Paper short abstract:

Rather than regulating the cost of credit for the financially excluded, policy makers should instead focus on how customers are treated at the point of transaction and how to create better access to mainstream financial services.

Paper long abstract:

For the past decade Fair Finance, a not-for-profit community finance institution, has provided credit and advice to financially excluded individuals in London. Drawing on this experience, the paper considers three issues:

First, that the ethical mission of the company is exemplified by the way in which the staff serve the customer; and not in the way in which prices for products are set. We cannot judge whether microfinance institutions are behaving ethically by looking at prices.

Second, that the new UK regulatory framework for high cost consumer credit is likely to lead to a bifurcation of the sub-prime sector into "near prime" and "doubly excluded". The cap on the cost of credit is, in reality, a denial of (legal) credit to a section of the UK population.

Third, that public policy should aim to eliminate financial exclusion, not to embed it in the financial system. The long-term interests of the financially excluded (and the rest of the population) would be best served by access to mainstream service providers.

These UK issues are likely to be similar to issues facing policy makers and microfinance institutions elsewhere in the world.