[ Archbishop of Canterbury, Justin Welby has criticized payday loan companies]
By Masuma Rahim
I was impressed recently to hear Archbishop of Canterbury, Justin Welby, attacking payday lenders such as Wonga on Radio 4’s Today Programme. These companies provide short-term funds, ostensibly to help you manage ‘cash-flow problems’ towards the end of the month. If you are able to repay the loan in the agreed timeframe the interest charged can be significantly less than most high-street banks charge for an unauthorised overdraft.
It’s not surprising that moneylenders are often seen as a good temporary solution, nor, with the increase in the costs of living and recent changes to welfare, is it surprising that almost £2.5m loans are provided by Wonga alone each year.
What payday lenders don’t advertise quite so openly are their exorbitant interest rates: Wonga’s APR is a scandalous 5800%.
It is overwhelmingly the case that those who find themselves in precarious financial circumstances approach moneylenders and, of course, it is those in the greatest need, or those who are most desperate, who will accept terms such as these.
The poor have long been exploited by moneylenders and in 2005 Vanquis launched a credit card specifically aimed at the poor with an APR of up to 69.9%, ‘depending on your circumstances’. It’s not difficult to guess what those circumstances might be.
Welby’s solution to the exploitation of the vulnerable and financially unstable is credit unions. Owned and run by members, these institutions provide loans with interest rates capped at 2% per month and also encourage regular saving. Long used by those who are less well-off, they are designed to serve people rather than profit.
The Archbishop has said that he would be in favour of the Church of England setting up its own credit unions as an alternative to high-street and doorstep lenders. Although interest rates would likely be in the range of 70-80%, it would certainly be less harmful to those members of society who sometimes need to borrow in the short-term but for whom traditional lending from banks is not an option.
As I heard this, I wondered whether Muslim organisations could also form credit unions to try to loosen the grip of payday lenders on the poor. I don’t mean Islamic finance, which is already relatively easily obtainable in the UK, but a service genuinely designed to help vulnerable people manage their finances without exploiting them. Such institutions already exist in several countries, including Afghanistan, Canada, Hong Kong and Trinidad but none exist in the UK.
One-fifth of all individuals in the UK live below the poverty line, rising to half of those in social housing. Britain was recently labelled “the most unequal country in the Western world.”
The situation is grim and there seem to be few signs of it improving. We know that poverty is the root of many social ills and we know that payday loans simply exploit those in poverty to perpetuate their reliance on such services. The Church has spoken out and hopes to take action. It’s time we did the same.