• March 2, 2015

March 2, 2015?Sarah Livingstone, head of Nathan London?s\r\nfinancial sector development practice, typically works on projects to help the\r\npoor in places like Bangladesh and Uganda gain access to credit. She and other\r\nmicrofinance professionals recently looked homeward.

?Whilst not on the\r\nscale of the least developed countries, financial exclusion still exists in the\r\nU.K.,? Ms. Livingstone told fellow members of the MicroFinance Club UK, where she\r\nis director. She commented when introducing a discussion February 26 in London on\r\nhow to make financing affordable for the poor while providing an adequate\r\nreturn for lenders.

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The club heard from speakers representing charity-based\r\nlenders and a credit union. The speakers explained how they provide online\r\nservices, hold down interest charges, and receive backing from socially\r\nconscious investors.

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Millions Lack\r\nShort-Term Credit

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As many as 1.4 million people in the U.K. do not have a\r\ntransactional bank account, Ms. Livingstone said, citing government statistics.\r\nAlso, about 7 million with the lowest incomes are not served by mainstream\r\nbanks and must resort to other lenders who often charge very high interest\r\nrates.

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These include payday lenders, who advance small amounts of\r\nmoney to be repaid when the borrower next receives wages. Payday and other\r\nshort-term borrowers who fall behind can quickly pile up exorbitant interest\r\ncharges and penalties, and collection practices can be abusive.

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Curbing Excesses vs\r\n?Operational Sustainability?

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The Financial Conduct Authority, a nongovernmental watchdog\r\nin the U.K., has imposed new strictures on payday lenders. A fee cap and other\r\nmeasures that took effect in January ?are intended to ensure that borrowers\r\nnever have to pay back more in fees and interest than the amount borrowed,? Ms.\r\nLivingstone said. The authority said when announcing the rules in November it\r\nexpected some lenders would go out of business. And in late February, the U.K.-based\r\npayday lender Wonga Group Ltd. said it would cut one-third of its workforce.

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?Whilst the cap will curb the excesses in the market, the\r\nrecent redundancies at a leading payday lender demonstrate that it is a\r\nchallenge to provide high-risk credit at a reasonable rate whilst maintaining\r\noperational sustainability,? Ms. Livingstone said. In the United States, the recently\r\nformed Consumer Financial Protection Bureau (CFPB) is scrutinizing practices\r\nand is likely to issue regulations. States are also reviewing the industry.

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Meeting the\r\nMicrofinance Need

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Panelist Philip\r\nKrinks, a former banker now an ordained minister in the Church of England,\r\nfounded the charity St Martin?s Affordable Finance Development after the\r\nArchbishop of Canterbury called for credit unions and other ethical lenders to\r\nincrease their activities and put payday lenders out of business. He teamed\r\nwith Martin Hockley of Street UK, an established Community Development\r\nFinancial Institution (CDFI), which wanted to scale up its lending, which it has\r\ntraditionally conducted through face-to-face transactions.

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Krinks and Hockley turned to online lending, which lowered\r\nprocessing costs and enabled an increased volume of loans, reducing overall\r\nexpenses.

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Lucky Chandrasekera, chief executive of the London Mutual\r\nCredit Union, has recently developed a payday loan known as CUOK. The interest\r\nrate is comparable to microcredit rates?which are high but not as much as\r\npayday lenders had been charging.

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Common Need to Hold Down Costs

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?Our product allows customers to pay back over a period of\r\nup to three months,? he said. ?In the past, payday lenders have demanded\r\nrepayment within a month, which many low-income customers could not\r\nafford. This led to the loans being\r\nrolled over, vastly increasing the charges.?

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London Mutual also can ?mobilize? its members? savings and uses\r\nelectronic processing.

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Ms. Livingstone observed that the need to keep costs down is\r\ncommon to both the developed and developing worlds. Whereas in the U.K. and U.S. this is being achieved\r\nthrough online banking, in the developing world microfinance providers are linking\r\nwith telecommunications companies to develop mobile banking services. What is important\r\nis that low-income customers are able to access affordable finance in the most\r\nconvenient way.

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