Sorry Archbishop but you're wrong...you won't beat Wonga by having moneylenders in church halls

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The new Archbishop is off at a gallop gleefully sticking his neb into all and sundry including the iniquities of the down-market credit business and it's Arch-Demon, Wonga. To give the Primate his due however he didn't promise to force the government to change the law - a welcome break from the seemingly eternal lobbying that has plagued the church since 'Faith in the City':

“We’re not in the business of trying to legislate you out of existence; we’re trying to compete you out of existence”. 

And the boss of Wonga - good capitalist chap that he is - responded by welcoming the competition and the extension of choice in the consumer credit market. All this has been a little spoiled by the silly business of the Church having invested some of its billions in the evil that is Wonga.

Let's be clear, I think the Archbishop is wrong. Not in wanting to encourage credit unions as an 'ethical' alternative to payday lenders, nor in seeing that the solution lies in extending choice rather than in the more usual regulation and restriction. No, the Archbishop is wrong because he doesn't appreciate the realities of the market he intends to enter (well sort of enter - more support of encourage really).

The interest rates (leaving aside all the macroeconomics for a minute) that lenders charge are made up of three things: the more or less fixed cost of setting up a loan, the lenders margin and what we can call a guess at the risks involved (i.e. how many borrowers will default and owing how much). Now we can do a little about the first two things but not much so, if we are to reduce the amount charged we have to reduce the risk of financial loss.

Assuming there is no government subsidy or underwriting of the risk (and guessing that the Archbishop doesn't intend to stick the Church's assets on the table) and no realistic surety, the effect of reducing risk is to reduce the number of people who can borrow. Or, to put it another way, to exclude the very people who are most at risk from loan sharks and other assorted folk peddling loans.

So credit unions with limited assets have to focus on low risk lending - not at all the market in which the Archbishop wants them to operate. If the Church is to compete with the payday lenders it must canonise one of them - we would need St Wonga.

This little headline grabbing initiative is great PR, brilliant politics and poor business. If the church wants to do something to reduce the need for lenders like Wonga the way to do this is to help reduce the reasons why vulnerable people use them. And to do this the Church should build on the work already being done out there by organisations such as Christians Against Poverty - working in local neighbourhoods to advise people on how to avoid debt, how to budget and how to get out of the mess once you're in it. And, while credit unions have a role in all this, they really aren't the solution.

If every church had a debt advisor or two plus a little relief fund, the chances are that thousands of people might be guided away from the risks of short-term borrowing. Rather than compete, the Church should simply remove Wonga's market.

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Rotherham Council gives local supermarket £80,000 - or so they don't say

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Well that's what it looks like to me:

Carl Battersby, director of environment and development services at Rotherham Council, told the BBC the idea to arrange the loan came after suggestions from its welfare reform steering group.

"We're trying to do the best for our local people," said Mr Battersby.

"Clearly we're not quite sure what the demand and take-up will be but we think it's the right thing to do to help some of the most vulnerable people."

He added: "People are struggling to meet the cost of basic items, food being one of them. As a council we wanted to do something positive."

The vouchers can only be redeemed at Pak supermarket in Rotherham until 11 January and exclude cigarettes and alcohol.

For sure all the campaigners against evil loans sharks and other such demons will see this as the action of a wonderful caring council. Indeed that's how the BBC reports it:

Struggling families in South Yorkshire are being offered help with their food bills through Christmas in a bid to stop people borrowing from loan sharks

But why just the one supermarket - and not even one anyone has heard of? Why not just give cash loans? It wouldn't be that cigarettes and alcohol bit would it!

Put simply this is an atrocious use of public money - bordering on malfeasance.

And 'the-man-who-would-be-MP' seems to get on well with this supermarket!

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Letting politicians and the well-meaning run banks is a daft (and dangerous) idea

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The other day Vince Cable announced his new small business bank:

"We need a new British business bank with a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high-growth companies that power our economy. Today I can announce we will have one. I am working with the chancellor to develop a state-backed institution that will combine up to a billion pounds of new government capital with a larger private contribution."

So there you have it – a super new bank run by politicians that will gallop to the rescue of all those dynamic little businesses that can borrow money from the nasty private banks (or indeed the nasty public-owned banks for that matter). For all that this looks and sounds like just another back-door bank bailout, Vince has his headline and a shiny new state bank to play with!

Now while this sounds like yet another rehashing of 1970s policies – picking winners, national investment banks and doubtless the white heat of technology – it is matched in its lunacy by the latest wheeze from Labour. This is the idea of making banks lend money to poor people:

Labour has published proposals for a policy that it says would force banks to lend more in deprived communities and encourage lending through third sector financial institutions.

The alarm bells are ringing loudly at this policy! Apparently the intention is to force banks to lend in poor places (on what basis is unclear) or else hand over dollops of cash to social lenders – charities, credit unions and so forth. The approach would:

...require banks to reveal what they lent in each community and to lend a minimum amount in every community.

Apparently this was a huge success in the USA where the Community Reinvestment Act was a factor in (although probably not the cause of) the housing-bubble that helped precipitate the financial meltdown we all enjoy today. So Labour in the UK is proposing a lending scheme targeted at people who won’t find it easy to repay the loans. To say this is irresponsible does not quite capture the whole picture. Assuming that the government’s moral suasion makes banks use credit unions and the like to do the lending, we face the added problem of banks run by politicians and the well-meaning lending to poor folk.

And this happens:

Leeds City Credit Union (LCCU) will be hoping yesterday’s sentencing of former manager Beverley Johnson for fraud will mark the end of the most traumatic chapter in its 25-year history.

Over the past five years, England’s biggest credit union has endured the fallout from chronic mismanagement which resulted in near complete financial collapse, two police inquiries, the former chief executive being forced to resign and finally an embarrassing court case thanks to a manager helping herself to the contents of members’ accounts.

LCCU’s mismanagement has been the subject of a long-running Yorkshire Post investigation which first revealed serious concerns as far back as 2007.

Imagine millions of – in effect – free cash landing into these organisations. Take a glimpse over the Atlantic again and look at how politicians and political favours nearly destroyed savings & loan institutions. And consider whether this sort of story might happen again here:

LCCU was shown to (be) rife with cronyism and nepotism, including major breaches of financial rules through favourable loans provided to staff and their relatives.

In one instance, the son of then chief executive Sue Davenport had received a loan for £14,205 when he was only entitled to £1,200. In another, Davenport’s daughter-in-law had been able to take part in processing a loan for herself at a preferential rate.

Criticisms from the Financial Services Authority (FSA) were also highlighted, in particular Davenport’s ability to exert an inordinate amount of control over the books. A letter written by the FSA to LCCU as far back as 2003 specifically referred to “the risk of intentional manipulation” – a risk subsequently shown to be one Davenport was willing to take.

Perhaps we shouldn’t take the risk of letting a coalition of the well-meaning and politics runs banks – it will end it scandal and crisis. And won’t help poor people – folk who need advising not to borrow rather than encouraging into taking out loans they can’t afford.

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