The debts start to mount now exponentially. Providential Financial, one of the main door-to-door small loans companies, charges an annual interest rate of some 164 per cent. (If debtors had bank accounts, a bank loan would cost around 15 per cent.) Loan company interest charges often far exceed the original sum by the time (if ever) they are paid off. Nigel Griffiths, the consumer affairs minister, has said that he will do something about the loan companies' habit of raising interest rates when debtors fall into arrears. That would help, but there is something the Government should do urgently that would transform the finances of the poor and the prosperity of whole poor communities: Labour should sow the seed-corn to set up a nationwide network of credit unions.
Credit unions are small co-operatives, starting with as few as 20 people, mainly run by volunteers, with virtually no overheads, which take in very small savings and lend out money on low interest rates, never exceeding 12.6 per cent a year. Anyone who can manage to save a minimum of pounds 5 a month for at least 13 weeks is then entitled to draw out a loan, if the committee running the credit union deems them credit-worthy enough. Many people have no collateral, and it works on trust and community. Astonishingly, credit unions have only 1 per cent bad debts, although they may lend to people with nothing. Those falling behind are summoned before the committee to plead their case, and have their problem sorted out.
What bank offers the community service of the credit union in Lewisham? A grandmother came knocking on the door of one of the committee members at 10pm on Christmas Eve desperately needing to withdraw pounds 50 of her credit union savings, and he advanced her the money there and then. Imagine he was James Stewart, and anyone who this Christmas wept over the re-released It's a Wonderful Life will understand what this is all about: little people banding together to fight off the depredations of the ruthless big financial institutions.
Take another typical Lewisham example. One man saved for four years and came to the union to take out his savings to pay a pounds 400 car repair bill. The credit union suggested that, instead, he should take out a loan and pay it back over a year, so he would still have his pounds 400 plus interest at the end. The loan for a year cost him just pounds 26.75.
Imagine if every single small community had its own credit union, a network of people's banks. The money comes in and often goes out to local community enterprises, helping to create employment as the bank grows. It is a highly effective way of creating a sense of community, since it is run by local amateurs with a bit of training, and reaches out to draw local people together. It was, of course, from these small mutual beginnings that the building societies began, now alas mainly converted into ordinary commercial banks, with surprisingly little complaint at this destruction of the mutual idea.
There are around 200,000 members of Britain's existing 645 credit unions - not many considering the need. Some are large employee credit unions, run for those working in local authorities, trade unions, British Airways, British Aerospace; there is even one for employees of Lloyds Bank. Many are run within schools for the local community, open to pupils and parents. Some are run by pupils learning vital skills, such as a group of primary pupils at the John Randall School in Telford who collect up to pounds 100 a week from other children. Even the smallest 20-person credit union is rigorously supervised by a government agency, scrutinising their accounts every month.
The launch of the Government's over-hyped ISA savings scheme was more razzmatazz than substance. No one has the slightest idea whence they plucked the figure of six million expected new poor savers. There is nothing very special about ISAs, except for the fact that savings can be paid in at supermarket check-outs. The real and sensible purpose was to dismantle Peps and Tessas that did less to help the poor and a great deal for the rich. The populist bit was just an excuse. After all, who are all these people who don't save now, but would? There's been no shortage of people keen to take in savings. The poor non-savers are those who need credit unions, so that they can borrow in a crisis without falling into the hands of loan sharks.
If the Government really cares about the poor, then credit unions are what they should go for. Britain is far behind other countries in their development. American law has encouraged their growth by forcing banks to set one up in their wake every time they close a branch. In Britain, banks are closing branches everywhere, and many outlying housing estates have never had access to one. A similar law here would have made a crucial difference over the past decade. Ireland has a mass of credit unions, holding pounds 2bn assets; Britain's hold only pounds 100m.
The start-up costs for even the smallest credit union are around pounds 4,000, covering the training of volunteers by ABCU, the association of credit unions. Leaflets have to be printed to draw in a community, local advertising bought and contracts printed for every loan and transaction. So far funds to set them up have come from urban regeneration money or from European social funds and sometimes from local authorities who are allowed to start them. It is a one-off set-up charge, with no danger the credit union will ever come back cap-in-hand for more, and extraordinarily good social value for money. Now is the time of year for the Government to organise start- up money to local authorities and Citizens Advice Bureaux.
Anyone interested in starting a credit union should call ABCU on 0161 832 3694