A way of providing hard-up families with cheaper loans is being planned by Falkirk and West Lothian Councils.
Opening a local ‘bank’ by setting up a Community Development Finance Institution (CDFI) service would help thousands on low incomes who are forced to borrow from expensive payday lenders to make ends meet.
The councils intends to go into partnership with Fife Council to launch the project which could be operating from town centre premises by next spring.
The number of desperate people thought to be paying sky-high interest on the short-term loans they need to get by has caused alarm in the town hall.
Latest figures show that, in Falkirk, nearly 43 per cent of households try to survive on an income of less than £20,000 a year and a third on less than £16,000.
Over half the households in Camelon are officially ‘income deprived’. In Bainsford and Langlees it is 30 per cent, in Hallglen and Glen Village 21 per cent and in Stenhousemuir West 20 per cent.
Tackling poverty is a key part of the council’s Towards a Fairer Falkirk strategy to reduce the levels of debt across the population and maximise the income of households who rely on benefits.
By launching a CDFI it will be able to increase the financial choices available to those who have to borrow money - while educating them about how to handle the cash they have.
A report from head of policy Fiona Campbell was approved when the council’s executive met.
Councillors were told: “The scale of a CDFI required to be financially sustainable is beyond the size of any one of our local authority areas, but Falkirk, Fife and West Lothian are exploring the options.
“The benefits include increasing support to vulnerable residents to help them out of debt by offering lower lending rates than the for-profit sector.
“Whilst APR (annual percentage rates) are high reflecting high risks and need for the model to be viable and sustainable, they are considerably lower that the alternatives such as payday loans companies.”
The executive was told giving financially vulnerable residents increased access to affordable credit will reduce the probability of them defaulting on rent or council tax payments and cut the build up of arrears.
The report warned while there were risks associated with launching a CDFI service - there are risks if one is not developed including the danger of financial exclusion, increased poverty and the associated impact of that, particularly on children, negative impacts on health and well-being and pressure on debt crisis services.
The planned partnership will work along similar lines to the CDFI Scotcash in Glasgow, where the average loan is £460, and provide around 12,000 loans a year across the three council areas.
The executive agreed talks with banks, Scottish Government and other funders with the potential of providing initial loan capital of up to £550,000 spread across the first three years of operation should start.
It also approved £170,000 from the Fairer Falkirk Fund be used to cover its share of the start up costs over that time.
Move welcomed by charity experts
National debt charity Citizens Advice Scotland (CAS) has warned consumers remain vulnerable to payday lenders and welcomed the council’s move.
Spokesperson Fraser Sutherland said: “CAS has previously called for more Community Development Finance Institutions in Scotland to help combat high interest commercial lenders being the only option for some low income families.
“This is a welcome development that we will follow with great interest and encourage other local authorities to consider.
“It is important that and new CDFI not only provides affordable credit, but a full support service of assistance with accessing basic bank accounts and money advice. Payday loans can lead to serious debt problems if not repaid on time and we would encourage anyone who is struggling with debt repayments to seek free, independent and confidential advice from their local CAB”
The Scotcash operation in Glasgow that Falkirk intends to copy provides a financial inclusion service with clients accessing advice and support in one place, helping individuals to re-negotiate debts and claim benefits.
It works closely with Glasgow Central CAB, provides money advice, foodbank vouchers, opens basic bank accounts with RBS and Barclays and savings accounts with Bank of Scotland and also links in with the three Glasgow-based Credit Unions.
This allows people who have previously not been able to access either basic bank accounts or credit union loans to move onto those more traditional services over time.
Council leader Craig Martin welcomed the initiative. He said: “This is a very innovative scheme. There are loan sharks out their taking advantage.”
Councillor Tom Coleman of the SNP admitted: “Some of the statistics in this report are eye opening. Obviously anything that stops greedy people targeting poor people has to be welcomed.”