Events | 2010.03.21
Microloans in Hackney | Feature
When Faisel Rahman saw a microfinance scheme - lending tiny amounts to millions of (poor) people excluded from the banking system - thrive in Bangladesh, he wondered if it could work in Hackney, London? Yes, it could...
Nearly 10 years ago, armed with a degree in geography and a credit card, Faisel Rahman, a slight and softly spoken man now 34, had a big idea: he decided he would open his own bank in the East End of London. The idea, he says now, was really a response to a puzzle: why was it that the poorest people in Britain – the people most in need of some financial assistance, most in need of fair rates of interest – were also the people who were denied access to bank accounts?
Rahman had already, at that point, devoted a good deal of thought to that puzzle. For a start, as the son of first-generation immigrants from Bangladesh – his parents had escaped the civil war in 1971 – he had grown up with financial exclusion, on estates in south and east London where doorstep lenders and loan sharks were often the only way of getting credit. Rahman\'s father worked by day and studied accountancy at night, and his son picked up on some of that ambition. Rahman won a place at Cambridge and on graduating went to Bangladesh, where he was seduced by the landmark social experiment of Muhammad Yunus, the Nobel Prize-winning architect of microfinance, and his Grameen Bank.
It is Yunus\'s understated contention that "more than half the population of the world – over three billion – do not qualify to take out a loan from a bank. And this is a shame…" Yunus had set out to rectify that "shame" by creating a model of banking that could include the poor, loaning small amounts of money on a large scale, encouraging tiny incremental savings schemes among peer groups, making entrepreneurial citizens of dollar-a-day subsistence workers.
When Faisel Rahman studied Yunus\'s bank he became obsessed with the transformative possibilities of the model to the extent that, at the age of 21, he had persuaded the World Bank that he would be the right person to supervise the implementation of a £120m microfinance programme in Bangladesh. He did that for just over a year, but all the time he was developing his own big idea: to return and put into practice in east London what he had learned. "You can imagine my mother\'s response," he tells me now, grinning, "when I came back after working for the World Bank and explained my plans to set up a bank in a back street of Hackney. \'Faisel,\' she said, \'We spent 20 years trying to get out of there!\'"
Rahman spent a lot of time talking his idea through with people in the financial industry. He was told that microfinance might work in the developing world but it would never work here. That the poor would not save. That bad debtors would never become prompt repayers. That he could never develop the idea at scale. In the face of this scepticism Rahman obtained a grant for a few thousand pounds from the overdraft of a charitable trust and secured it against his credit card. He then opened the doors of Fair Finance to business.
In the years since then he has watched the banking crisis, the implosion of debt, from the other end of the telescope. While the government has been printing billions of pounds to keep the economy intact, he has been hammering out deals to tide people over with £100 until the end of the week, or watching business start-ups grow by investing in entrepreneurs that no bank would touch. He has documented how he has saved 1,000 people from eviction from their homes in the last year alone by working as an intermediary with housing associations, helping to put together cases against loan sharks and bailiffs. More than once he has been violently threatened with being run out of town. He\'s still here, though, quietly putting his case, lending money at fixed and affordable rates, helping people into the economy, and now attracting enough investment to expand his idea to eight or 10 further sites across London in the next year.
It is hard, listening to Rahman explain all this, from his modest office in a converted print shop near Dalston station, not to be reminded of James Stewart\'s character, George Bailey, in Frank Capra\'s indelible film It\'s a Wonderful Life . In particular that speech in which Bailey sets out the principles of his father\'s Savings and Loans business to Mr Potter, the sharkish developer who fleeces the town for personal profit: "My father didn\'t save enough money to send Harry to school, let alone me. But he did help a few people get out of your slums, Mr Potter, and what\'s wrong with that? Doesn\'t it make them better citizens? Doesn\'t it make them better customers? What\'d you say a minute ago? They had to wait and save their money before they even ought to think of a decent home. Wait? Wait for what? Until their children grow up and leave them? Until they\'re so old and broken down that they... Do you know how long it takes a working man to save five thousand dollars? Just remember this, Mr Potter, that this rabble you\'re talking about... they do most of the working and paying and living and dying in this community…"
We have been assailed in the past two years, daily, by figures that seem to suggest our broken relationship with money, the millions that have become billions and trillions, but there is one figure that you do not often hear. Six million adults in Britain do not have access to a bank account. These are the people for whom credit has always crunched. Of these at least four million each week borrow from "doorstep lenders" just as they did when Rahman\'s parents first came to Britain and just as they have done since Victorian times. Another million and a half people are indebted to so-called "payday lenders", the mostly American-owned high street operations – the Money Shop, Cash Converters and the rest – who make short-term loans with few questions asked at APRs that often start at 600% and can escalate to 2,500% or more. "When I tell people that is the financial reality of Britain," Rahman says, "they don\'t at first take it on board. But to unlock that system, it seemed to me, you cannot approach it only as a money-making business – though that must certainly be part of the aim. You need to also explicably do things that don\'t make money."
Lending to the poor has lately acquired a bad name, the catch-all of "sub-prime", with its inference of damaged goods, the "toxic loans", which, as we all know, got us into our current difficulties. In some ways, though, Rahman argues, the motivation of sub-prime lenders was inspiring. "It said, you know, just because a woman has got divorced and has credit history only with her husband doesn\'t mean you can\'t lend her money. Or that recent immigrants were necessarily a bad risk – it did away with all of that. Opening up mortgages to these people proved a few things – for one it proved that poorer people were fantastically loyal to the institution that lent them money…"
What the lenders forgot, however, Rahman argues, was that when you start dealing with people with unpredictable lifestyles and with income that might be variable month by month, you can\'t just use the same computerised systems of default and interest that you use for people in regular salaried employment. Muhammad Yunus\'s microfinance model, which operated in parts of the world where everyone\'s lifestyle was precarious, had shown that. You had to know exactly who you were lending to, and establish more intimate and flexible models based on that knowledge.
The people who come through the doors of Rahman\'s microbank are nearly all "sub-prime" risks. He and his small team try to start by telling them what they cannot have, then what they can. At a time when the culture is full of the message that easy credit is a phone call away "we are the voice in the first instance," he says, "that says you can\'t afford that car. Or who goes through their accounts and says you don\'t need this or that."
Rahman first helps clients consolidate debts to existing lenders, and in many cases offers therapy and emotional support as they unpick some of the guilt and shame of their finances. They work to get debt at exorbitant interest rates written off, and they also support business start-ups on the scale in which banks refuse to contemplate. It is not a welfare organisation – interest rates often run at around 35% – but it responds sympathetically to a pressing need. In all of this Rahman is proud of several things – the fact that the default rate on loans is around 6%, substantially lower than that of credit card companies, and that they have helped to start up and support nearly 150 businesses. But the fact he is most proud of is this: he has shown that even by adopting all of these approaches, you can still make a business model that works, and provide investors in the bank with a modest rate of return.
It is a wonderful life, then? Rahman laughs. He\'s seen the films, he says. "The similarity is only that the James Stewart character is the person who knows his community and his community knows him and he makes decisions based on individuals. And in a way that is what I am trying to do: just making finance part of the community. It\'s about relationships and respect and fairness…"
On the short walk from Dalston train station to Rahman\'s office you pass by a handful of high street banks and half a dozen other brightly lit financial institutions, full of adverts and brochures featuring shiny new cars and foreign holidays: payday lenders with their promise of a little help until the next salary cheque.
The last three years has seen the exponential growth of these institutions in Britain; they are banned in most states in America and not allowed to operate in most parts of the EU (most of which has a statute for universal banking provision by regulated banks). Payday lenders tend to move in to places from which banks have moved out. "You can look at what has happened in America," Rahman suggests "and see it as a scenario that could easily take place here. Cleveland, Ohio was ground zero for sub-prime lending. And what you saw was as the banks pulled out from offering loans they have been replaced by payday lenders. They knew people would go to desperate lengths just to hold on to their homes in particular, so they lent people money to pay their mortgage payments or rent each month. APR can start at 2,000%."
What Rahman fears is that though there haven\'t been very many repossessions in Britain compared with the previous recession, as soon as interest rates rise, or as people come off preferential fixed-rate mortgages, more and more people will find they have nowhere else to turn. That story is already horribly familiar to him.
In the days after I meet Rahman I go in search of some of his clients. The more people I speak to, the more I have that sense of how indebtedness, so encouraged in recent years – the air that has floated the consumer boom – has become a kind of national narrative. It is the oldest plot-line but one which rarely has a happy ending.
The stories I hear from some of the more extreme cases on Rahman\'s files all tend to follow the same trajectory. A life lived near the edge of solvency is suddenly upset by a change of circumstance, redundancy, divorce or illness, and what starts as a stop-gap financial solution becomes a gaping hole. Sometimes the crisis doesn\'t look, to begin with, like a crisis at all. One man I spoke to, a psychiatric nurse with the NHS (who in common with many was too ashamed to be named), first borrowed £300 from a payday loan company to get the brakes on his car fixed. He handed over his three post-dated cheques for £100, each of which would be cashed by the lender on subsequent month\'s paydays, and it went from there. He now owes about £30,000 in unsecured loans in addition to his mortgage.
"It seemed easy," he said. "I walked in and it wasn\'t a hassle, there were no credit checks, just a requirement to have a bank account. When I came to repay the loan, though, and the money wasn\'t all in my account on the appointed day, I was faced with rollover charges and bank charges and I had to borrow more to pay it off. A few hundred quickly turned into a few thousand. And then the letters started coming and the harassment. The phone would ring day and night with threats of litigation or bankruptcy if this or that cheque bounced." Eventually his "two precious bank accounts were foreclosed" because of a default on payments and then the problems escalated.
Fair Finance had helped him to see some possibility of a debt-free future for his wife and young son, negotiating with his creditors, helping him with a manageable payment schedule. Like all the people I spoke to, the nurse said he blamed himself, of course he did, but he said, "we live in a society where it sometimes seems there is no choice than to get a bit of extra money from somewhere". If that money is available, no questions asked, from a brightly lit store advertised with girls in bikinis holding beachballs, what on earth could be the problem?
In her timely book Payback , about financial transactions and the imagination, the novelist Margaret Atwood argues that "debt is the new fat". That is to say, "we seem to be entering a period in which debt has passed through its recent harmless and fashionable period and has returned to being sinful". What seemed for many like a lifestyle option lately looks like an old-fashioned transgression. People like the psychiatric nurse are at the sharper end of that shift but nearly all of us feel it in one way or another.
Rahman is not so interested in the more metaphysical aspects of our problems with money. He is interested in finding practical solutions. Along with other lobbyists he has recently been in talks with the Treasury about ways in which the "contract between banks and the community can be renewed", and in which the privations and anxieties of financial exclusion can be avoided.
Some of this has to do with regulation. Britain is almost uniquely laissez-faire when it comes to moneylending. In the consumer credit act in the 1970s it was stipulated that all you needed to deal in credit was a licence, which currently costs £200. Once you have that you can charge what interest you like as long as that rate is noted in the small print.
The Citizens Advice Bureau takes 7,000 calls about debt problems every working day: more than 1.5m a year. Serious complaints might be directed to the Office of Fair Trading, an under-resourced body, working to tight guidelines. "I completely agree," Rahman says, "that people should take control of their finances and they should be aware of what they are signing up to. But there is a guy in the borough here, a doorstep lender who has about 10,000 regular clients. The vast majority are women in their 60s and 70s. They are unlikely to pursue a case with the Office of Fair Trading."
What interests him more than regulation, however, is a different working relationship between banks and the people they serve. One model is enshrined in America\'s "Community Reinvestment Act", which has no equivalent here. The act was originally the idea of civil rights campaigners who saw that the first step out of a ghetto might be the ability to access credit at fair rates of interest. That led to the Carter administration introducing a law by which every bank in America has to disclose to whom it lends and to whom it doesn\'t. If banks do not perform well on that disclosure – which is measured every year – penalties are imposed and the money is invested in financial provision for communities that banks do not penetrate. Since 1977, $3.7 trillion has passed from the banking industry into the communities through this act.
"During the recent troubles, of course," Rahman says, "this act was tacitly linked in some minds to the sub-prime problems. When the Federal Reserve looked into it, however, they discovered, not surprisingly, that most of the sub-prime problems were caused by the banks who were least involved at the community level. Who least understood their client base. Most of the banks who were supporting microfinance organisations were also lending staff to them, as part of their development, and not surprisingly those individuals returned to their banks often totally motivated about the possibilities and the responsibilities involved."
Rahman is not holding his breath for a similar act here; he tends to have more faith in innovative business models than politicians to effect change. In that respect, too, he knows it is not enough to argue a case, "rather you need to show what difference might look like". The challenge is to prove that the difference that works for a few thousand people in east London could be made to work for a few million people across the country. "If you want to do it on a big scale there just aren\'t the examples yet," Rahman concedes. He is not alone, however, in believing that "we need to rethink slightly what a bank might be for".
A good deal of that thinking is currently being done in a converted print shop not far from Dalston station.
For more information, please visit
http://www.guardian.co.uk/society/2010/m[...]e-faisel-rahman-muhammad-yunus
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