ECRC supporter Dr Georges Gloukoviezoff, is an excellent economist and specialist researcher in issues of financial exclusion. He continues to make a large contribution to the debate on responsible credit with a recent publication from Dublin’s Trinity College Policy Institute for the Irish Government.  

Book outline: “Unlike the UK, France and Belgium, Ireland has not developed a framework to promote financial inclusion. The aim of this report is to review the research and assess the effectiveness of the different strategies and policies that have been introduced to the UK, France and Belgium, in order to inform future Irish policy on financial inclusion.”

Stressing a global approach: “Appropriate access to basic banking services and the promotion of responsible credit are both taken into account in relation to access and use difficulties. For example, when strategies to promote responsible credit are assessed, the analysis considers not only the promotion of appropriate access (adequate evaluation of the borrowers as well as the characteristics of the available credit) but also the framework set up to deal with repayment difficulties (i.e. personal debt management and debt enforcement). Such a global approach is needed in order to assess the efficiency of a financial inclusion strategy, acknowledging that access and use difficulties are linked. A policy that only targets access difficulties could increase use difficulties and therefore be ineffective in promoting financial inclusion.” 

A too narrow understanding of Responsible Credit  “The promotion of responsible credit: this issue examines access to appropriate forms of consumer credit which respond to the customer’s need (involves taking into account overindebtedness).” But (p100)” 3.2.2 Appropriate access to credit: The quality of access to credit and the way to promote it are European concerns (OEE, 2008). These issues are usually referred to as “responsible credit” which has two derivatives: “responsible lending” and “responsible borrowing”. In line with mainstream economic theories, the promotion of “responsible credit” implies ensuring that markets are working properly. It means that information has to be accessible and understandable for both lenders and borrowers and that prices should be fixed regarding the level of risk.” 

While the author correctly identifies and describes responsible credit, he fails to mention “productivity” of the credit. Not conveyed in the text is the key message that quality of the credit in meeting the consumer’s needs for the funds throughout the lifetime of the credit relationship is important. There is no mention of this element of “flexibility” or “adaptability” to borrower circumstances which constitutes responsible credit.

Understanding and Combating Financial Exclusion and Overindebtedness in Ireland: A European Perspective - What could Ireland learn from Belgium, France and the United Kingdom?

Author: Georges Gloukoviezoff
Blue Paper #26 PDF (1.0MB)

Blue Paper Abstract

In modern societies like Ireland, every citizen needs to have appropriate access to a current account, a debit card or credit in order to lead a normal life. However, Ireland has the lowest level of access to a current account in Western Europe, some of its population relies on moneylenders to access credit, and an increasing number of borrowers are facing overindebtedness. Therefore, financial inclusion is a key social policy issue for a cohesive Ireland. However, it is an extremely complex one as it requires reconciling the interests of low and moderate income people and banks.
This paper, Understanding and Combating Financial Exclusion and Overindebtedness in Ireland: a European Perspective, looks at how Ireland could promote financial inclusion. It does this by developing an in-depth analysis of the responses implemented in the United Kingdom, France and Belgium. The paper examines their successes and failures in relation to financial exclusion and assesses what policies would be appropriate in an Irish context. The paper sets out guidelines for an appropriate framework to deal with financial exclusion in Ireland by building on its current strengths while also learning from experiences in other European countries. The guidelines address access to basic banking services and affordable credit as well as appropriate responses to overindebtedness.
This paper was launched by Professor Patrick Honohan, Governor of the Central Bank, on Tuesday 18 October 2011.

About the Author

Georges Gloukoviezoff has a PhD in Economics and specialises in financial inclusion and overindebtedness. His work deals with difficulties of access to basic banking services, overindebtedness as well as potential solutions such as basic bank accounts, microcredit and financial regulation. He is a former Visiting Research Fellow at The Policy Institute and has been involved in numerous research projects at national and European level. In 2010 his book on financial exclusion was published in France: "L'exclusion bancaire. Le lien social à l'épreuve de la rentabilité" (Presses Universitaires de France). He is Director of G2 Research (Dublin, Ireland) and member of the board of the National Observatory of Poverty and Social Exclusion (Paris, France).

Contents

LIST OF TABLES AND FIGURES XII

PAPET OUTLINE XIV

I. A revised definition of the process of financial exclusion XIV
II. A political regulatory framework XV
III. An Irish strategy to promote access to appropriate basic banking services XVII
IV. An Irish strategy to promote responsible credit XIX
ACKNOWLEDGEMENTS XVII
GENERAL INTRODUCTION 1
Aims of this study 2
Overview of the study 4

PART ONE
Understanding Financial Exclusion and Overindebtedness as a Social Phenomenon 7
INTRODUCTION 9
CHAPTER ONE: The Process of Financial Exclusion: A Result of Financialisation 10
1.1 A comprehensive definition of the process of financial exclusion 10
1.2 A framework: the financialisation of society 14
1.2.1 From financialisation of the economy to financialisation of society 14
1.2.2 Financialisation: needs, forms and logics 16
1.3 Why do banking difficulties have negative consequences? 21
1.3.1 Basic banking services: accounts and means of payment 21
1.3.2 Consumer credit 26
1.4 Why do some people face banking difficulties? 34
1.4.1 Do households lack financial skills? 34
1.4.1.1 Confidence and skills 34
1.4.1.2 Lack of financial room for manoeuvre 37
1.4.2 The profitability constraint and financial providers 45
1.4.2.1 Supply side causes of financial exclusion 45
1.4.2.2 An imperfect competition 47
1.5 Government responsibilities and financial inclusion policies 50
1.6 Conclusions 51

PART TWO: Combating Financial Exclusion and Overindebtedness 53
INTRODUCTION 55
CHAPTER TWO: Appropriate access to basic banking services 57
2.1 Access to basic banking services in Ireland 57
2.1.1 Exclusion from banking services 58
2.1.2 Ireland’s strategy to promote access to basic banking services 60
2.2 The UK market answer: government as facilitator 63
2.2.1 Course of action 63
2.2.2 Evaluation of the appropriateness of service provided 66
2.2.3 Economic model and quality of access 67
2.2.4 Results 69
2.3 The French “quasi-regulatory” answer 72
2.3.1 Course of action 73
2.3.2 Evaluation of the appropriateness of service provided 75
2.3.3 Economic model and quality of access 76
2.3.4 Results 77
2.4 The Belgian regulatory answer, “solidarity based” 80
2.4.1 Course of action 80
2.4.2 Evaluation of the appropriateness of service provided 82
2.4.3 Economic model and quality of access 83
2.4.4 Results 83
2.5 What could be learnt for Ireland? 85
2.5.1 Characteristics of the basic banking services 86
2.5.2 The cost of basic banking services 88
2.5.3 Making access to basic banking services effective 90
2.6 Towards an Irish basic banking service 92

CHAPTER THREE: Towards fair credit 95
3.1 Introduction 95
3.1.1 Measuring access to credit, and overindebtedness 96
3.2 Ireland: to promote responsible access to credit 97
3.2.1 Quality of access and overindebtedness 97
3.2.2 Appropriate access to credit 100
3.2.2.1 Better informed borrowers and lenders 100
3.2.2.2 The right price 102
3.2.2.3 Alternative appropriate credit providers 102
3.2.3 Dealing with financial difficulties and overindebtedness in an efficient way 103
3.2.3.1 Managing arrears 103
3.2.3.2 Remedial measures for overindebtedness 106
3.2.4 Strengths and weaknesses of the Irish strategy to develop responsible credit 107
3.3 Consumer credit in the UK 111
3.3.1 The British way to promote fair credit 111
3.3.2 Access to affordable credit 113
3.3.2.1 Better informed borrowers and lenders 113
3.3.2.2 The right price 115
3.3.2.3 Alternative affordable sources of credit 116
3.3.3 Dealing with financial difficulties and overindebtedness in an efficient way 119
3.3.3.1 Managing arrears 119
3.3.3.2 Remedial measures for overindebtedness 120
3.3.4 Strengths and weaknesses of the British strategy to develop responsible credit 122
3.4 Consumer Credit in France 124
3.4.1 The French approach to responsible credit 124
3.4.2 Policies promoting access to affordable credit 126
3.4.2.1 Better informed borrowers and lenders 126
3.4.2.2 The right price 128
3.4.2.3 Affordable alternative sources of credit 128
3.4.3 Dealing with financial difficulties and overindebtedness in an efficient way 131
3.4.3.1 Managing arrears 131
3.4.3.2 Remedial measures for overindebtedness 133
3.4.4 Strengths and weaknesses of the French strategy to develop responsible credit 135
3.5 Consumer credit in Belgium 137
3.5.1 The Belgian approach to responsible credit 137
3.5.2 Developing appropriate access 139
3.5.2.1 Quality of information 139
3.5.2.2 The right price 142
3.5.2.3 Responsible credit alternatives 143
3.5.3 Dealing with financial difficulties and overindebtedness in an efficient way 144
3.5.3.1 Managing arrears 144
3.5.3.2 Remedial measures for overindebtedness 145
3.5.4 Strengths and weaknesses of the Belgian strategy to develop responsible credit 147
3.6 Lessons for Ireland 149
3.6.1 A comprehensive perspective 149
3.6.1.1 A political issue 149
3.6.1.2 A specific strategy 150
3.6.2 Areas of action 151
3.6.2.1 Better informed lenders 151
3.6.2.2 An appropriate price: the question of interest rate ceiling 152
3.6.2.3 Appropriate credit alternatives 154
3.6.2.4 Financial pedagogy: information –education – advice 155
3.6.2.5 Arrears management 157
3.6.2.6 Dealing with overindebtedness 159
3.6.2.7 High quality qualitative and quantitative research 161
3.7 An effective Irish strategy to promote responsible credit 161
GENERAL CONCLUSION 164 color:#231F20;">
BIBLIOGRAPHY 167.

General Conclusion

Tackling financial exclusion through the promotion of access to basic banking services as well as affordable credit and appropriate responses to overindebtedness requires an appropriate framework. This report assesses what such a financially inclusive framework in Ireland would look like, based on what has been done in the UK, France, and Belgium. But, overall, it has to be stated again that promoting financial inclusion is a political issue. Therefore, reducing the influence of a financialisation led by market logic can be achieved in two ways. The first way is to promote appropriate alternatives so that people are less dependent on financial services providers. The second is to reduce the influence of market logic on financial services providers. In relation to the first approach, it is possible to limit the consequences of market logic by giving households access to alternative responses, especially regarding consumer credit. While access to appropriate forms of consumer credit is necessary, attention needs to be paid to what Thiel (2009) asks about the UK: “Do we really believe that the best way for poor people to make ends meet is to take out more and more credit, and above all credit for which they frequently don’t repay the principal, but only the interest rates?” (p.28). The provision of alternative responses to consumer credit involves questioning the level of wages, the characteristics of social welfare benefits, and the quality of public services. Even though these are different issues from that of financial inclusion, they are important elements in the promotion of responsible credit. The second way involves limiting the influence of market logic over commercial institutions such as financial services providers. Such a goal requires selecting an approach that would have a stronger influence. Without it, market logic would considerably weaken the effectiveness of those responses. The concept of corporate social responsibility (CSR) which is at the heart of the British strategy is an example of such an approach. Hitherto the United Kingdom, France and Belgium tried to tackle financial exclusion through self-regulation. These choices were made at a time when belief in free market effectiveness dominated, but they have systematically failed despite marginal improvements.58 In France and Belgium self-regulation has been replaced by legislation, while there are numerous calls for a similar development in the United Kingdom. However, not all legislation is effective, given the failure of the French “Right to an account”. In order to tackle the process of financial exclusion, regulation is needed, but it must be appropriate regulation. An analysis of the various international examples of regulation indicates that three key elements are required for its effectiveness:

• The definition of precise targets on financial inclusion, based on a range of indicators – Targets regarding basic banking services and credit should be related to both dimensions of financial inclusion: access and use. Therefore indicators will need to be quantitative and qualitative.

• Independent assessments to be carried out of the policies implemented, and the results regarding the targets adopted

• The implementation of incentives and sanctions in a manner that ensures the involvement of all stakeholders – This could involve the implementation of different mechanisms such as the creation of a financial inclusion fund, which could be used to cover part or all of the costs of dedicated services (e.g. MABS) that contribute to financial inclusion.

A regulatory framework based on transparency and accountability could limit the influence of market logic without suppressing its positive elements. While financial inclusion goals are usually defined by governments, the more technical aspects in relation to implementation are the responsibility of all stakeholders, including financial services providers. A financial inclusion taskforce (or the existing Steering Committee on Financial Inclusion) could be a useful body to promote and monitor a financial inclusion strategy in Ireland. Based on the assessment of what has been done in the United Kingdom, France and Belgium, this report outlines some guidelines regarding the promotion of access to appropriate basic banking services and responsible credit. However, even if these recommendations are based on evidence, there is no one way to promote financial inclusion. The success of such a strategy relies on its ability to complement the specific context of a society. It also relies on a culturally defined definition of financial exclusion, agreed by all the key stakeholders. The guidelines provided in this report will hopefully contribute to this discussion.