Why Ethex Suppports the Ethical Finance Sector

Over the past six months, investors on Ethex have been getting behind a relatively new sector for the platform, and it’s exciting to see the potential for people to invest to help others across the UK who have been let down by banks and traditional finance providers. 

Within the Ethical Finance sector, both Fair for You and Great Western Credit Union ran incredibly popular bond offers on Ethex, each raising significantly more than their target. At the time of writing, Salad Money’s Ethical Finance Bond looks set to pass its target raise, having passed the 75% mark, before the offer is due to close on 8th May 

As the cost of living crisis continues to cause misery for families across the UK, we’ve found that socially-minded investors are stepping up and investing in organisations that offer fair, affordable and responsible credit options to those most in need. Here at Ethex, we have put a lot of thought into supporting the development of ethical finance. We want to take a moment to investigate the growing need for community development finance institutions (CDFIs) and credit unions and how they are improving lives. We also want to dispel some preconceptions and elaborate on the very reasonable questions about why Ethex supports ethical finance.

Almost no one wants to have to borrow money for things that they need, but at times, credit can be the only answer for people to obtain vital household items or, increasingly, just to make ends meet. The FCA’s Financial Lives Survey (1) estimated that in the six months to January 2023, 77% of UK adults felt the burden of keeping up with their bills and their credit commitments had increased.

However, a growing number of people in the UK are being denied access to traditional credit options due to poor credit scores, previous bad payments or simply having no credit record at all. The number of underserved customers in the UK is rising, with a new report finding it has grown to 20.2 million people.  (2) 

So, the need for nonprime lending is greater than ever, but recent research conducted by Clearscore showed that overall provision to underserved consumers has reduced by 34% since 2019 and loans offered to customers with the lowest credit score reduced by 76% during the same time period. (3) 

This tells us that, while the need for credit is on the rise, the options for people locked out of traditional credit, like high street banks, are diminishing, which leaves people who are in real need of finance with few acceptable options to turn to. We all know about the dangers posed by unregulated lenders to financially vulnerable customers. Unfortunately, unscrupulous ‘payday’ lenders are still legally operating, lending to people already struggling with the cost of living crisis and charging astronomical rates of interest, locking them into a spiral of debt with little possibility of getting out. A 2023 article from the BBC showed that borrowers commonly face "double bubble" interest, where the size of the original loan is doubled through interest. (4)

There are, however, options available to people who have been turned down for credit to help them avoid high-interest loans from unscrupulous lenders. Credit Unions can often provide an ethical and affordable source of credit for members, funded by the savings of local depositors, ensuring that the benefits of their members' savings are kept locally. However, even with a relatively healthy Credit Union sector in the UK, there are still big gaps in the market.

This is why CDFIs are needed to serve financially vulnerable people, offering credit to those that they can, but, importantly, support and inform those whom they are unable to lend to.

This is a question the Ethex team had to investigate thoroughly before welcoming CDFIs to raise finance on the platform. And it’s something we want to explain fully to potential investors. Of course, the short answer is yes. In the current economic climate, the number of underserved customers for nonprime credit in the UK keeps growing, and it’s estimated that there’s an estimated shortage of credit supply of around £2 billion. (2)

The big problem comes when people are declined mainstream credit and turn to unethical and unregulated lenders to bridge the gap. A recent study conducted by IPSOS for Fair4All Finance revealed a concerning statistic: in the past three years, an estimated three million individuals in Great Britain may have resorted to borrowing from illegal moneylenders. When asked, 7% of people said they or someone in their household had used an unlicensed or unauthorised lender that charged them interest (sometimes known as a loan shark or illegal moneylender). (5)

This is where CDFIs provide a vital service. For example, Salad Money looks at applicants’ ability to repay credit and not at their credit score alone, which can be unrepresentative of their current situation. Salad Money uses Open Banking data to see in real life what a person’s financial commitments are and uses that information to calculate affordability for loans. In that way, they can lend to people who would otherwise have no other option than an unaffordable high-interest loan.  

Salad Money’s number one goal is to save customers’ interest when compared to these other alternatives of last resort whilst ensuring their loans are affordable and customers are treated respectfully. They offer affordable and fair loans, which over 50,000 people in the UK have already accessed. Their commitment to keep rates as low as possible has helped customers save an average of £497 in interest each (based on an average loan amount of £973).

Lucy, a 41-year-old single parent and digital transformation worker from Wales, has always tried to be careful with money, but in 2022, she found it impossible to cover the cost of driving lessons on her £25,000 salary, which she needed to secure a promotion. 

It was with much caution that she looked into loans. “I was really worried because my credit score had become awful and I was in the process of rebuilding it following an abusive relationship a few years ago.

“But I had a look at Salad Money, who were recommended through another website. It said they are tailor-made for people in the NHS and public sector, and I liked the fact they said it was all done on a fair process where they can actually see whether or not you can afford the payments because of Open Banking.”

Lucy was successful in her application and borrowed the money she needed with affordable repayments for driving lessons, securing a higher-paid job. She says “This was one of the best and most sensible decisions I ever made to get this loan at that time. I absolutely love my job, and I get paid nearly £10,000 per year more.” Another benefit for Lucy is that repaying the loan has helped her improve her credit score for any future borrowing she may need.

Responsible lenders like Salad Money recognise that for some applicants, credit is not the answer and lending to people who are unable to afford repayments is damaging to their financial and personal well-being. In these cases, Salad Money does not just decline the loan but works with the individual to provide other forms of support. In order to help people avoid high-interest lenders that will only make their situations worse, the team at Salad Money can signpost other resources to help them, including checking that they have access to all the benefits they are entitled to.

Across the UK each year, there are some £16 bn in unclaimed benefits.  In 2022-23, Salad Money helped people identify £36.3m in benefits they were entitled to each month but hadn't claimed, an average of £348 each (£4,176 per year).  Salad Money also help applicants check their eligibility for hardship grants (in 2023 alone, they helped people access £135,000 through the NatWest and Responsible Finance hardship grant programme).

The bottom line is that most people will need to borrow money from time to time, whatever their circumstances. And with the cost of living crisis putting greater pressure on finances, unfortunately, more people are turning to unethical high-interest lenders to make ends meet. This is causing a deepening problem of debt and poverty for society, and the only realistic alternative is to help fair and affordable nonprime lenders such as Salad Money and Fair for You reach a wider audience with their services.

Some Ethex investors have said they would prefer to see impact investments like Salad Money’s bonds at lower interest rates on Ethex’s platform. We have discussed this and the clear answer from all our impact bond issuers is that the additional capital they are raising on Ethex is competitive and is making a big difference to what they can do. 

Investments in the current Salad Money bond offer will facilitate over £60 million* of affordable loans over 5 years for thousands of workers hindered by poor credit scores across the UK (*if the full £500,000 bond target is reached). This will positively impact the lives of the most financially vulnerable in society, giving them an affordable option and keeping them from unaffordable lending that could lead them deeper into poverty. 

But more than that, investing to support organisations like Salad Money will help to reshape the face of consumer credit for the future, fixing the broken nonprime lending market and ensuring that the most financially vulnerable people in society are not excluded from the system.

You can view the Salad Money IF ISA eligible bond offer here.

References

1. FCA Financial Lives Survey

2. New report from PWC ‘Overlooked and financially under-served’

3. Clearscore/EY Report Feb 2024

4. BBC article on illegal Moneylenders

5. Research by IPSOS for Fair4All Finance