Questions and answers
Q. Why are DWP administering Growth Fund?
A. Given its key role in the wider Financial Inclusion agenda and experience in dealing with the third financial sector, HMT invited DWP to administer the Growth Fund; which will operate under EU State Aid rules as a Service of General Economic Interest.
The Growth Fund supports the Government’s wider agenda for reducing financial exclusion, and this in turn is integral to DWP’s long-term core business.
Q. If you feel that there is a gap in the market why can’t you simply expand the Social Fund?
A. Financially excluded people are able to borrow now, but this is often at unaffordable, high, unregulated and sometimes exorbitant interest rates. The Growth Fund seeks to provide for affordable loans to be made available to those who are able to repay.
The Growth Fund does not impact on the position of banks as lenders to the financially included, or the position of the Social Fund for those who apply for budgeting or crisis loans.
The Growth Fund is simply intended to reduce unaffordable debt amongst those on low incomes, and to plough the money saved on excessive repayments into local economies. We think it will provide a highly desirable and morally defensible service.
Q. £36 million has been allocated from the Financial Inclusion Fund – do you see this as enough, and what happens when the money runs out? If you were serious about the benefits this Growth Fund can make to local communities surely you would have allocated more money?
A. £36 million is considered sufficient to provide the service required to generate change for the target group for an initial period. Organisations bidding to provide the Growth Fund service were required to set out how they would use the funds to provide a viable, regulated personal loan service to others who may be financially excluded in the future. So yes, the Growth Fund will be sufficient and yes, we are very serious indeed about the need to generate a sustainable service in the long term.
Q. Why are you loaning money to those who are the least likely to be able to afford the repayments? Aren’t you encouraging them to get into debt?
A. It is appreciated that those on very low incomes/benefits may have a reduced capacity to repay loans – customers’ ability to repay will be taken into account by Growth Fund lenders, but very low income is not a sufficient reason to deny access to, or the choice of, affordable credit.
Benefit customers and others on low incomes have always needed to borrow relatively small sums of money from time to time for the occasional hiccups of life. It would be better for them to be able to save for such occasions, but in many cases it will not be possible to engender a savings culture until existing debt problems have been addressed. The Growth Fund contributes to the overall solution.
Loans from GF lenders will be repayable at affordable rates – far less than those charged by the alternative credit market e.g. doorstep lenders, loan sharks, pawnbrokers etc..
People will borrow the money they need anyway. We are giving them access to affordable credit, rather than the spiral of unaffordable debt.
Q. And in trying to make the repayments won’t customers run out of money and end up claiming Crisis Loans from the Social Fund?
A. The Growth fund will make affordable loans available to those who have demonstrated their ability to budget and are likely to be able manage the repayments.
Q. But their circumstances might change and they run into problems. Will they be able to reschedule the loan?
A. Repayment of each loan will be a matter for discussion between the borrower and the lender, and this is something the borrower would need to discuss with the lender prior to taking the loan.
Q. Isn’t this a disincentive for people to come off benefits?
A. No. Anyone wishing to borrow money, regardless of their type of income or benefit status has the opportunity to apply for a loan from the Growth Fund. The lending institutions will be free to consider loan applications against reasonable credit-worthiness criteria, and to refuse loans to people whose circumstances indicate they will be unable to the make the repayments.
Q. CUs and CDFIs will expect to be repaid on their terms – won’t this mean that they are harassing people who are already vulnerable?
A. These not-for-profit organisations already play a key role in the provision of affordable loans, and are active in providing this as well money advice to those on the lowest incomes without encountering difficulties with repayments. However, they need a larger capital base in order to grow and become sustainable. The Growth Fund is there to help them overcome the barriers they face in improving their services and offering increased coverage.
Q. Will DWP be refusing deprived areas this funding?
A. The Growth Fund is a new and innovative approach in addressing the need to ensure affordable loans are made available to those who wish to borrow and can demonstrate their ability to repay.
The assessment of bids to deliver Growth Fund has taken into account a number of factors – one of the key factors being the consideration of applications from areas where there are high levels of financial exclusion – which is where it’s needed most.
The application and decision-making process has been fair, clear, open and transparent. CUs and CDFIs wishing to deliver GF were provided with all the information required to help them decide whether to bid.
Q. Won’t taxpayers be losing money if this does not go to plan?
A. The financial institutions involved will be using their own experience, credit-worthiness, and of course their past success to ensure the Growth Fund is also a success.
DWP Service Delivery Managers will be monitoring performance closely to ensure that Growth Fund money is used appropriately.
Q. Why should taxpayers on low incomes themselves who can’t afford loans have to fund this?
A. The Growth Fund is simply intended to reduce unaffordable debt amongst those on low incomes, and to plough the money saved on excessive repayments into local economies.
The taxpayers themselves will benefit from the regeneration of their local community.
The alternative would be to do nothing – the consequence of which is that those on low-incomes will have to continue to resort to doorstep or other high cost lenders.
Q. Is the Government taking business away from alternative financial institutions and money- lenders?
A. No – they already have a strong customer base and this should hold. The Growth Fund does not impact on the position of banks as lenders to the financially included, or the position of the Social Fund for those who apply for discretionary or regulated loans. The sorts of customers who will be borrowing from CUs and CDFIs are those who are not in a position to borrow from banks. This may be because they do not have a bank account, or they do not have a strong enough credit record to borrow. If this initiative puts loan sharks out of business, then this is something to be celebrated.
Q. What do people do now to fulfil their credit needs?
A. Those who have a poor credit rating, or a history of bad debt, have to turn to non-status lenders. The most respectable of these institutions provide similar credit products as those in the mainstream sector but at a much higher rate of interest. The least respectable charge similarly high interest rates, tend to cater for those with bad debt histories, and appear to target vulnerable people and encourage them to get into further debt.
Those on low incomes turn to the alternative credit market to fulfil their credit needs. Borrowers therefore use doorstep lenders, pawnbrokers, mail order catalogues, and sometimes illegal money lenders to help them make ends meet or to allow them to make larger household purchases.
A typical loan of £400 from a doorstep lender, repaid over 53 weeks, may generate a total repayment of £636 – this equates to an APR of around164 per cent.
Q. How will customers benefit from borrowing from CUs and CDFIs who are supported by the Growth Fund?
A. The Growth Fund will provide the opportunity for people to help themselves, and will allow them access to loans at low cost rates, and improve their credit rating.
Low cost credit produced locally keeps money in the community; it is then spent and recycled in local businesses. And the low repayment rates charged increases the real level of local spending by reducing the amount of borrowing from the alternative credit market, such as doorstep lenders and loan sharks.
One estimate (Life Saving Community Development Credit Unions) suggests that if credit unions were able to capture 54,000 additional members over 5 years (current membership is around 410,000), then £227 million of credit would be diverted away from alternative credit lenders. This would earn the poorest households an additional £75 million, which could then be used in the local economy.
Q. Will financial advice will be provided at the time a loan is applied for?
A. A number of credit unions (CUs) provide assistance to people who need money advice or who are struggling with existing debt repayments. Some appropriately qualified and licensed credit unions provide assistance themselves while others have entered into partnerships with local agencies to ensure members get the specialist help they need.
CUs may also be able to offer members products designed to help people gain better control over their finances. Members may be advised on their account options, such as a Budgeting Account which has a bill paying service (useful for members who choose to pay in a fixed regular amount which is then used to pay agreed household bills on the members behalf), an account that is suitable to receive DWP benefits and pensions by Direct Payment, and a Savings account.