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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In which I defend the indefensible...

I’ve rather held off from writing this post. Partly because right now lending is a touchy subject and partly because I don’t want people to see me as an advocate of rapacious down-market lenders.

But here it is...

Stella Creasy, Labour MP for Walthamstow has been campaigning loudly and effectively for new regulations around doorstep and payday lending:

A cross-party group of MPs has secured a vote on the principle of introducing caps on the total costs of credit for British consumers, following good practice across the Americas and Europe. We have the backing of a wide range of consumer groups, charities, trade unions and religious groups, who recognise that every day these rates go unchallenged, debt and poverty get worse. We also have the support of many Tory and Liberal Democrat backbenchers.

All good stuff. But there’s a problem – not just the impact that hobbling Provident Financial would have on the economy of Bradford (where it is headquartered and where it will employ approaching 1000 people) but a problem for the very people Ms Creasy wishes to help.

What Ms Creasy proposes is a cap on interest rates and associated fees. Seems straightforward until you consider what the effect of such a cap will be. By capping interest rates you will reduce the supply of credit to riskier groups (which tend to be poorer groups) – the area the doorstep lenders won’t touch will get bigger and the credit checking will get tougher. People who can get a short term loan now would not be able to get a short term loan if Ms Creasy’s bill became law.

Again this is fine. Truth is that many of these people shouldn’t be borrowing money given their financial status. But what we know is that they do want to borrow money, which leaves them with two routes – pawn shops or the bloke in the nice suit who’ll agree to help “just this once”.  You know him – he’s the illegal loan shark who has been forced right to the margins by the liberalised credit regime we enjoy. Right now, these loan sharks aren’t that common (although they’re on every estate) because Wonga and other down market lenders have taken their market.

And the likes of Wonga are licensed, regulated and subject to the law – let me tell you that the bloke in the nice suit isn’t and he will use force to get his money.

The effect of an interest cap will be to increase illegal loan sharking – it really is as simple as that. I know it sounds good to reduce those shocking interest rates we see on ads, to control this “legal loansharking” as the campaigners have dubbed it, but it will have negative consequences for too many people – the very people Stella Creasy wants to help.

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