Patricia Hewitt – 1998 Speech at the Downing Street Seminar on Profitable Community Banking

The speech made by Patricia Hewitt, the then Economic Secretary to the Treasury, at Downing Street, London, on 3 November 1998.

Introduction

1. Good morning and welcome to Downing Street.

2. We invited you here today to explore community development banking, to hear about the US experience, and to consider what we can learn from it. Community banking can offer a win-win solution – it improves services for people in the poorest communities, and can prove profitable for the banks.

3. How can we ensure people have basic cash access facilities? What is the best way of helping people begin to save and get credit? How can we expand Credit Unions? How do we bring small scale capital into deprived areas? Do we do this through banks? Through credit unions? What about micro-credit organisations? These are some of the many questions I hope we will explore today.

We are extremely fortunate to have with us:

Ron Grzywinski of Shorebank;

Greg Hattem of Bankers Trust;

Cliff Rosenthal of the National Association of Community Development Credit Unions; and

Susan Rice, currently with Bank of Scotland, but formerly with NatWest’s US subsidiary, Bancorp.

4. I want to start by why there is a problem with social exclusion. Then I want to move on to talk about the steps the Government is already taking to tackle social and financial exclusion. I will conclude by looking at how to take the agenda forward.

General policy considerations

5. My concern is financial exclusion, which is both a symptom and a cause of social exclusion. Combatting social exclusion is at the very heart of this Government’s agenda.

6. We have watched the gap between rich and poor in this country widen over the last twenty years.

7. Most people in Britain have benefited from rising living standards; and this is reflected in the growth and prosperity of the financial services industry.

8. Of course this is good news, and we will be doing all we can to ensure it continues.

9. But for the poorest people, concentrated in the most deprived neighbourhoods, it is a different story.

10. They have not shared in the increased wealth and greater opportunities so many of us enjoy.

11. And, crucially, they do not – or cannot – access financial services products.

12. In my own constituency in west Leicester, there are outer city estates with too few jobs and too much crime, where most children leave school without qualifications – and where financial services all too often mean benefit cheques and illegal loan sharks.

13. It is in the poorest communities that we find the highest concentrations of people without bank accounts, without access to other financial services.

14. People in these communities can very often by locked into the cash economy, cannot get affordable property or possessions insurance, can only access credit at unbelievably high interest rates, and do not use mainstream savings opportunities. Also, the chances of accessing appropriate finance and support for self-employment or starting their own businesses may be effectively zero.

15. This Government is not prepared to accept a society where economic opportunity is restricted in this fashion.

Government response

16. For many of those living in our most deprived neighbourhoods, the policies of the past bear much of the blame.

17. But the past is the past. We must now get on and deal with the problems head-on.

18. We have to bridge the gap between the poorest neighbourhoods and the rest of the country – and this is a priority issue.

Tackling financial exclusion

19. The Government cannot overcome problems of social exclusion on its own, and nowhere is this more evident than in the area of financial exclusion.

20. Our policy is to promote wider access to financial services, where progress has been made, but is in danger of becoming stalled.

21. We set out overall agenda for deprived neighbourhoods, in the Social Exclusion Unit report, Bring Britain together, which was published in September.

22. This set out our proposals, to be taken forward by 18 policy action teams, over the next year.

23. Two of these action teams concern financial services. They are to be run by the Treasury and will report to me by July next year.

24. One of them will look into prospects for increased access to personal financial services for people living in poor neighbourhoods, especially retail banking, but also credit unions and insurance.

25. The other will concentrate on encouraging enterprise in deprived neighbourhoods.

26. This means better access to capital for small firms especially those starting up in poor neighbourhoods; and better access to appropriate advice.

27. Let me now turn to the main areas of interest to the banking industry.

Access to bank accounts

28. First, access to bank accounts, and those who don’t have bank accounts.

29. Whilst access to banking is the norm, at least for those in regular full-time employment, there is a conspicuous unbanked minority, predominantly poor and not in regular full-time work, for whom life without a bank account is becoming increasingly inconvenient.

30. We are talking here about somewhere between 2 1/2 and 3 1/2 million people, concentrated in the most deprived neighbourhoods.

31. We used to think that the main reason people did not have bank accounts was that banks turned them down.

32. But recent research, sponsored by the British Bankers’ Association, dealing specifically with people without current accounts, reveals a far more complex pattern.

33. Only a very small number of people had been refused accounts, or did not ask for one because they feared refusal.

34. Far commoner were people who thought traditional bank facilities were not for them, the so-called self- excluded.

35. But to depict the main problem as self-exclusion is to avoid the issue, which is how banks can redesign their products, to better suit the circumstances and preferences of those currently without access to them.

36. I would like to think that such difficulties can be overcome. Some banks are offering new accounts where an on-line debit card replaces the cheque book and access to credit is withheld until the customer and the bank feel comfortable with it.

37. I know a number of you are already thinking on these lines.

Contribution of credit unions

38. Credit Unions too have an important role in tackling financial exclusion. They provide savings facilities, a source of low cost personal credit and financial education and advice.

39. Our approach to credit unions is to encourage the movement to grow, while retaining and strengthening its traditional focus on the poorer members of society. This will be partly through legislative change, lifting some of the restrictions on Credit Union operations.

40. We have also been thinking about how the movement should be regulated in future; and the scope for setting up a share protection scheme. Proposals in these areas will be published soon.

41. But even within the existing legislative framework, we believe there is considerable scope for expansion. We have established a taskforce to explore ways in which banks can work more closely with credit unions to increase their effectiveness, and are studying existing good practice here and in other countries.

42. I am delighted to see most of its members here today, and we look forward to Cliff Rosenthal’s presentation, later in the morning, on how the banks have helped the credit unions in the United States.

Small firm finance

43. Just because a neighbourhood may be poor in its physical and economic standing does not mean that it cannot be rich in people with ideas and initiative to start up and run their own businesses.

44. But to realise their ambitions for business, these budding entrepreneurs will often need more capital, advice and mentoring than is presently available. Access to capital is a key component of strategies to regenerate poor neighbourhoods and encourage greater self-reliance.

45. At present there is too often a mismatch between potential enterprise and the support needed to realise it, with the deficit greatest in the poorer areas where it is most needed.

46. The key to generating sustainable and productive enterprise in deprived neighbourhoods is to create the right incentives for the private sector to work with public agencies. This could help lever in fresh capital where it is needed most. Without access to capital there will be no new enterprises to support.

47. We need to help pull together the expertise and disciplines which commercial finance and business advice can bring, along with the local understanding of neighbourhoods which local agencies provide.

48. The work of the Treasury action team involves examining the current roles of large corporations, banks and professional service firms in community regeneration, and how this complements the voluntary sector and community support networks.

49. The role that innovative community investment projects can play in building and sustaining local economies has already been vividly highlighted in some the world’s poorest regions. The Grameen Bank in Bangladesh, for example, offers Microfinance – savings and loans at a human level, providing first stage finance to enable individuals to make a go of their enterprise. This has proved itself viable.

50. We will look at the availability of debt and equity finance, and we will see how that capital can be put to best use by making sure enterprises have the right technical advice and mentoring when they need it most.

51. We will also examine critically the role of the various Government support schemes, such as the loan guarantee scheme, Business Links and Training and Enterprise Councils.

52. So we – and I hope you – are interested in innovative approaches to small firm finance, to help overcome the disadvantages experienced by those seeking to start up on their own in poor areas.

Conclusion

53. Like the Clinton Administration in the US, this Government believes strongly that wider access to financial services – through positive action by the banking community – is vital.

54. And we also believe that the driving force will be banks searching for new, profitable market opportunities.

55. This has been the experience in the United States, as our guest speakers today will testify.

56. In the US, the banks are obliged to report on their provision of credit to all sections of the community; but they are not required to do anything that is inconsistent with sound banking principles.

57. The result, so we are told, has been a huge injection of finance into low and moderate income neighbourhoods. And US banks have found profitable market opportunities in areas they might otherwise have ignored.

58. I think there is much to be learned from considering the implications of that message for what we do in this country. I should emphasise that we are not planning to copy the US legislation. But we are interested in increasing the response of UK banks to the opportunities that exist for profitable banking in our poorer communities.

59. That is the objective of this seminar, which I hope you will find enjoyable and thought-provoking. So it is a pleasure to hand over to Ron Grzywinski, the Chairman and Chief Executive Officer of Shorebank, considered by many to be the pioneers of community banking in the United States.