Fair Finance (based in London) is trying to fill the gap left by the banks, but in a “smarter, nicer, cheaper” way. The company was founded by Faisel Rahman (36) in 2005 after he returned to London from Bangladesh, where he had been working on microfinance projects at Grameen Bank, a pioneering Bangladeshi lender, and the World Bank.
Rahman wanted to try something similar with financially excluded people in the UK. About two-thirds of Fair Finance’s customers are women, roughly 60 per cent live entirely on social security benefits and almost three-quarters are housing association or council tenants. The company charges them interest that is high enough to make some “affordable credit” activists wince, but low enough to be much cheaper than the alternatives for “subprime” borrowers.
The business model: Fair Finance describes itself as a social business. It offers a range of financial products and services designed to meet the needs of people who are financially excluded. It aims to revolutionize personal finance, starting with the people whom the mainstream providers have left behind.
Instead of the credit scores used by mainstream banks, or the sophisticated algorithms used by online lenders such as Wonga, Fair Finance relies on the judgment of its loan officers, who meet all their borrowers face-to-face. “The whole movement around credit scoring was, ‘how do you take the human out of the decision?’ Humans are fallible, they might be biased,” says Mr Rahman. “Credit scoring works with the vast majority, but for people on the margins – and now those margins are getting bigger – you need to understand the complexity.” The loans from Fair Finance that have been in arrears for more than six months represent about 7 per cent of the total amount it has lent out.
Rahman states that he expects to break even by 2014. He has raised £750,000 from wealthy individuals and borrowed £2.5m from three banks to try to prove there is another way to lend viably to the poor. Source: Financial Times
Commentary: Granting credit on the basis of subjective lending sounds somewhat odd in the age of objective lending based on analytics and credit scoring . Let’s see how this business model will work out in a developed lending market such as the UK. Fair Finance may just make it on the basis of providing a method for philanthropists sharing their wealth with people living on “the margins”.