A pioneering initiative in East London could spell the beginning of the end for loan sharks who charge extortionate interest rates and blight the lives of more than 300,000 households in Britain.
Fair Finance has become the first microfinance group in Europe to secure a commercial loan to expand. It has raised £1 million from Société Générale and BNP Paribas to increase its loan book and expand its operations in a deal that will involve the organisation repaying the two banks with interest.
Fair Finance, which was set up on a housing estate in Stepney in 2005, was inspired by the Bangladeshi micro- credit pioneer, Muhammad Yunus. It provides loans to people who have been rejected by banks and who, in many cases, have instead borrowed from doorstep lenders.
The company helps customers to refinance their loans from doorstep lenders on to a much lower rate. It offers advice to those who are eligible to open bank accounts and helps people caught up with loan sharks report them to the police. The lender also extends credit to businesses in need of small loans who have been refused by banks.
Its customers typically borrow about £500 for 10-11 months for purchases such as ovens or school uniforms. The annual percentage rate, or APR, is 44 per cent, or about £100 in interest on a £500 loan. That compares to an APR of more than 400 per cent that doorstep lenders often charge, or even more — in the region of 2,500 per cent — from “payday lenders”, which offer very short-term credit.
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Fair Finance secured the loan from SocGen and BNP after reaching the point last year when 80 per cent of its costs were covered by interest generated on loans. The remainder of costs were met by angel investors, who have injected money for about a decade. The group will receive its money back plus a capped rate of interest. Faisel Rahman, the founder and boss of Fair Finance, said: “This is the first time a notfor-profit microfinance organisation has managed to get through banks’ credit committees.”
Fair Finance plans to use the £1 million to expand its lending book, so that it can generate more interest income, and repay some of the angel investors.
There are about 1,200 loans on its books at any one time and only 7 per cent of customers do not repay every year. Mr Rahman said that customers who run into difficulty because of an event such as losing their job or a death in the family have their loans restructured so that they can pay off their obligation over a longer period. For those who “won’t pay”, Fair Finance is “tough”, he added, to the extent that it will seek county court judgments.
Fair Finance employs 12 people. Six give advice on debt and five make decisions on who to lend to following training. The company would like to expand to 15 people with the extra funding.
Doorstep lenders do have some fans as they provide loans to people banks will not lend to. Loan sharks, in contrast, are illegal.