The government has identified financial inclusion and youth transitions as two areas where flexible impact funding can make a difference, and additional funding could flow in future.
What the government said in August 2018 when launching its Civil Society Strategy
The government will allocate £90m to an ambitious youth initiative, delivered by a new organisation which will operate independently of government. This organisation will have at its heart ensuring that major employers and social sector organisations work together to help the most disadvantaged young people transition into work.
This pot of money is unique. By being outside the usual constraints of government funding, we are free to consider bold approaches to investing in long-term solutions. We also have a great opportunity to properly test and evaluate different interventions over time, leaving a legacy of increased youth employment in target areas, a decreased black and minority ethnic youth employment gap nationally, and a solid evidence base for targeted interventions supporting the most disadvantaged young people, including those at risk of serious violence.
The government will direct funds for the establishment of a new Financial Inclusion organisation responsible for deploying £55m of funding from dormant accounts. It will primarily address the problem of access to affordable credit and alternatives.
The organisation will also look to support other ways of helping individuals strengthen their financial resilience. It will work with providers of affordable credit to develop approaches to helping customers save money alongside taking out credit. It will also explore ways to help people protect themselves against income shocks, such as through insurance.
What unites both funds are the long-term nature of the funding and the call for new ideas to meet the challenge that millions of people need access to affordable credit. The National Audit Office recently reported that 8.3 million people in the UK are over-indebted and four in ten do not feel able to manage their money well. A further 600,000 people are estimated to need debt advice but cannot gain access to it and 22 per cent of adults have less than £100 of savings.
These statistics demonstrate the fragility of many household accounts in the UK. However, it is also important to recognise that access to credit will remain a regular need for many. Some 1.4 million people used high-cost credit for everyday household expenses in 2017, up from 1.1 million in 2016. The challenge is how to help households avoid a cycle of spiralling debt.
We need more responsible lenders
More lending capacity from responsible lenders to meet demand is essential. The Financial Inclusion Commission identified the gap between demand for community lending, estimated as £3.5bn per year and the supply, at around £3.0bn.
Part of the unmet demand could be satisfied by existing social enterprise lending models. Credit unions can lend to members but capped at an annual percentage rate (APR) of 42.6 per cent, which limits their reach. Credit unions may need core capital to develop new business areas or to help them scale and consolidate. Responsible CDFIs (Community Development Financial Institutions) have greater regulatory flexibility to make loans above 42.6 per cent APR and could do more with more capital for on-lending.
Social organisations that meet the financial needs of the community through loans or advice should be able to access the dormant account monies, potentially for core costs and loan capital. Five Lamps, a CDFI, is one example of how to use investment capital that may be applicable to other organisations.
Five Lamps recently raised £5m of new loan capital from nine social investors in a funding organised through Social Finance. This capital will be used to offer affordable loans at below 100 per cent APR to eligible borrowers and the lending model allows for significant loan loss provisions of the order of 10-12 per cent.
Blended capital: potential for new models
Targeted lending to the most vulnerable at under 100 per cent APR interest rates requires a degree of subsidy or philanthropy. This has been recognised in the US, Australia and elsewhere with government loan guarantees offered to community lending institutions to allow them to reach out to the financially excluded. This is where charities and foundations can play a role.
In Australia, the Good Shepherd Microfinance’s no interest loan scheme (NILS) has been in operation for over 35 years. NILS offers fair, safe and affordable loans to people on low incomes for essential goods and services, such as white goods, car repairs, furniture and medical, dental and educational expenses. Loan recovery rates are cited as being around 95 per cent which is reassuring if this model could be replicated elsewhere and serve a vulnerable cohort. A small UK pilot in Tenbury is in operation testing this NILS approach. It makes short-term loans around £350 on average.
How can fintech play a role?
The financially excluded are often tech-savvy but do not deliver customer value for many operators. There are few cross-selling opportunities and so semi-commercial or social enterprise/profit-with-purpose models need to be established. Could philanthropy support the growth of socially responsible fintech?
Creating technology solutions for difficult problems is an iterative process and requires venture funding to progress one or more ideas until they start to gain traction and revenue. It is challenging to obtain venture capital for pre-revenue entities even where the founders have invested substantial sums. The dormant accounts fund could provide venture funding for new social-enterprise models addressing financial exclusion.
The challenge – youth unemployment
Youth service spending by local authorities in England is down by a third compared with three years ago, according to figures for the Department for Education (DfE). In addition, schools and local authorities struggle to find the support to help young people make good choices as they transition into employment.
There is also compelling evidence that it is possible to identify children from age 11 who are significantly at risk of NEET (not in employment, education or training) outcomes. Social Finance research in Newcastle highlighted that those adolescents who had more than six contacts with social care accounted for two-thirds of the eventual NEET population.
It takes time and consistent effort working with young people to encourage good choices, provide work opportunities and to cement links with future employers. Government has set a good precedent of multi-year programmes with the Fair Chance Fund that provided up to three years of help to homeless adults to secure accommodation, skills and employment.
Dormant accounts – the opportunity for charities
The £90m dormant accounts fund has the potential to make a significant impact and to find creative solutions for cohorts hard to reach. The funding is flexible and this offers social organisations an exciting opportunity to propose new models that are effective but might require grant alongside investment to be viable. The funding recognises that for these programmes to be successful they need multi-year support.
One example is the Talent Match programme, which focused on hidden NEETs – those who were unemployed but not claiming benefits. To reach this group, you need to engage with local organisations who know their communities well. The dormant account monies could provide funding for smaller, grassroots organisations who wouldn’t normally qualify for central government funding.
Charities and social enterprises have a significant role to play in providing solutions to deal with financial exclusion and effective transitions to employment; they need access to both financial and human capital. Favoured organisations for support will likely combine a track record of effective intervention with a desire to innovate and a willingness to adopt data-driven approaches to delivery and continuous improvement. Now is the time to prepare ahead for funding from 2019 onwards.
Jonathan Flory is a director at Social Finance
Charity Finance wishes to thank Social Finance for its support with this article