These two hardly appear to belong in the same sentence – religion and pay day loans. However, there are various prohibitions on charging interest in Judaism, Christianity and Islam – the connection isn’t new and has been recently raised in the UK.
In the UK the Church of England recently said it will seek to compete with pay day loan providers by providing similar loans through credit unions. Surprising? Perhaps not given that the Archbishop is a former financier who has previously lobbied for a cap on high interest rates charged by loan companies. The Archbishop said pay day loan companies are as “morally wrong” and has compared the industry to Old Testament usurers.
The Archbishop has met with the CEO of Wonga, a large pay day lender who not only has a large presence in the UK but also in Canada (www.wonga.ca) and other countries. It is reported that Wonga seems to be unthreatened by the Archbishop’s challenge stating that it welcomes a fuller set of alternatives for people to solve their financial challenges and for better consumer choice. Should pay day lenders feel threatened?
The Archbishop’s idea is nice one. However, in reality will the church be able to compete with large lenders? It seems that the plan is for the church to help 500 financial co-operatives to expand their reach by using the Church’s 16,000 premises. At first glance, it sounds like a good idea but looking at the reasons why people use pay day loans this action by the Church is hardly likely to drive them out of the market.
For a start, there is the moral judgment which many borrowers will feel is being placed upon them by having to go to a church. One attraction that pay day lenders have is that the borrowing process is private. There is no judgment. People my feel that the church is judging them or even trying to convert them! This will be a major hurdle. Secondly, the Archbishop’s plan means that his preferred lenders will not be available 24/7 like online pay day lenders. Credit unions also are likely to have more paperwork and to make the loans financially viable (and competitive) there are likely to be fuller credit checks.
While providing a location will decrease lender’s overheads short term lending carries many other expenses which will need to be covered by the interest rate charged and the fees. The main expense is the default rate – high risk borrowers often default. This has to be covered by the borrowers who do pay up. Credit Unions haven’t been too interested in providing short term loans in the past – it seems odd that they will suddenly find the whole thing attractive just because they have a number of locations rent free. There will clearly be other big costs to be considered by the Credit Unions associated with staffing and set up.
The Church has also run into another hurdle – it transpires that they have indirectly invested in the pay day loan industry. The Church’s pension fund of $7.7 billion was invested in a firm which led Wonga’s 2009 fundraising. This obviously has been an embarrassment. Obviously taking the moral high ground when it comes to business can back fire. That said, a red face is unlikely to deter the Archbishop and the Church. What may deter them are the realities of pay day lending – it will be interesting to see what happens next. This is unlikely to happen overnight.