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Financial Exclusion: tackling it the Welsh Way
The problem in Wales
I want to take the opportunity of talking with you this afternoon to look at the underlying approach which, in Wales, we are trying to bring to bear on the issue of financial exclusion.
Scale of the problem
The enduring scale of poverty and deprivation in Wales is already well know, and does not require lengthy repetition here. One set of statistics must stand for the whole complex question of financial exclusion. The Welsh Assembly Government’s first substantial publication in the field of social exclusion suggested that around 23% of households in Wales had no savings whatsoever, a figure which rose to 32% in the cases of Merthyr Tydfil and Caerphilly local authority areas.
In five of the 22 local authorities in Wales more than 40% of households reported savings levels of less than £1000. No single authority contained less than 30% of households in that position.
Debt
Financial exclusion reaches its sharpest point, of course, for those individuals and families who find themselves in debt. Deep and intractable indebtedness has become a fact of many lives in the most disadvantaged localities. In the period between 1981 and 1988, average savings per person in the United Kingdom fell from 15% of take home pay to 5%. Over the same period personal borrowing increased from £93 billion to £284 billion.
Recent research has also suggested that ‘debt is a more serious problem for consumers in Wales than in other parts of the United Kingdom’. The National Association of Citizens’ Advice Bureaux have also reported that the rate of increase in debt inquiries to CABx has been particularly sharp in Wales. In 1999, debt enquires in England rose by 12%, while in Wales the figure reached two and a half times that level, at 30% . Unsurprisingly, a survey of Bureaux users showed that debt was concentrated in poorest households.
Access to credit
The difficulty which faced the most people in this situation is less about not having access to credit than on having to borrow money from the most expensive and least reputable lenders. Nearly half the clients taking part in a nationwide CAB survey in 2001 reported a strategy for coping with debt which involved taking on further borrowing. Almost half of those contacted in a recent survey of some of the poorest parts of Wales had borrowed money in the previous two years. Of these, one in four had used a weekly collecting credit company, and one in twenty-five had borrowed from individual money-lenders who were almost certainly lending illegally.
Borrowing money in the unregulated market did not only bring problems of massively high repayment rates. One in ten people reported being threatened in some way by their lender. One in twenty five – ‘almost certainly users of unlicensed moneylenders’, the research authors conclude - had had their benefit book kept by the lender as ‘security’ for their loan.
More generally, it has been estimated that three million borrowers in Britain use the door-to-door facilities of firms who are able to charge legal credit rates of more than 250% a year. As banks have closed branches in disadvantaged areas (see below) so, as the Chief Executive of a major money-lending company puts it, ‘more people come dropping into my market’.
You will hardly be surprised to hear that services such as cheque cashing agencies or shops and agencies specialising in credit for customers with poor credit ratings, charge extremely high interest rates. Many people in financial difficulty, however, resort to using them. This makes credit very expensive and often results in unmanageable debt’.
And the Banks
The need to rely upon such services, and those even less within the mainstream, has been exacerbated by policies pursued by high street banks in the years following the boom and bust era of the late 1980s. Banks do not only aim to screen out those who represent an active risk. They prefer, as others have suggested, to ‘concentrate on more profitable, better-off customers, whose accounts cost little to administer and whose purchase of non-current account products and services boosts profitability.’ As a result, best estimates suggest that some two and half to three and a half million adults in Britain have neither a current account nor a savings account.
Financial exclusion has an important community as well as individual dimension. Banks not only prefer to concentrate upon profit-rich customers, they prefer to operate in profit-rich places. The rate of closure of bank branches accelerated during the 1990s , producing a decline of nearly 30% in the number of branches over a ten year period. The position in Wales reflects the general position. Evidence from the banking union, UNIFI, identified 31 bank closures in Wales during the year 2000 alone.
The factor which each of these communities holds in common is that every one is located in an Objective One area, that is to say, in a part of Wales where poverty is already most pronounced. To provide just one example, the town of Neyland in Pembrokeshire which has a population of 4,000 and a hinterland of a further 1,500, saw all four bank branches closed during the 1990s, the last on 19 November 1999.
Figures from the British Bankers’ Association suggest that, by 2000, only 63 per cent of Welsh households lived within one mile of a bank or building society branch, compared to a British figure of 75 per cent. The Campaign for Community Banking Services concludes that this gap has widened over the period of bank branch closures and suggests that ‘Welsh rural communities are generally further from neighbouring towns retaining bank branches than their English equivalents’. And, on top of this, the geography of Wales means that simple ‘as-the-crow-flies’ distances disguise the extra obstacles of valleys and mountains which mean that even a short distance between two points can take a very long time to travel.
Nor are these issues simply a rural phenomenon. In urban communities, 85 per cent of the British population live within a mile of a mainstream financial institution, while in Wales that position is enjoyed by only 77 per cent. Behind these figures lies a flight of banks and building societies from particular urban communities – outlying estates and inner city areas.
And post offices
Even this is not the end of the problem. The withdrawal of banks and building societies is mirrored by the accelerating decline in the number of post offices from both rural and disadvantaged urban communities in Wales, at a time when privatised utilities and other services increasingly reward – by preferential pricing and marketing – those customers who are able to pay by non-cash means.
Figures provided by the Post Office suggest that in the five years to 2000, 150 branches had been closed in Wales, predominantly in rural areas. The post office network is particularly important to poorest communities in Wales. While 45% of the less well off half of the population live within half a mile of a bank or building society, 95% of the same groups live within the same distance of a post office.
In Wales post office usage has a significance both in poor urban communities, where customers carry out 33% more business at post offices than the national average , and in rural areas. Only 5% of rural parishes have a bank, whereas nearly 60% have a post office.
In over three quarters of Welsh constituencies, more than 50% of post offices rely on benefit payments for more than 40% of their business . This figure is regarded by the post office authorities as a level of reliance on income from benefit transactions which threatens long-term survival because, in an increasingly commercial context, the reliance on such customers threatens the viability of individual offices.
The loss of a post office does not simply produce an adverse affect upon individuals. Estimates suggest that, for a settlement of 1,000 to 3,000 people, having a post office puts about £100,000 each month back into the community . This figure is given added importance in those 2,000 rural settlements in Britain where the post office provides the last shop in a village.
Where does policy responsibility lie?
It will not have escaped your notice that the policy responsibility for many of the difficulties which I have just outlined remain in the hands of the Westminster, rather than the devolved administrations. It is not my purpose to be critical of colleagues in London, although many of us have a lingering sense of disappointment at the decision to rely so heavily on the carrot approach to inducing financial institutions to meet their social obligations. Even in the United States, the federal government’s use of the Community Reinvestment Act powers shows what can be achieved when the obligations of very rich organisations to very poor communities are backed-up by statute. In the case of the Post Office, too, the difficulties and uncertainties which seem to have surrounded the achievement of the Universal Bank proposals are much in need of resolution. Our fellow citizens who rely on benefit payments have the Prime Minister’s guarantee that, in the new Post Office world, they will have ready access to financial services designed to meet their needs, and that those who prefer to receive payments in cash will be able to do so. These are vital building blocks in combating financial exclusion and, in Wales we look forward very much to the practical achievement of these promises.
Developing Solutions in Wales
The position I have described to you is one where the need for policy and practice solutions to provide access to financial services by poor people and localities is urgent, and when some of the major policy levers lie elsewhere.
The response which we have tried to design in Wales is one which is:
- true to the political values which we bring to administration, and
- places a premium on imaginative and ground-breaking use of those policy solutions which we can generate ourselves.
In the time I have available, I have to concentrate on just a couple of examples, starting with credit unions.
Values
When I said, a moment ago, that the Welsh Assembly Government’s approach to financial exclusion is one which has an ideological as well as a practical component, I was simply reflecting the fact that, for individuals who experience debt and service-failure, the impact is wider than the simply personal. Research carried out in South Wales during the late 1990s emphasised the extent to which, in those places where disadvantage is at its more concentrated, individuals experience an acute and overwhelming sense of shame about the place in which they live.
In social exchanges away from home such individuals never identified the area from which they had come, for fear of evoking powerful and stigmatising reactions in others. In dealings with the ‘official’ world, the same respondents reported a sense of ‘invisibility’, in which their needs and requests for help were ignored or dismissed by more influential individuals, writing-off what they were told simply because of the community from which the issues had been raised.
Credit unions are important because they provide a response to financial exclusion which allows individuals to fashion a solution at a collective as well as a personal level. This is especially important in Wales where we are able to draw on a tradition of collective endeavour, in which credit unions provide a means of promoting social solidarity, as well as enhancing individual citizenship. In addition to providing financial services, unions operate from an ethical basis which emphasises a sense of community and belonging. They attempt to reinsert the principle of mutuality into the world of economic transaction which is otherwise governed only by considerations of profit and loss.
Innovation
For the purposes of this presentation, I have time to look at only one main area of innovative practice where I think we can show how, in Wales, we have been able to work with credit unions to provide some ground-breaking policy solutions.
During the 1990s, the privatization of water, gas and electricity industries, produced a whole new series of problems for poorest consumers of these essential goods. In 2000, discussions with the South Wales electricity company, SWALEC, produced an agreement in which energy efficiency measures which the company are obliged to promote should be targeted through credit unions. The company were attracted to this route precisely because it provided a clear means of directing its efforts towards individuals and communities most in need. The scheme involved the distribution, at very low prices, of energy efficient kettles and light bulbs to union members. The substantial grant made by the Welsh Assembly Government to the Wales Cooperative Centre for credit union development purposes has provided the central capacity by which the effort needed to set up such a scheme has been possible. By the time the first round of the scheme had ended, 4,250 kettles and 12,500 energy efficient bulbs had been delivered to 34 participating credit unions. With three quarters of the 47 unions in Wales in participation, the total savings to members on recommended retail prices, alone, has been estimated to be in the region of £75,000. More importantly, however, the project has the potential to save Welsh credit union members collectively, up to half a million pounds on their annual electricity bills. Over the lifetime of the products the saving in electricity bills could exceed £2 million.
Credit unions are sometimes, and wrongly, dismissed as ‘poor people’s banks’. The initiative I have just outlined is, to my mind, a clear example of the way in which unions can provide services which are superior, rather than inferior, to the products which are available to such individuals from mainstream institutions. What is needed is imagination, backed up by the resources and political impetus which government can provide.
Let me give you one more example which I think fits into this sort of way of doing things. You will know that, since privatisation, utility companies have come, more and more, to rely upon pre-payment metering as a means of providing services to disadvantaged consumers. The additional costs which fall upon pre-payment customers – that is to say, those least able to afford them – has been widely attested, particularly in the Welsh context . Now, as a result of discussions between the credit union movement in Wales and the electricity supplier MANWEB, we have a scheme which allows those who make regular payments through their local credit union to be charged at lower, direct debit payment rates. These discussions were concluded towards the end of 2001 and the first referrals to the scheme were made in February 2002. One hundred credit union members are to be involved in the first phase of a programme which, once again, aims to extend union services to those most in need of them.
Community loan fund
While credit unions build from the individual to the communal, financial exclusion also has an impact which begins at the collective level. Here I want, again, just to mention one example of the work in which we are engaged in Wales, the Community Loan Fund.
The CLF is a joint venture between Finance Wales and HSBC. It is being funded by the Assembly Government through the WDA. Since its establishment in autumn 2000 Community Loan Fund (CLF) has made an impressive start - loans of almost £500,000 were made in the first four months and, over the period 2001-02 to 2004-05, nearly £2m has been allocated or planned for by the Assembly Government. This is being matched pound for pound by HSBC. CLF makes loans to social economy enterprises, mainly focused on Communities First areas. It has been found to be a good method of securing private sector leverage; a ratio of 6:1 leverage on CLF loans has been achieved.
The wide range of projects supported by the Fund include those which support community regeneration and help the community sector increase long term sustainability. We are especially interested to work with groups which are at a start up or early stage or ventures seeking to expand. The Fund is designed to be of help to community organisations who find it difficult to obtain traditional finance, with particular emphasis on ventures run by woman and ethnic groups.
The CLF supports community regeneration throughout whole of Wales, with priority to Community First areas. It helps the community sector increase long-term sustainability and provides access to sound business advice. It is especially beneficial to community organisations that find it difficult to obtain traditional finance and encourages a more entrepreneurial spirit in Wales.
It is the Assembly’s Intention that the Fund will continue its good work and the number of projects supported will continue to grow.
Conclusion
What I have tried to demonstrate, in this contribution is how, through the work of the Welsh Assembly Government and its partners, we are developing a specifically Welsh set of solutions to local needs and circumstances in financial exclusion.
There were many more practical examples which I would like to have had the time to discuss with you today but what I hope I have been able to demonstrate is that the nature of the solutions we have applied at the Assembly Government is that they apply a set of values which have a traditional resonance in Wales, in a fresh fashion. The values are those which link individual progress and life chances to collective effort and action. Where those chances are at their most reduced, then governments must intervene to bolster the shared struggle needed to bring about improvement.
The development of credit union services in Wales and the way in which we have set about the work of the Community Load Fund show all those values in action. They do so, moreover, in a way which – in terms of legislation, financing, policy and practice – shows an Administration prepared to act creatively within, and at the boundaries, of the powers available to it.
30 September 2009
