Features | 14/10/21

For years there has been a policy debate about how best to support individuals that cannot afford to borrow from commercial businesses. There will always be a group of people that are considered too risky for commercial businesses to lend to, and the welfare system is designed to support this group. But there remains a discussion about how best to help them access credit to deal with essential or emergency costs.

This came into greater focus when many government support schemes were cut following the financial crash in 2008. Since then, subsequent governments have tried to work out how best to support these groups, often taking inspiration from other countries.

Most have tried to expand the credit union network and increase membership, but despite millions in government funding, little has been achieved. Members are often required to save before they can borrow. The system also moves slowly compared to the decision making of the commercial sector, not helpful if a car repair is needed quickly to get to work for instance.

The current government has decided to focus its attention on a No interest Loan scheme (NILS). A NILS has long been supported by the Treasury, first announced in 2018 by Philip Hammond, the then Chancellor. The aim of the NILS would be to provide a financial cushion for people unable to access or afford existing forms of credit, but who can afford to repay small sums, by offering a way to spread essential or emergency costs.

Following mentions of the scheme as various meetings with the Economic Secretary, John Glen MP, in September Fair4All Finance (founded in 2019 to support the financial wellbeing of people in vulnerable circumstances) announced that they had been appointed to deliver a pilot of the scheme.

The pilot is designed to test whether this scheme can be scaled to make resources go further to improve financial wellbeing for customers in vulnerable circumstances. It will receive funding from HM Treasury and up to £1m of lending capital from each devolved administration, matched in England by Fair4All Finance.

The scheme will kick off with proof-of-concept loans this Autumn, followed by a wider two-year pilot in up to six areas of higher deprivation starting in Autumn 2022. They will work with credit unions, Community Development Finance Institutions (CDFIs) and other regulated lenders, who will be able to apply to administer the loans through a formal procurement process starting in November.

The NILS pilot aims to test the benefits to customers, society and the economy and show whether a permanent nationwide NILS can be delivered in a sustainable way.

Though the scheme has noble aims, we need to be aware of the limitations and the associated costs. You can lend with no interest, but all lending comes with a price and with a risk.

The launch of scheme is something that commercial lenders will be following. The proposed use of existing lenders is noteworthy and will undoubtedly help tackle the administration costs.

However, you must consider the funding of the loan, the acquisition and administration of applications, making payment and serving the customer, and following up if things go wrong. That is before you consider that often, through no fault of the borrower, there will be those who cannot repay their loan.

The NILS has been positioned by some as an alternative to high-cost credit but firms would be unlikely to lend to this group of consumers. The scheme would not have the scale to deal with this demand. Alternative lending exists because it meets the needs of customers that struggle to access mainstream financial services. Consumers need to be able to access a range of competitive financial products to deal with their circumstances.

We will all be funding the NILS through Government financial contributions to support expensive lending that comes with significant default risk. As a society, we may decide that these are costs we want to cover to meet a social need, especially at a time when many more will need to support to deal with the impact of the pandemic.

It will be interesting to see if the NILS can become a part of the lending landscape. But it will take time to see results. In the meantime, we will continue to advocate for the alternative lending sector.

We need to ensure that current regulatory pressures do not force vulnerable consumers out of the market into the hands of less desirable alternatives, while support schemes continue to be tested.