, but this is a good example of how that can happen. If a credit union or local bank can offer you loans or a mortgage on a not-for-profit basis, its interest rates only need to be enough to cover risk and costs. It can offer better deals than a mainstream bank. If you had a choice, why would you ever borrow money from anyone else?

The trouble is, most people don’t have that choice. Credit unions are still small scale and tend to operate in specific towns or regions – and that local connection is a big part of their strength. They can also be a bit ramshackle and unprofessional. Sometimes they’re run by a small network and are practically invisible to those outside it. They can be hard to find, even if there is one where you are. There’s apparently a South Luton Credit Union, but I couldn’t tell you anything about it. Googling it will give you a phone number and that’s about it, so you’d have to be pretty committed to track it down.

So it is likely that the credit union movement, with its principles of member ownership and democratic control, will ever overtake the banks? Hardly. But is it possible? Of course it is. And to improve the chances of that outside possibility, you need people with a vision for a fairer financial system and a platform to spread it. People like Mr Welby.

So, a kick in the pants of the Church Commissioners who invested in Wonga, and let’s get on with it.

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7 Comments on “Archbishops, credit unions and NFP banking”

  1. DevonChap August 5, 2013 at 5:12 pm #

    In America Goodwill have ‘Goodchoice’ loans which are cheaper than payday loans, but at $12 per 45 days on $100 loans the APR is still higher than the ABC thinks Credit Unions could do it.

    Competition is good but I don’t think the credit unions will out compete Wonga and its like. Like any good business they will respond to competition and the result will be better for consumers but there are fixed costs that will mean short term loans will never be cheap (similar fixed costs for checks on a 30 day £50 loan or 5 year £5,000 loan have to be recouped much quicker on short term loans making the APR much higher). Also I don’t think Credit Unions will be able to deal with even half the levels of default Wonga have.

    As to whether not for profit will eventually out compete for profit companies I suspect that the desire to be rich will motivate people more than to do good but time will tell. Its the competition that is important

    • Jeremy August 6, 2013 at 11:03 am #

      Personally, I still think there’s a radical online solution out there that will ‘do for money what Skype did for the telephone’ as one theorist put it. Obviously I don’t know what that is, but somebody ought there is working on it. That’s far more likely to be the future than credit unions, but that’s another thing.

      Yes, the desire to be rich is there, but I don’t see why that would be a force working against credit unions. You could after all get a loan from a credit union and use it to set up your business, and you’d be getting a better deal than going to a bank. If you’ve got a decent one around, you don’t need to be altruistically motivated to choose a credit union, and that will be increasingly true as the sector professionalises.

      • DevonChap August 6, 2013 at 9:16 pm #

        The desire to be rich leads entrepreneurs to want to scale up their businesses – if you make £1 off every customer more customers means more money. For credit unions scaling up just means more hassle. Hence they generally stick to small niches either geographically or who the are open to.

        An example of this is Swedish Free Schools. Quite a few Swedish educational charities and not for profit enterprises set up schools which are very good. But after setting up one school they rarely set up another. However, unlike the UK, Sweden allows for profit companies to operate Free Schools and these chain, such as Kunskapsskolan, operate many schools, allowing them to replicate successful models and reap economies of scale.

        The question I have to ask of creedit unions is, if they are such a good deal why aren’t they bigger?

        • Jeremy August 7, 2013 at 9:42 am #

          A good question, and the main reason is that there were surprisingly tight restrictions on what they could and couldn’t do until the financial crisis. Since 2008 there have been a series of measures to reform and open up the sector as an alternative to mainstream banking.

          Until very recently, credit unions could only serve individuals for example, but not businesses or community groups. They weren’t allowed to pay interest on savings, only a dividend. And they were only able to accept members within specific geographic areas or interest groups.

          The new rules only came into force in January 2012, so it’s really just the start of a growing, more open and flexible credit union movement.We’ll have to give it five years before we know whether those new measures have worked, but I’m hopeful.

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