'Community banks' to help manage debt, says think tank

http://www.bbc.co.uk/news/business-28518694

Version 0 of 1.

An uncompetitive financial services market and the expense of declaring bankruptcy are leading people into "problem debt", according to a report.

The government should help by making it easier to found "community banks" offering cheaper loans, according to the Centre for Social Justice (CSJ).

Employers should also help their workers save, it said.

A £525 fee to declare bankruptcy is stopping many people from doing so, the report suggests.

Almost half of people with unmanageable debts say it has harmed their health. Such debts keep people poor and entrap others, the CSJ report said.

Credit unions currently serve more than one million customers, lending a total of £600m, but because of current regulations they are "often unable to serve the poorest in society who would most benefit from them", said the report.

Loan sharks

The think tank said the government should relax membership rules for some of the more successful credit unions, remove interest rate caps for small loans and allow them to invest members' deposits to generate income.

These new lenders, which the think tank calls community banks, could then offer smaller loans similar to payday lenders' loans, but with more amenable conditions and cheaper rates.

Capping payday loan rates was a mistake, said the report, as doing so would force people to go to loan sharks.

The Financial Conduct Authority earlier this month said payday loan rates should be capped at 0.8% a day, meaning a £100 loan for a month would cost £24.

The report was led by former Labour minister Chris Pond.

The Centre for Social Justice was founded by Work and Pensions Secretary Iain Duncan Smith in 2004.