New research shows impact of Covid-19 on the affordable credit sector

More than 60 Credit Unions and Community Development Finance Institutions (CDFIs) in England, Scotland and Wales took part in the study, which asked about the impact of Covid-19 on demand; lending volume; income; liquidity; viability, and confidence. They reported a decline in the number of people seeking loans and a reduction in the size of loans being sought; a rise in the number of customers seeking payment holidays on their loans; and an increase in saving deposits.

Providers have furloughed staff and closed branches to help them deal with the impact of the pandemic. Some have adapted their business models, increasing the use of digital tools and introducing new products.

Those providers with the smallest average loan amounts (under £1,000) appear to have been most adversely affected by Covid-19, with a higher likelihood of furloughing staff, closing branches and of using government support schemes. They are also less confident and more likely to forecast breaches of regulatory ratios or covenants and inability to meet short-term costs. These providers are the most likely to serve the most vulnerable and financially excluded.

There are likely to be a range of complex reasons behind the drop in the demand for credit. Positively, it may be because people have had support through other channels set up in response to the pandemic, such as the Job Retention Scheme or an interest free overdraft. There have also been fewer opportunities for consumption during the crisis. Alternatively, some people may have not sought a loan from an affordable credit provider because their financial position has worsened and they may have to take other action, such as borrowing from family and friends or going without an important purchase.

There is concern that household finances will come under severe pressure as financial support interventions introduced in response to COVID-19 taper off and unemployment rises. Affordable credit providers have a crucial role to play in supporting families through these difficult times, but this new research by the Trust and CFS shows that these providers are themselves vulnerable to the pandemic. It will be essential that the affordable credit sector is supported to sustain and scale during this challenging period, so that it is able to support families and communities in the months ahead.   

Read the report.

Pål Vik, Director, Community Finance Solutions said:

"This research report finds that the short-term effects of Covid-19 are more acutely felt by those lenders targeting low-income consumers. The findings underline the needs for ongoing research and data collection to inform interventions to preserve the access to affordable credit for those that need it the most."

Sarah Davidson, Chief Executive, Carnegie UK Trust said:

“Affordable credit providers have a vital role to play in helping disadvantaged communities cope with Covid-19 and rebuild resilience afterwards. This research highlights the need to continue to monitor the impact of the pandemic on affordable credit providers, and for the sector to receive the support that it needs to sustain and scale, ensuring that it can support those who are financially vulnerable.”

Sasha Romanovich, CEO, Fair4All Finance said:

“Many more people in the UK will find themselves in vulnerable circumstances and the need for fair and affordable credit is likely to grow significantly over the coming months, not least as some high cost providers fail or withdraw from the UK market place. Fair4AllFinance have a role as a catalyst to create a thriving and sustainable affordable credit sector, and we welcome this research.”

Michael Sheen, actor and social activist said:

“It is vital that affordable lenders come through the current stage of the crisis to be able to support financially vulnerable consumers in the medium to long term. We need all those people with a voice: councils, housing associations, the third sector and the media, to highlight to those borrowers that often need access to small sums of money that fair credit is out there, at a fair price. ”

The Carnegie UK Trust has also recently published The 10% solution: How to make affordable credit more available to those who need it most as a short and full report. This research examines the levels of high cost credit use and the provision of affordable credit across seven Scottish local authorities, reveals the gap between demand and appropriate supply, and puts forward a range of interventions available to local authorities that can support affordable credit providers and make a significant difference to the lives of low income individuals in their areas. Increasing the market penetration of affordable credit providers in these seven areas to 10% of demand could save low income households nearly £5m a year.

While the research fieldwork for this report took place before the COVID-19 pandemic, it demonstrates the need for affordable credit, and the importance of supporting a resilient sector which can provide for financially vulnerable consumers in the years ahead.