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The effects of the financial crisis on local communities

The shock waves of the financial crisis are still being felt in our local communities. It is estimated that over four million individuals are borrowing from lenders charging interest rates of between 450% and 2,500%. Surely it isn’t right that dependence on quick, high-risk loans is becoming the norm for many lower income households, in the UK’s most deprived communities?

And how about the people running micro and small enterprises, who are struggling to access credit to enable start-up, expansion or job creation in their local areas? Not only is this running-down our local high-streets, but it is also hindering economic growth, since small and medium sized enterprises (SMEs) are vital for growth and job creation (they provide 60% of private sector jobs and half of private sector turnover).

Creating a new financial model

Yet my reaction to these figures is not one of anger, (although I do understand the anger amongst those who feel poorly served by our economic institutions). No, for me, this has sparked an appetite for innovation: for the creation of a new financial system.

Firstly, we need the banks to get themselves in order. Then we need to work in partnership with them to create new financial models, which meet the needs of all sections of society.

In the UK we talk about the need for competition; in almost every sector we put in place legislation and regulation to ensure market diversity reflects consumer needs.  Yet in the financial sector, the focus has been on creating frameworks to enhance competition at only one level; among the established and powerful banking institutions. In fact, the UK stands out among major European economies in the way that commercial banks dominate lending, with UK banks controlling 82% of our market.

But in the UK we have a proud heritage of driving forward sector revolutions: from the industrial revolution to the internet. I believe the UK should be using its historical strengths to spearhead a financial services revolution.

Looking to the Community Finance Sector

Community finance, such as credit unions, coops or mutuals are real alternatives to the banks. In the USA, the community finance sector has experienced sustained growth since the strengthening of the Community Reinvestment Act and the establishment of the CDFI Fund by President Clinton. In France, the community finance sector provides 55% of available lending. There is real scope here for us to learn from abroad and to use the community finance sector as way to bring about change.

The Community Investment Coalition (CIC)

My interest in this policy area has been sparked by CDF’s work on fair access to finance, which has led us to join with a number of partners to form a Community Investment Coalition (CIC). The CIC influences changes to legislation, policy and local practice.  It aims to change the narrative on the financial sector. And we’re already seeing results.  In response to highlighting the need for greater transparency across the financial services sector, the Government gave assurances that they would ask the banks to work with the Treasury and the British Bankers Association (BBA) to start work on developing a framework for banks to publish disaggregated data about lending to SMEs.

And at the CIC’s first conference in January, we heard Dan Letendre, Vice President of the Bank of America talk about his experiences of leading a team that solely lends to community development finance institutions (CDFIs). He said it’s been a long haul, but it’s no longer extraordinary. It’s mainstream. And I firmly believe that we should, and indeed can, aim for the same achievable goal here in the UK.

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Alison, spoke at the Westminster Social Policy Forum about rebalancing the UK’s local economy.