Loan sharks profiting from financial exclusion

UK banks could help stop loan shark growth by learning from US ‘small dollar loans’ products according to a new research by Fair4All Finance.

The report says there is an urgent need for the mainstream financial sector to help address the credit vacuum for those on lower incomes, with loan sharks profiting from this financial exclusion.

The new report explains that while the UK consumer credit market has grown by more than 50% in the past year, the three forms of credit most commonly available to lower income customers pre pandemic now account for just 0.3% of lending, down from 4% in 2013.1

With provision shrinking, Fair4All Finance says that demand is often being met by unregulated and sometimes illegal lenders, with newly-released data in its report showing that 7% of adults (3.3 million people) have used, or believe someone in their household has used, illegal moneylenders, whilst 15% are aware of an unlicensed lender operating locally

A further 16% of those declined for regulated credit had either used a loan shark or knew that someone in their household had, compared to 5% of those who had successfully applied for mainstream credit. Those in lower income brackets who had been refused credit were more likely to borrow from friends or family, or to sell or pawn their possessions, than they were to apply to another legal lender

The report contains a number of recommendations for stopping the growth of illegal lending, including:

• More innovation from mainstream finance in developing products to address the credit vacuum, including potentially replicating the US small dollar loan model, which delivers sub-$1,000 loans to lower income households. While six of the largest eight banks in the US offer such loans, as do many smaller banks, only one major UK bank currently offers a similar product on its website
• The scaling up of affordable credit providers, potentially through investment from those mainstream providers who have contributed to the creation of the credit vacuum
• Further research on digital illegal lending as this growing activity presents a growing risk of causing widespread harm, and a widening of the remit of the UK’s national illegal money lending teams2 to cover this activity.

Niall Alexander, Credit and Consumer Markets Lead from Fair4All Finance said  “Increasingly, lower income households have few or reducing options when it comes to accessing legal forms of credit, even the most expensive forms. In this report we ask what happens to those people when they need credit and can’t get it. Does their need for credit go away with a refusal? In some cases they may go without food, sell possessions or make other difficult choices. It is clear that others are enticed, whether by choice or through deceit, into borrowing from unregulated lenders.”

“This ought to be a major concern to policymakers, regulators and indeed the financial services sector. We hope that this report encourages those groups to consider practical steps to reshape the credit market and stem the growth of illegal lending.”