Community Reinvestment: people-centred finance for the 21st century
Very few people foresaw the economic situation we now find ourselves in or predicted that the government would be forced to bail out collapsing banks that just a few months previously were being heralded as world leaders. Despite the immediate and significant challenges and hardship the recession brings, the current situation also provides a once in a generation opportunity to fundamentally re-think how we do things and ask ‘what sort of society do we want to have in the future?'. With bold thinking and a clear vision, the banking sector, which precipitated the current downturn, can in future become a force for sustainable, positive social change.
The recession has brought into sharp relief a number of challenges that need to be overcome in order to create conditions for the economy and our communities to flourish as we come out of the downturn:
- We must restore public confidence in banks and the banking system
- There is an urgent need to tackle financial exclusion which continues to undermine efforts to regenerate deprived communities
- Problems persist in the availability of finance to community and social enterprises and the range of investment products offered is extremely limited
- The third sector and local communities need support to maintain their income in the face of increased demand for services and a lack of sustainable revenue streams.
We must ensure that ‘public money' works for ‘public benefit' by establishing a new model of people-centred finance fit for 21st century economics.
Urban Forum is proposing a Community Reinvestment Act and community reinvestment banking.
A Community Reinvestment Act
Poor communities continue to be deprived of access to financial services and are regularly charged more for basic services than more affluent communities. Research conducted by Save the Children and the Family Welfare Association in 2007 found that low-income households pay an additional £1k ‘poverty premium' each year for essential services like; gas, electricity, telecommunications, insurance and access to cash and credit. With an estimated 3 million people in the UK still without a bank account, there is an urgent need to address this inequality in the provision of financial services to poor communities.
The Community Re-investment Act (CRA) is a piece of US legislation that dates back to 1977. The Law requires banks to meet the needs of the whole community and to eliminate any discrimination in the provision of financial services to excluded groups. The Act has had a major impact on banks' lending policies and increased the availability of finance into deprived neighbourhoods and supported the growth of a strong community development finance sector in the US. The CRA has also strengthened accountability and scrutiny by providing a right to challenge a bank's failure to comply with the legislation and by publishing CRA-ratings of institutions.
Why should we be copying the United States banking industry when they've contributed so much to cause the global banking crisis?
Some may question the sense in adopting practice from the US banking system given its well documented recent failures. However it is worth noting that fewer than 25% of US sub-prime loans were made by institutions covered by the CRA, the actions of institutions not covered by the Act were of far more significance in precipitating the global financial crisis. It is also worth noting that so far in the UK the mutually-owned building societies and ethical financial institutions, that tend to embody the principles of the CRA, have not required public bailouts . The provision of financial services without discrimination should not be confused with indiscriminate lending which has been a major cause of the current crisis we now face. Clearly commercial considerations are important, however far more can be done to take account of the social benefit as part of lending policies.
Community Reinvestment Banking
With significant public finance invested in a number of banks we have a unique opportunity to go further still by establishing community reinvestment banking as a new model of community-focused financial institution.
A community reinvestment bank would be run as a commercially viable business, providing financial services without discrimination and reinvesting profits into supporting community action through grants programmes and other support. Community reinvestment banking would therefore offer citizens a financial and social return on the debt attached to the billions of pounds of public investment and offer an ethically attractive and financially secure opportunity for savers and investors. Community reinvestment banking could provide sustainable income to support community organisations, self help groups, charities and social enterprises, enabling them to respond to local needs and build a healthy civil society.
Why do we need Community Reinvestment Banking?
There is a widespread feeling that the £90bn of public money invested in banks on the brink of collapse has offered little to communities and citizens. Citizens quite rightly want to feel that the money pumped into these ailing banks has been worthwhile. Protecting the banking system from collapse means very little to citizens, who have seen these banks post unimaginable profits over recent years and place huge wealth in the hands of a small minority.
Community reinvestment banking would provide vital sustainable support for activity that was of public benefit with grants as well as loans and other financial services. It would also provide a clear and compelling vision for the future that demonstrated a commitment to change and acknowledged the lessons from the past.
How would these proposals differ from mutually-owned building societies, credit unions and other forms of social investment?
Community Development Finance Institutions (CDFIs), credit unions, micro enterprise schemes and friendly societies, provide significant expertise to tap into in developing people-centred financial services. CDFIs and credit unions offer a range of valuable financial services in under-invested communities, but they operate in communities where mainstream finance is unavailable. It is this failure of mainstream financial services to meet the needs of disadvantaged communities that needs to be addressed.
Whilst credit unions and CDFIs play an important role, they account for only a tiny proportion of the financial services sector as a whole. In 2007 the value of the entire CDFI sector was less than one tenth of the profits posted by Royal Bank of Scotland in the same year . With the introduction of a CRA, banks would routinely provide a far wider range of financial products to support social and community enterprise including; commercial loans, sub-market lending, patient capital and equity investment. A CRA would also provide considerable investment into the community development finance sector. In the US more than $6 trillion has been reinvested since the introduction of the CRA. The US Treasury's assessment that public investment in CDFIs levers in 27 times that amount in private investment, makes a compelling business case for supporting this sector in the UK.
Community reinvestment banking is very different to the plans for a ‘Social Investment Bank' using dormant accounts to provide loan finance, since a reinvestment bank would routinely offer loans as part of the commercial side of its business. The Social Investment Bank does not challenge or change the way banks operate - it simply makes available other people's unclaimed assets to be distributed by those who operate the current system. Community reinvestment banking would take community benefit to the heart of our financial institutions. Fundamentally changing our financial services sector - not tinkering to make the current system work better.
Mutually-owned building societies and co-operative-based financial institutions, such as the Nationwide Building Society, Unity Trust Banks and the Co-operative Bank, have shown to be less affected by the toxic-debts that have crippled many banks. The commercial viability of these mutual and co-operative societies, with their focus on members' interests and social justice values, provide a blueprint for economics that serve social ends. A huge amount can be learnt from the experience and expertise of mutual and ethical financial institutions in developing community reinvestment banking.
How would Community Reinvestment Banking work?
Community reinvestment banking would offer a wide range of financial services in a responsible but inclusive way. This would include a far broader range of products that contribute to achieving social objectives and that form a continuum of mission-related investment. Adopting the practice of financial and charitable trusts in the United States , this would include: insured and uninsured deposits, senior and subordinated loans, guarantees, fixed income securities and private equity. Specialist and technical business support could also be provided to community groups and third sector organisations.
Profits generated by a community reinvestment bank would be used to support activity that met public need and was of community benefit. Local panels could be established to decide how profits would be disbursed in grants, or participatory budgeting could be used to engage local people in decision-making.
There are a range of possible delivery mechanisms to take forward these principles, all with obstacles that would need to be overcome. Some possible delivery mechanisms include:
- A series of pilots in areas where the headquarters of publicly-backed banks are located (eg Northern Rock - Newcastle, Bradford - Bradford and Bingley, Calderdale - HBOS etc)
- Through the Post Office Network (building on recent calls for a People's Bank to be established )
- In collaboration with existing ethical/mutual specialist financial institutions (eg Nationwide Building Society or the Co-op Bank) drawing on their experience of socially-orientated business
- Through existing State-owned financial institutions such as National Savings and Investments (which had a social remit in the past).
Of course significant questions remain: What happens if there is no profit to reinvest? And how will the Exchequer manage the public finances if the public investment in banks is not quickly returned? However, we believe that with political will and a compelling vision of how things could be different in future these are problems that could be overcome.
What difference would these proposals make?
There would be a number of significant benefits from introducing a Community Reinvestment Act and establishing community reinvestment banking including:
- Reducing financial exclusion within deprived communities by ensuring financial services were provided without discrimination, thereby reducing the double jeopardy suffered by poor people - paying more for services because they are poor - and alleviating poverty;
- Supporting the burgeoning social enterprise sector through the mainstream provision of finance products to support their growth and development;
- Sustainable income invested in activity that meets the needs of local communities through the reinvestment of surplus generated by community reinvestment banking to support the third sector;
- Rebuilding public confidence in banks and the banking system through demonstrable evidence that financial institutions can contribute to positive social change;
- Establishing an ambitious new economic system designed to meet the needs of citizens and communities as a whole not serve the interests of the few.
We are calling on all the main political parties to grasp the once in a generation opportunity to create people-centred financial institutions that serve the interests of local communities. The combination of a Community Reinvestment Act and community reinvestment banking would provide a robust new regulatory framework and a model of community-centred financial institutions to restore public confidence, stimulate economic growth and support community empowerment.
Toby Blume, Urban Forum