A recent study by the University of Essex, in collaboration with the Association of British Credit Unions Limited (ABCUL) and the Financial Ombudsman Service (FOS), highlights the critical role that credit unions play in supporting vulnerable members through responsible lending. The study offers best practices for affordability assessments when providing small-value, short-term (SVST) loans, ensuring these loans remain accessible and manageable for financially vulnerable individuals.

Supporting Vulnerable Members with Responsible Lending

Credit unions are pivotal in promoting financial inclusion by offering affordable loans to individuals who may not have access to traditional banking services. In light of rising financial vulnerability, particularly due to the cost of living, credit unions serve as a vital resource for many individuals who would otherwise have to turn to high-cost lenders or illegal loan sharks. This guide, developed by Dr. Andrea Fejos and supported by the University of Essex, provides essential best practices for assessing affordability in small-value, short-term loans, ensuring that these loans remain a sustainable option for financially vulnerable members.

Why Affordability Assessments Matter

Credit unions are often described as “lenders of last resort,” offering an essential alternative to payday lenders and loan sharks. Many of their members face financial instability, including inconsistent income, poor credit histories, or significant existing debts. The key to responsible lending is conducting thorough affordability assessments that are specifically tailored to each member’s financial situation.

This guide emphasizes that lending decisions should be based on affordability, rather than just creditworthiness. It’s crucial for credit unions to assess whether members can sustainably repay loans, ensuring that financial difficulties are not exacerbated.

Tackling the Unique Challenges of Credit Unions

Despite their essential role, credit unions face several challenges in conducting affordability assessments. Many members do not have access to traditional bank accounts, making it difficult for credit unions to fully understand their financial situation. The guide recommends using open banking data to better assess a member’s financial background, although it acknowledges the challenges in interpreting these reports effectively.

Best Practices for Fair and Responsible Lending

The study outlines several best practices that credit unions can implement to ensure responsible lending:

• Conducting thorough affordability assessments: Credit unions should assess members’ income, expenditures, and borrowing habits to make well-informed lending decisions.
• Prioritising financial well-being: Lending decisions must align with the best interests of the member, ensuring loans are sustainable and won’t cause further financial strain.
• Documenting decisions: Clear records of the decision-making process should be maintained to ensure transparency and support future complaint resolution.

These standards will help credit unions maintain their balance between fulfilling their financial inclusion mission and ensuring the sustainability of loans.

This guide is a valuable resource for credit unions, helping them implement fair and responsible lending practices. By adhering to these guidelines, credit unions can stay true to their core values of social justice and financial inclusion, offering a trusted alternative to high-cost credit.

Download the Full Study

To access the full study and explore the detailed recommendations, you can download the full guide here.