How to make banks lend to deprived communities
Shouldn't banks be reinvesting in their local economies? Peter Kelly, business development and marketing director at Unity Trust Bank makes a strong case for a Community Reinvestment Act that would make it an obligation.
Soon after the financial crisis hit in 2008, the most pressing issue on everyone’s mind was how our finance sector could be reformed so that a meltdown of this degree would never again occur and economic stability could return to the UK.
But since the dust has started to settle and confidence has begun to return, it has become clear that our financial sector is capable of, and indeed should be, stretching its responsibilities far wider than this.
Instead of simply being expected to withstand shock and provide economic stability we believe the sector should also be playing a much greater role in funding community finance.
As put forward in ResPublica’s ‘Markets for the Many: How civic finance can open up markets and widen access’ approach to financial reform paper, launched 4 February 2014, we agree that making reforms to the community finance market and establishing Community Development Finance Institutions (CDFIs) as lenders of first resort for SMEs are crucial steps in enabling this.
The centerpiece of the package of measures would be a UK-style Community Reinvestment Act (CRA) - similar to the one passed in the US in 1977, which requires all banks to reinvest in their local economies and which produced $68.5 billion of private investment between 1996 and 2009.
At the moment in the UK we see banks generally taking three approaches to community finance. They either have a commercial funding relationship, such as that developed by Unity Trust Bank; a corporate social responsibility approach (CSR) - as generally favoured by the big banks and which focuses on grants, sponsorship and volunteering; or, sadly, they have a total lack of appetite or support for it at all.
The commercial approach has started to yield some very promising results, and in the UK it has been achieved with the help of government intervention through the £30m Regional Growth Fund and the use of Community Investment Tax Relief. This has facilitated £30m of bank leverage from Unity Trust Bank and Co-operative Bank and last year alone helped contribute towards the creation of over 2,500 jobs.
CSR activity, however, often papers over the cracks.
Firstly, although the big banks often have substantial CSR budgets and some of them do use these to channel important funding into community finance, there are a myriad of good causes to support so it is understandable that not all banks use their budgets in this way. They all want to be recognized as a good corporate citizen, so they need to find some differentiation.
Secondly, and perhaps more alarmingly, because there seems to be little alignment between our high street banks’ CSR strategies and their mainstream objectives, this has lead to a situation where we see many of them providing commercial finance to payday lenders operating in the UK.
Yet at the same time their CSR departments are funding CDFIs, credit unions and free money advice agencies to help those very same consumers who are struggling in the hands of the high cost lenders.
The lack of correlation exemplifies the urgency with which we need to explore reforms that would encourage them to instead reach the most financially vulnerable and support community finance in a more responsible manner.
At a time when banks are examining their ethics, values and long term reputation, there has never been a better opportunity for them to contribute and to find ways to do it sustainably. I hope that Unity Trust Bank has shown that commercial opportunities do exist to support CDFIs, and perhaps a carefully developed CRA would provide the much-needed catalyst to push this forward.
We have been here before with this debate. The fact that this was being discussed 14 years ago as part of the Social Investment Taskforce suggests nothing significant has changed, and that a need for action remains. Let’s not be having the same debate in another 14 years, during which time we have allowed our finance sector to at best ignore or at worst further damage the financial wellbeing of some of the most vulnerable in our society.
This blog was originally published by ResPublica.