Throughout the United Kingdom, people living in low-income, marginalized communities have limited access to financial products and services that serve their needs. These individuals, who may be most in need of flexible and reliable finance, are often excluded from all but the most usurious of financial service providers. Faisel Rahman is seeking to transform the provision of financial services to the most disadvantaged by demonstrating that this market can be profitable if first, the proper information is provided to mainstream financial institutions, and second, financial products and services are tailored for low-income individuals.
The New Idea
Faisel is challenging retail financial systems in the U.K. that discriminate against and exclude the most marginalized people and that allow predatory lenders to exploit these vulnerable populations. To reform such practices, he is increasing transparency and accountability by providing critical information to key decision makers—banks, regulatory agencies, and borrowers—to better reflect the credit-worthiness of disadvantaged people. Faisel also is seeking to reduce the scope of predatory lending by encouraging and influencing the government’s regulatory activities and by educating borrowers, both by providing counseling about money and debt management, and by providing financial products that compete with the “doorstep lenders.” Most importantly, Faisel is delivering new client-centered financial products and services to the most marginalized people in a way that demonstrates to banks that this population is creditworthy and that his approach is financially viable for mainstream institutions.
Low-income and disadvantaged minority communities face two key challenges in the current retail financial systems. For some, the problem is limited or no access to credit and other financial products and services. Retail financial services in the U.K. are for the most part targeted at the mainstream, average-income earning person. They do not consider the provision of services designed for the needs of poor people as a profitable activity. More than two million people (7 percent of the population) use no mainstream financial services at all.
Mainstream banks are reluctant to lend to individuals who have limited or no credit history, no history of a job in the formal economy, or who do not own a home. Recent immigrants, especially women, make up a large number of this group, especially those who work in the informal economy and live in social housing.
For others, the problem is not so much access to credit but rather becoming too indebted and developing a poor credit record. The U.K. is currently experiencing record levels of consumer debt. Too many low-income individuals are borrowing beyond their means and becoming massively indebted. Beyond the economic burden, this kind of crippling personal debt can lead to depression, substance abuse, and other health problems.
In both instances, expensive specialized financial offerings do exist, but are provided by so-called “door-step” and other predatory lenders who provide sub-prime loans, pay-day lending, pawn broking and other services like bill paying and check cashing. And while they may receive something that “suits their needs,” the poor pay huge fees and rates of up to 1,069 percent APR.
Roughly five million people regularly use these services, according to estimates by the Competition Commission and Financial Services Authority. Yet despite the huge numbers in this market, it goes largely unregulated and is thus subject to abuse. For those who most need affordable access to credit, this reliance on institutions working in the sub-prime market and charging high fees has kept many locked in a cycle of poverty, exclusion, and debt.
To transform the provision of financial services to those in the most disadvantaged communities, Faisel created Fair Finance, which works at two levels to increase and improve access to credit. At one level, it provides tailored products and services to the poor in a way that demonstrates such populations are a profitable market for mainstream banking institutions. At another level, Fair Finance focuses on changing the behavior of financial institutions and regulatory agencies to eliminate exclusion of and discrimination against marginalized populations.
Faisel is adapting processes and services from mainstream financial institutions to low-income communities. This includes personalized wealth management advice typically reserved for high-net work individuals. Faisel recognizes that the financing needs for low-income individuals are often more complicated, given that they may need very small amounts of credit, or may not have a job in the formal economy, and perhaps do not speak English, do not have a credit history, and face other kinds of barriers. He thus offers a level of personalized service previously only available to the rich that empowers people from marginalized communities to become part of the asset-based welfare economy.
Fair Finance’s approach starts by placing the borrower at the centre of product and service design. Products and services include: Money and debt advice; small sized personal consumer loans (of 500 to 1,000 pounds at affordable interest rates, currently 24 percent); business loans for new start and grey economy enterprises; home improvement loans at affordable rates; and appropriately configured insurance. Depending on their needs, clients can engage at any point with Fair Finance for any need and move forward to take advantage of the “joined-up” nature of service provision. For instance, an individual who has engaged with money and debt advice will find that he or she can easily access consumer-borrowing services from Fair Finance. Another example would be someone who has recently taken out a home improvement loan accessing insurance to then insure his or her home against theft or damage.
Faisel is also focused on educating his target market of low-income individuals about their options so they can make better choices in accessing credit. For instance, a key product provided by Fair Finance is a money and debt advice program that helps heavily indebted people to get out of debt and move from financial exclusion to inclusion. The majority of money and debt advice in the U.K. is funded by the government through schemes that are output driven or focused on legal problems, resulting in a ‘tick a box’ advice rather than meaningful personal finance assistance. Faisel has created debt advice program focused on helping individuals get out of crippling debt situations that also provides personal consultations on money management to keep them debt free in the future. To fund the consultations, Faisel enlisted the support of Housing Associations, which often have the most to gain from people managing their money better.
Another aspect of Faisel’s education effort is his “Debt on our Doorstep” campaign, which draws media attention to the problem of loan sharks and predatory lenders in an effort to pressure government regulators into taking action. The campaign is also designed to educate low-income individuals about their options. Faisel recognizes that in the current system, many have no alternative to seeking the services of doorstep lenders, as these are often the only lenders who speak their language and do not require legal identification or other documents. Faisel is using the “Debt on our Doorstep” campaign to educate the target population about the problem of predatory lenders, and to raise the visibility Fair Finance and its offerings. At present, 70 percent of Fair Finance’s new loans are rescheduled loans from sub-prime lenders.
Faisel also works at another level to eliminate exclusion and discrimination by mainstream lenders. He is developing tools that can be used to convince financial institutions to change their perception of risk and to advocate for regulatory changes. For instance, Faisel has designed a new credit assessment methodology that will demonstrate to financial institutions that an individual’s creditworthiness should be evaluated in a more nuanced way. Working with a group of university mathematicians, he is building a dataset of 10,000 individuals who have applied for personal loans from various U.K. microfinance institutions (MFIs) serving poor communities. While the current credit rating system only takes into account three factors (job, home ownership, and previous credit), the new system will assess 82 different factors (including age, family structure, payment of mobile phone bills, etc.) to create a more accurate risk assessment measure. In addition to encouraging banks to think more comprehensively about risk assessment, the new data will inform government regulators about the level and extent of discrimination in lending. Faisel intends to sell this model to utility and other companies so that they can use the information to inform their decisions about to whom they provide credit.
Faisel also created the first-ever in the U.K. disclosure report that provides information about the kind and location of loans made by Fair Finance. To increase transparency about decisions banks are making about where they are—or not—choosing to provide loans, Faisel is using this disclosure report as a tool to pressure mainstream banks to similarly disclose lending information. Thus far, he has persuaded the Royal Bank of Scotland and Barclays to begin to provide certain disclosure information, though it is only a beginning. Again, such reports can not only facilitate changes in lending practices, but also enlighten government regulatory agencies about where discrimination is happening.
To increase access to needed capital, Faisel created “Fair Finance Ventures,” which is a fund that will allow private sector interests to invest in Fair Finance. He sees this as a possible tool to engage mainstream financial institutions in the low-income communities in a limited way, without exposing them to risk or having them be responsible for this large a number of small loans. The goal is to use this as a tool to educate them about these communities and provide another mechanism for bringing reluctant lenders on board.
Fair Finance currently employs ten people and is working out of two offices in two neighboring local authorities in East London. In its two and a half years of trading, Fair Finance has resolved more than £1.2M worth of over-indebtedness, supported more than 2,800 people in resolving debt issues, and saved 300 people from eviction. Depending on growth opportunities Faisel plans to open at least three more offices in the next two years and is projected to support at least 1,800 people during the year 2007 to 2008.
Faisel’s family had a long history of social and civic leadership in Bangladesh, from early social land reformers pioneering redistribution in the 1800s, through the freedom and independence movement in the 1960s and 1970s, to high court jurisprudence after the independence of Bangladesh.
Faisel’s family left Bangladesh for London in the 1970s. In the 1980s, in the space of five years, both of Faisel’s parents lost their jobs and savings in a banking crisis, while record interest rates caused them to lose their home. Faisel experienced, first hand, how an inflexible financial system failed to help his family when they needed it most, and helped turn a problem into a crisis.
This crisis ultimately strengthened his family and community ties that proved critical in the still racially volatile east London where they lived. During this time, his family home was firebombed by racist arsonists and gangs would roam the streets after dark. This was coupled with tough schooling at an inner city school where gang culture was rife.
Faisel’s interest in human interactions and their environments—social, economic, and geographic—led him to pursue studies at Cambridge University where he developed concepts of societal ecology and the importance of economics for communities. He gained recognition for research work on the Dialectics Of Power In A Bengali Village where he studied microfinance’s effects on women’s empowerment at the Grameen Bank. Following his studies he worked at the World Bank, where he focused on developing a program on micro-enterprise to help create growth-orientated businesses that generated local employment and opportunities in local villages in Bangladesh.
To get a better understanding of the risk paradigm of financial flows, Faisel took a job in the City of London as a Lloyds of London Underwriter. He then sought to put both his skills and ideas into practice by leaving his Lloyds of London job to begin the first micro-credit project in London.
With no committed funders Faisel began with his personal overdraft facility, some friendly community groups, and a few women on an East London council estate. His microcredit model grew to be one of the most successful microcredit programs in the country and has received recognition from local communities, citizen organizations, private banks, government, and the Bank of England. After a series of innovations in debt advice and success in building a business model, Faisel moved from this group of women in East London to creating Fair Finance as an integrated provider of financial services for the poor.