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USURY CEILINGS IN FRANCE (III) - Dood Respond to LaSer Cofinoga
The Dangers of the New English Disease -

In the May edition of Audience, LaSer Cofinoga contend that the French system of consumer credit regulation is holding back the growth of the economy by restricting access to credit for many low income households – particularly young people – and restraining the consumption of capital goods. The edition particularly references a study by Andre Babeau that calls for a review of French usury legislation as a means to free up the market and encourage the extension of more credit to those on low incomes. Key to the general assessment of the problem of financial exclusion is the statement that people on low incomes – although prevented in many cases from obtaining credit – are in fact solvent and able to maintain loan repayments. LaSer Cofinoga points to the levels of credit extension in the U.K, which has no anti-usury legislation, with considerable envy. But is the UK system really a model which should be promoted for adoption in France and other European countries?

The problem with industry assessments of the UK, such as that presented by LaSer Cofinoga, is their central assumption that credit extension – at any price – is preferable in all cases to lack of access. In other words, they fail to distinguish between access to affordable credit and access to credit that is too costly to have any long term benefit to the borrower (usurious and unproductive credit). Had an assessment been made of the current position in the UK with regard to access to affordable credit then the conclusions drawn by LaSer Cofinoga would have been entirely different from those presented in Audience.

Despite the lack of lack of constraints on UK lenders generally, many consumers in Britain do not have access to affordable credit. Serious scientific analysis of the extent of this problem is finally starting to take place. In a forthcoming report concerning financial exclusion in the South East of Britain, an estimated 6.6% of all households are found to have no access to affordable personal credit – that’s over 200,000 households in what is generally regarded as the wealthiest area of the U.K. When finally we get a national assessment completed the % is likely to be significantly higher.

And the groups that are found to be excluded are precisely those that LaSer Cofinoga identify as a problem in France – including young people between 20 and 30 years old.

Exclusion from affordable credit – and providing access to usurious credit - is not good for the economy. Of course, in overall figures it is tempting to assume that the greater the level of credit extension, the more this is fuelling consumption and economic growth. But that is an over-simplistic approach. We know from the UK that extension of credit at extortionate rates to people on low incomes significantly reduces their ability to consume in the long term. This is obvious, as interest costs and repayments must be borne in the future. The higher the rate of interest the less future income is available for spending.

How much might be lost to local economies as a result? In the Home Credit industry alone our Competition Commission estimates that excessive charges cost low income consumers £100 million per year. That is only one small part of the overall extortionist market in the U.K, but the sums are big enough to illustrate the scale of the problem. Clearly low income communities cannot afford to have £100 million stripped out of them in excessive interest payments. Allowing this to occur is our legislators knowing contribution to the degeneration of our communities and is speeding economic decline in low income areas.

Exclusion from affordable credit is intricately bound up in exclusion from mainstream financial services generally, and particularly linked to the movement of banks to low cost and lower risk customer bases. An estimated one in 12 people in the UK have not even a current bank account, and banks are again escalating the level of branch closures in low income areas.

This has left a market of low income people open to ‘specialist’ or ‘alternative’ lenders, who are free from any constraints of reputation or law to lend at extortionate rates to the poor. Contrary to industry belief in the power of market forces, this does not result in competition on price terms as recent market investigations in the UK are starting to show. This is primarily due to the fact that the poorest people are not price sensitive and have very urgent needs for cash. Lenders compete on the speed of their offer and the informality of their lending procedures. To be blunt, they get in quick, don’t ask too many questions, and trap them in a constant cycle of re-financing.

So what are the real lessons of the UK free-market based approach? Firstly that it allows mainstream lenders to withdraw services from those communities that need them most and excludes people from affordable credit. Secondly, that in doing so it permits the existence of a secondary market that over-charges the poorest and strips money from their local economies. This epidemic of financial exclusion is at its height in the UK, where there exist no facilities to treat the disease – neither restriction on usurious lending nor community reinvestment obligations on banks as exist in the U.S.

We have one point of agreement with the articles in Audience. Low income households can be credit-worthy and should not be excluded. But achieving their inclusion is the responsibility of the mainstream banking sector and legislators. Ripping them off really isn’t going to help them or the French economy.

Damon Gibbons
Debt on our Doorstep

6th July 2006

ID: 37788
Author(s): iff
Publication date: 06/07/06

CRÉDIT ET EXCLUSION - Audience No 30 LaSer Cofinoga

Created: 06/07/06. Last changed: 07/07/06.
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