To those of us on decent incomes, with access to low-cost credit and financial resources for an emergency, low-income households may appear to make poor financial decisions leading them into difficulties.
They take out expensive loans to cover seemingly small consumer purchases, operate in cash, and rely on in-kind and financial support from friends and family.
However, there is little evidence to suggest that low-income households are poor at managing their money. Rather, these strategies reflect the reality of managing on a low income.
These households not only have a low income, but they are also more likely to experience income fluctuations; their expenditure is typically not evenly spread across the year, with events such as Christmas, school holidays and start of the academic school year often involving larger outlays.
At the same time, they lack access to appropriate and financial services to bridge these gaps between income and expenditure effectively.
The emphasis needs to be on expanding the toolkit of low-income households rather than on teaching them to make 'better choices'.In fact, according to the Financial Conduct Authority, 1.2mn UK adults lack access to basic banking services to make payments or save, and 5.6mn incur significant interest payments by having to resort to high-cost credit.
Meanwhile data from Norton Insurance Brokers highlights 7.5mn homes do not have home contents insurance to protect them against theft, fire or flood.
Expanding access to affordable credit and financial resources
Aside from implementing policies addressing their low and fluctuating incomes, the emphasis needs to be on expanding the toolkit of low-income households rather than on teaching them to make 'better choices'.
Low-income households need access to affordable credit to make lump payments and bridge gaps between income and expenditure, as well as savings products that help them build savings habits, and accessible financial services to make payments safely and cost effectively.
The myriad of charity and community organisations providing affordable loans, debt and money advice, and other forms of support, are vital to helping low-income households weather external shocks and improve their financial resilience.
There are good practice models for driving investment into these organisations that the UK government could learn from.For example, last year community development finance institutions (CDFIs) – community-based, non-profit lenders – provided loans to 90,000 individuals, saving them on average more than £300 in interest payments.
According to Responsible Finance's 2022 Impact Report, CDFIs also helped a further 70,000 identify more than £4,000 in annual unclaimed benefits to which they were entitled.
Yet they are just scratching the surface in terms of need, with 12.9mn UK adults still with low financial resilience who are in, or vulnerable to, financial difficulty, requiring support to help better manage their situation.
Learning from our international counterparts
With the right funding and support, well-designed CDFIs and other community-based organisations could help many more. There are good practice models for driving investment into these organisations that the UK government could learn from.
In France, a partnership between government and banks has provided sustained investment and support for community lender Adie, which enabled it to grow eightfold between 1998 and 2008.
Over the pond, the Community Reinvestment Act has been used to encourage US banks to invest in CDFIs and credit unions. Between 1992 and 2001 the act resulted in nearly $1tn (£786bn) in bank investments and loans to CDFIs, helping to regenerate low-income neighbourhoods.
While there has been some progress in the UK, with the establishment of Fair4All Finance, which received £96m in funding from the dormant assets scheme to support credit unions and CDFIs, there is certainly more that could be done.
The UK is still lagging behind its peers in terms of mechanisms to leverage sustained investment into the sector.
There are community-based providers that can deliver, and proven models for scaling up delivery through public and private investment.
But, the question remains: is there the political momentum to realise these benefits?
Pal Vik is a senior research fellow and director at Community Finance Solutions at the University of Salford Business School
