Helping people escape debt
My story for The Sunday Times (of London)
“Look at this,” says Faisel Rahman, clutching a photocopied loan application with the applicant's name carefully blanked out. “They're charging 555.4% APR.”
But he's moved on. “Or look at this one,” he says, showing another. “They're lending £1,500. At the end of the year, the borrower has to pay back £2,775.”
Crikey. A year after Lehman Brothers collapsed, everybody knows how hard it is to get credit, but as Rahman can show you, there are still plenty of lenders willing to advance money – so long as the rate of interest is extortionate.
They're not high street banks, but neither are they loan sharks. They don't throw bricks through windows or turn up at night with hungry rottweilers or, as some loan sharks do, with unruly young children. But in one important way these legal lenders are worse: they can enforce their loans in court.
They are legal lenders whose brightly coloured high street premises have mushroomed all over the country. One of them regularly advertises at Premier League matches. Their targets are the 2m or so British adults who do not have a bank account and the many more who can't get their bank to lend.
“When you think about the high rates of interest they're charging,” Rahman says, “you can see that there isn't enough competition in the market. We want to come in and offer customers much lower rates and take away their business.”
To hear him speak, you might think Rahman, 33, was a gimlet-eyed moneylender himself. He's not. He's a visionary financier – named as a “young global leader” at the World Economic Forum earlier this year – who has shown with his scheme in east London that it is possible to run a social enterprise that, though small, pays its own way. After a tough childhood – his family was evicted three times – he decided to go to Bangladesh, his parents' homeland, to work for the Grameen Bank.
Founded by Muhammad Yunus, the Grameen pioneered micro-credit, or small loans to the economically excluded. Rahman was subsequently hired by the World Bank to develop micro-credit for it – and then he decided to bring the idea back to Britain.
There is one crucial difference between his UK plan and the Bangladeshi model, which relies on groups of borrowers holding each other to account, so few debts turn bad. That kind of “peer lending” could never be effective in Britain's inner cities, where communities are not so close-knit. The solution was for individual lenders and borrowers to get to know each other properly and build a relationship of mutual trust – just like old-fashioned banking. Five years since Fair Finance launched, it seems he may have got it right.
“We have saved 2,000 households from being evicted, and helped more than 1,500 individuals previously entangled with loan sharks, saving them a combined total of £750,000 in interest payments.” He adds with pride: “We have also created 150 businesses, helping people who had been told they could never be entrepreneurs.”
Entrepreneurs such as Tom Foxcroft, a young man who came to see Rahman for a loan two years ago. “He wanted to buy some old Jubilee line trains that were otherwise going to landfill,” Rahman recalls. “They were selling for £1 each, and he wanted to put them on top of a railway arch and turn them into design studios.”
Foxcroft had been unable to get a foot on the ladder because of the price of studio and workspace, but Rahman saw the potential and lent Foxcroft £7,500.
“He's making a mint,” Rahman says.
What the banks hadn't seen, because they have stopped offering a personal service to all but the super-rich, was how good Foxcroft was at persuading people.
Rahman has not done it all on his own, of course, which is where Mark Hannam, a hard-headed former City banker, comes in. “He was very impressive,” Hannam recalls of their meeting four years ago. “He had a very clear vision and had spotted a gap in the market.”
Hannam joined the Fair Finance board as unpaid non-executive, and has since become chairman. He describes it as “a private bank for the poor”, providing “bespoke services, based upon face-to-face meetings between the bank and the customers”.
Based on those meetings, Fair Finance regularly lends to people who want to come off welfare to be an entrepreneur, but ordinarily couldn't hope to do that because any start-up loan for less than £20,000 is considered to be consumer credit. And consumer credit is expensive for people who don't conform to the banking industry's “safe borrower” profile.
Fair Finance charges a high rate of interest by some standards – 35% APR – but that's minuscule compared with the rates charged by even the legal doorstep lenders and so-called payroll lenders (who offer loans designed to tide borrowers over till payday that, if you don't pay them off at once, become ruinously expensive).
In fact, Fair Finance is not only concerned with lending money. A huge part of its work is advisory, because many customers have over-borrowed and need help to repay their debts.
One customer, who prefers to be anonymous, came to Fair Finance after getting in debt to pawn shops and other lenders. “I call them legal loan sharks. It was not that they ever pounded on my door. They're helpful and polite – until you don't pay them. Then it's very stressful. You borrow £200 and you pay back about £400 or £500. Even though I was working extra, the funds came in and went right out again. Fair Finance paid off those debts and now I'm paying a much better rate. It's been a huge burden off my shoulders.”
To attract business away from doorstep lenders, Fair Finance opened its first modest office on a council estate. To tackle high street payroll lenders, it set up a second branch close by them. There are two more offices. If Rahman can raise another £650,000 from investors, he hopes to open branches all over the capital.
Crucially, the rate of bad debts, at 6%, is substantially lower than in the credit card industry, and the interest rate is higher than Fair Finance would like only because a personal service is relatively expensive to operate. To stay afloat, Fair Finance has to make a surplus. Board meetings endlessly debate how to increase that surplus – attracting more investors to expand the business and help even more people – without squeezing the customers it has.
“You could make a lot more by shafting the poor,” Rahman says – but that's what the predatory lenders do.
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