In a converted paint factory in north-east London, Andrew Squires is about to lend £600 to an elderly Greek man who wants to buy a television for his daughter and a washing machine for his wife.
Mr Squires does not work for one of the payday lending companies clustered along the main road, nor is he one of the loan-sharks that lurk on the nearby housing estates. He works for a company that has raised £750,000 from wealthy individuals and borrowed £2.5m from three banks to try to prove there is another way to lend viably to the poor.
In the five years since the financial crisis, mainstream banks have recoiled from lending to riskier customers, creating a financial services vacuum into which a new breed of lender has swarmed.
The volume of payday loans – which are typically short-term, high-interest and quickly-approved – has more than tripled in four years. The practices of this growing sector have alarmed enough legislators to persuade the government this month to radically strengthen its oversight of the lenders and allow the regulator to cap interest rates and fees.
Fair Finance, the company Mr Squires works for, is also trying to fill the gap left by the banks, but in a “smarter, nicer, cheaper” way, according to its energetic founder, Faisel Rahman.
The 36 year-old started the company in 2005 after he returned to London from Bangladesh, where he had been working on microfinance projects at Grameen Bank, a pioneering Bangladeshi lender, and the World Bank. He wanted to try something similar with financially excluded people in the UK.
About two-thirds of Fair Finance’s customers are women, roughly 60 per cent live entirely on social security benefits and almost three-quarters are housing association or council tenants. The company charges them interest that is high enough to make some “affordable credit” activists wince, but low enough to be much cheaper than the alternatives for “subprime” borrowers.
In the converted factory in Dalston, Mr Squires’ white-haired customer agrees to pay £162 to borrow £600 for 52 weeks, an annual percentage rate of 55.5 per cent, much less than the typical £25-£30 a payday lender charges to borrow £100 for a month. He can also pay the loan off early without any charges, and miss a payment or two if he calls first.
Does this business model pay for itself? Not yet, but Mr Rahman’s investors, many of them rich people who want to do something socially useful with their cash, clearly think it can in time.
He has promised them a capped 5 per cent annual return and repayment as the company becomes profitable, though he does not expect to break even until 2013-14.
Instead of the credit scores used by mainstream banks, or the sophisticated algorithms used by online lenders such as Wonga, Fair Finance relies on the judgment of its loan officers, who meet all their borrowers face-to-face.
“The whole movement around credit scoring was, ‘how do you take the human out of the decision?’ Humans are fallible, they might be biased,” says Mr Rahman. “I suppose [credit scoring] works with the vast majority, but [for people] on the margins – and now those margins are getting bigger – you need to understand the complexity.”
The loans from Fair Finance that have been in arrears for more than six months represent about 7 per cent of the total amount it has lent out.
Back at his desk, Mr Squires thumbs through the file of a man who is paying £344 a month in fees to three payday loan companies just to “roll over” his £1,900 of debt with them.
He hardly sounds creditworthy. But Mr Squires, who has met him and studied his bank statements, decides to lend him £2,000, which will pay off the payday lenders and leave him with monthly repayments of less than half the amount he has been paying in fees.
“There are three types of payers: good payers, won’t payers and can’t payers,” Mr Squires says. “He’s a good payer, someone just needs to give him a chance.”
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