In this blog, Baroness Susan Kramer calls for a revival of community banking in the UK, noting that that compared to most rival economies we are missing a fundamental stratum of banking and that lack undermines our capacity for both local and national growth.
Community Banking in the UK has largely disappeared. High street banks and building societies embedded in their communities essentially no longer exist. The financial services they historically provided to the self-employed and to micro and small businesses are no longer reliably available. Credit Unions and Community Development Financial Institutions (CDFIs) have been set up in the UK but they are scattered and small, lending £287 million last year across the whole country according to their trade body Responsible Finance. Bank of England numbers show that overall lending to SMEs remains close to its all-time low reached in 2022. The Federation of Small Business cites a dismal picture of ongoing barriers to borrowing such as requirements for personal guarantees. Initiatives like Purple Shoots and Bank of Dave have established templates but need more support. Some 2 million individuals are unbanked and many more lack access to more than basic financial services. Compared to most rival economies we are missing a fundamental stratum of banking and that lack undermines our capacity for both local and national growth.
Over recent years, innovation has been expected to fill the gap. Fintech, challenger banks, open banking were all promoted as approaches which would meet the need but frankly all have failed. The British Business Bank has a remit to help grow CDFIs but will freely admit that its plans are not transformational. Better Society Capital and Fair4All (using dormant assets) have limited programmes and Lloyd’s Bank recently put some money into the CDFI sector but even collectively it’s not game changing. Tony Greenham (once of the RSA and now of SW Mutual) along with others has been trying to revive the mutuals sector to fill the gaps but with limited reach. Concerns for “access to cash” have led to a scheme expected to deliver 350 banking hubs within 5 years where bank branches have been closed. But so far at least the mandated services are very limited even for individuals and do not cover the needs of the self-employed and of micro and small businesses. Data is lacking. The Financial Services Act 2012 included a “have regard” on ease of access which led to quarterly reporting by major banks on their lending to small businesses by postcode (to 5 digits); the information appears to be little used except by academics and bank PR departments.
Experience in the USA is a striking contrast. In 1977, Congress passed the Community Re-Investment Act. It was a civil rights measure responding to extensive evidence that banks were redlining ethnic minority communities and refusing to provide financial services other than deposit taking within those redlines. The force behind the Act was its regulatory implication. Regulators were required to refuse permission for mergers and acquisitions (then all the rage) to banks which could not demonstrate that they provided the full range of financial services to ethnic minority communities within their territorial range. As an offset they could resource another organization to provide such services, typically a CDFI. Virtually every bank chose to resource a CDFI and community banking were revived across America. The sector has evolved with many CDFIs linking forces with civil society groups to support new businesses with advice on such skills as financial management and marketing and with links to angel investors. The sector took a big step forward when in 1994 a CDFI Fund was set up within the US Treasury. The Clinton and later the Obama Administrations used the sector at times of financial instability and recession to funnel federal funds into communities and into the micro and small business sectors. Today the CDFI sector in the USA has in-excess of $222 billion in assets. Even the major banks assert the critical value of the sector’s role in both stabilizing the US economy and seeding the next generation of big bank customers.
In the UK CDFIs and civil society groups are pressing for measures under the heading of “financial inclusion” to fill the gap in financial service provision. Fair Banking for All campaigns for A Fair Banking Act which is often characterised as a UK Community Re-Investment Act. I would not wish in any way to undermine the campaign which calls for the FCA to assess banks on their provision of affordable credit, to set up a rating system and to take action where a bank is not meeting its standards. But I think it’s time to be bolder and to deliberately create a comprehensive CDFI sector recognising that most major banks with their cultures, mission and overheads are not the right entities to service the communities they have abandoned. The FCA/PRA insist this is not their role as a regulator but that it falls to Treasury. As best I can tell, Treasury has little interest. It seems to me quite reasonable to require major financial services players to contribute alongside government on the principle that both benefit materially from the vibrancy and resilience of thriving individual, self-employed, micro and small business sectors. Requirements could be attached to the banking license or to branch closures just as two examples. Such an ambition cannot be achieved overnight but a plan and a timetable would energise change. Without such an ambition and a plan of action I cannot see how we achieve sustainable growth in the economy.
