Banks should be required to lend more to deprived communities that have been underserved by mainstream finance, according to think tank ResPublica.
The report, Markets for the Many: How civic finance can open up markets and widen access, calls for the introduction of a US style Community Reinvestment Act which requires all banks to reinvest in their local economies.
It says that since the financial crisis lending to SMEs has fallen by 29% so Community Development Finance Institutions (CDFIs) could ‘fill the void’ left by mainstream finance.
Adam Wildman, research manager at ResPublica and co-author of the report, said: ‘Community finance could easily become the backbone of our economic renaissance. With the economy finally turning the corner, the conditions now exist for our SMEs to thrive and expand. But what is currently lacking is the credit our small businesses desperately need to do so.
‘If the Government were to truly support community finance by introducing the right support mechanisms, we could well witness a new wave of entrepreneurship and generate widespread prosperity. We recommend both the Government and the Opposition throw their weight behind the introduction of a UK Community Reinvestment Act to ensure this takes place.’
Between 1996-2009, the act produced $68.5bn of private investment in the US between 1996-2009. The report argues that similar legislation in the UK would ‘dramatically’ boost private investment in this country.
It also calls for the extension of the Credit Union Expansion Project to include CDFIs.
Peter Kelly, director at Unity Trust Bank, said: 'CDFIs play a vital role in promoting enterprise and creating jobs, yet the opportunity exists for so much more to be achieved. The responsibility and role of the high street banks is currently unclear. On the one hand their CSR departments support CDFIs, credit unions and money advice agencies to help people in the clutches of the high-cost lenders.
'Yet at the same time the high street banks provide commercial funding to the high cost lenders themselves. The status quo needs to change and Community Reinvestment Act type legislation would create the constructive dialogue and practical action that has been missing for far too long.'
