Bad credit home improvement loan

Charles Leadbeater on a mutual credit scheme which is starting to put Liverpool's loan sharks out of business

The woman was distraught. Her new-born baby had just died, and she could not afford to bury her. The funeral would cost [pounds]300, a sum well beyond the reach of an unemployed single mother with several children. In desperation, she turned to the only credit available to her, a loan shark. She got the [pounds]300 she needed to bury her child. The loan shark made her pay [pounds]1,500 over the following months to clear the loan.

This woman's story persuaded Mike and Doreen Knight that the community of Speke, on the outskirts of Liverpool, needed something different. In the past two years, by dint of their determination and energy, local know-how and entrepreneurship, the Knights, aided by a small army of helpers, have created one of Britain's most impressive community credit unions at the heart of one of the country's most neglected housing estates.

The Speke Community Credit Union has 1,500 members and is recruiting 50 members a month by word of mouth. It is the only financial institution serving an estate of 6,000 homes and 13,000 people.

The estate was built to house workers for postwar manufacturing companies, the likes of British Leyland and Dunlop, which deserted the area long ago. People who could afford to moved out long ago to places such as Warrington. Unemployment is a condition of life on the estate. Speke has had its fair share of government jobs schemes, but they have made little lasting impression. Some of the men work in the cash-in-hand economy of minicabs and window rounds. Many of the women are single mothers caught between the dole and the loan shark.

The last bank serving Speke, the TSB, closed its doors two years ago. The credit union occupies its former offices in the rundown shopping parade. Even if there were a bank in Speke, most of the people there would not be allowed an account, even less a loan, insurance or a mortgage. The state is both too inflexible and too much prey to political whim to offer lasting help. It wants to do things to people and for people; not to allow them to take charge of their lives. Neither the public nor the private sector seems capable of addressing Speke's multiple problems. Faced with this sustained failure, Mike and Doreen Knight decided it was time they and other people did something about it.

Mike Knight, a first-year student at Lord Michael Young's School for Social Entrepreneurs, has lived on the estate for most of his life. One of 16 children, he met most of his older siblings in the string of local authority homes he passed through as a child. By his own admission he was on the verge of becoming "a very bad boy" when he met Doreen, who took him in hand.

It was Doreen who first got involved in the credit union, which was set up by the local vicar in 1989. By the mid-1990s the union was on the verge of collapse: the Knights took it by the scruff of the neck. Doreen had run a hugely successful women's football team, as well as an anti-drugs youth club. Mike had been a community development worker. With funding from the European Union social fund and the Single Regeneration Budget, channelled through the Speke-Garston Partnership, a public-private development project, the Knights set about their task with gusto.

The credit union looks like a bank; the computerised tills are staffed by a team of 35 volunteers working on a rota. These are people like Yvonne Piroun, the single mother of three girls, the oldest of whom is 12. She was going potty sitting at home all day, she says, when Doreen dragged her along to the credit union for a training course. Yvonne left school unable to read or write. Now she is the project's youth worker. The Knights have tapped into a seam of self-improvement and ambition among people on the estate that most top-down state-sponsored schemes don't recognise. It is this capacity to fill in the gaps in the financial services sector left behind as banks rationalise their high-street branch networks that interests the Treasury, which last week announced a long overdue review of the regulations governing credit unions.

Anyone on the estate can join the credit union, which is governed by a 12-strong board of directors, elected by the members. A member has to undertake to save at least [pounds]67 over 12 months. If their savings record is good, they are eligible for a trial loan of [pounds]200, repayable over a year, at an interest rate of 1 per cent. The saver can then take out a second loan, of [pounds]500 or twice the amount they have saved with the union. When Doreen and Mike Knight took over the union the loan limit was [pounds]400; now it is [pounds]1,000, a reflection of the higher level of saving the union has encouraged.

This basic saving and loan service is vital on an estate where loan sharks are the only other source of ready cash, charging rates of interest close to three figures. Members use the union to save and borrow for holidays and Christmas presents, to buy season tickets for the city's football clubs and to carry out minor home improvements. Yet its significance goes well beyond that, as Mike Knight explained.

"People on this estate don't know the meaning or value of money, because it's not theirs. Most people on this estate who are in debt have multiple debts. They will often be behind paying all of their bills as well as owing money to a loan shark. As soon as their dole cheque arrives, most of it goes straight out of the door again to pay off debts.

"Poverty and multiple debts breeds stress. It's no wonder that to escape, many people, women stuck at home with several kids, turn to drugs or drink. The credit union is a way out of that downward spiral. We do not just provide cheap loans. We want to help people to take control of their lives."

That spirit of co-operative self-help should strike a chord with the government, which has been flirting with the idea of mutuality without doing much with it. Last week in a report published by Demos, Stephen Martin and I proposed creating a new local institution, the Employee Mutual, a kind of self-help club through which employers, the employed and the unemployed would help provide one another with services in kind such as training, childcare and job search. The Employee Mutual would marry flexibility with security in the labour market on modern terms. Credit unions could develop to play a similar role in personal finance.

The Speke Community Credit Union, and other schemes like it in Scotland, could become the prototype for a new social banking sector. The credit union provides people on the dole or working in the cash economy with a way to gain a credit record. At the moment, they do not register on the banks' radar screens. The record they acquire from the credit union can be used to approach a bank. Indeed, one possibility would be for the credit union to link up with a large financial services provider, such as Abbey National or the Co-operative Bank, to provide its members with insurance, mortgage and pensions which the credit union cannot supply itself. The bank would get access to a source of new customers; the members would get access to financial services they are currently denied.

This kind of joint venture could create a model for a social banking system, in which private-sector financial services companies work in partnership with local savings mutuals to reintegrate poor communities into a national savings system. The credit union could then become a community one-stop shop for a range of financial services.

The Speke union has the technology to allow people to pay most of their utility bills. "Each time someone pays a bill through the local Post Office they have to pay 98p," explained Doreen. "Instead we could allow most people on the estate to pay their water, gas and telephone bills free of charge. We already do that for electricity bills; we could do it for all households bills."

The Knights also have ambitions to marshal the union's buying power, to win better deals for members and to keep their spending within the local community. The union has already negotiated discounts for members booking holidays with local travel agents and purchasing white goods from a local supplier. Mike Knight would like to be able to develop an enterprise fund to help local entrepreneurs set up their own businesses. "It's only small stuff, but we want to be able to help people to make more of their lives, by helping them to buy a car to start cabbing, or to buy a window cleaning round or to buy a mobile burger bar. With a bit of help we could become a community enterprise fund, not just a community savings institution."