Grassroots private finance schemes show how 'small is bankable'

The report contrasts the availability of public funding for large-scale regeneration schemes and the difficulties that local people, small businesses and community groups face in accessing private capital. Concern that disadvantaged neighbourhoods represent a poor risk and the closure of local branches by the high street banks are identified as major contributing factors.

The researchers at the New Economics Foundation describe a variety of alternative community finance initiatives, supported by flexible funding partnerships, that have begun to meet the demand for capital at affordable interest rates. The five models identified are already serving around half a million people and have assets of more than £400 million. They are:

• Credit unions - not-for-profit, co-operative institutions where members with a common bond save money in the form of shares which can then be lent on to fellow members. There are more than 700 credit unions in the UK with over 400,000 members.
• Community loan funds - often charitable institutions providing start-up capital for community regeneration initiatives. The 11 existing funds have assets of more than £74 million and have enabled borrowers to lever-in £10,000 worth of commercial capital for every £1,000 originally lent.
• Micro-finance funds - providers of small loans for locally-based entrepreneurs such as sole traders and family businesses. The Prince's Youth Business Trust, helping unemployed young people, is the largest example of these initiatives which charge borrowers close to the market rate of interest, without relying on traditional collateral or equity arrangements.
• Mutual guarantee societies - formal associations of small and medium-sized enterprises who pool their savings in banks to offer collective guarantees, enabling them to borrow more and qualify for better lending and deposit rates of interest.
• Social banks - for-profit financial service providers, usually dedicated to social or environmental objectives.

The study, being launched this morning (Monday) at a meeting attended by Patricia Hewitt MP, Economic Secretary to the Treasury, describes how community finance initiatives have benefited from technical assistance from the private sector. A number of commercial banks have provided active support.

But it urges banks and other financial institutions to recognise the emerging business case for involvement in such schemes. For example, written-off bad debts represent an average of just 2.9 per cent of total assets held by credit unions. One in three community loans funds are running bad debts of less than 3 per cent and social banks of less than 1 per cent.

Banks will also find that working in partnership with successful community finance initiatives enables them to expand their core business. They can learn more about the various sectors involved in community regeneration and gain access to new markets and customers.

The researchers conclude that there is considerable scope for developing community finance further. However, they call on the Government to play its part in promoting new initiatives. Proposed measures include the introduction of tax credits as an incentive for banks and other institutions who finance schemes.

Britain could also follow the example of the United States where banks and other mainstream financial service providers are required to disclose their record in serving poorer communities. Those whose record is unsatisfactory risk regulatory sanctions.

Ed Mayo, co-author of the report, said: "Finance is not the full solution to social exclusion, but community finance initiatives in Britain, continental Europe and the United States address a wide range of economic needs and opportunities. Micro-finance provides pump-priming for small businesses, community loan funds increase inward investment and mutual guarantee societies sustain small enterprises. By investing in community and social enterprises, they support essential services for disadvantaged neighbourhoods."

He added: "Their track record both here and abroad is one of serving individuals and groups that are not conventionally 'bankable' and improving their access to capital without insisting on premium interest rates. They have also demonstrated that the clients whom they serve are able to use financial services effectively to reduce their vulnerability and to increase their incomes."