Community (Development) Finance 101

Community Finance or Community Development Finance focuses on the financial services, such as loans and payments services, available to under-served populations. Foregrounding social justice, the vision that guides our community finance research is the financial inclusion of all Canadians.

Financial inclusion sees all Canadians accessing safe, neutral and appropriate financial services at a reasonable cost.  Yet, in Canada we still see an estimated 400,000 to 1 million – or 1 in 28 – Canadian adults with low incomes (i.e., less than $25,000) with no functioning bank account and another 1 in 10 report they would have difficulty covering a $500 emergency expense. Why is there rising use by lower and middle income Canadians of considerably more costly, largely unregulated fringe financial services? The problem of high cost fringe financial services extends well beyond the widely publicized problem of payday lending or the need to regulate the remittance industry for newcomers.  Title loans, installment loans, refund anticipation loans, rent-to-own contracts are all equally in need of national attention.

Higher monetary, social and personal costs of accessing essential banking services through unregulated fringe financial service providers is concerning. That these costs are disproportionately paid by lower and middle income Canadians means the effects of Canada’s growing income inequality are exacerbated.

We know that Canadians may be financially excluded due to (1) having either no credit rating or a bad credit rating, or (2) facing significant obstacles to using mainstream banking services at reasonable costs. Simultaneously, there is a notable increase in the use of payday loans to bridge short term gaps in income at effective annual rates of interest substantially higher than rates charged by mainstream credit providers. Further, while there is increased community and local government interest in establishing community-based microcredit funds as a means for promoting community investment and economic development, there is a lack of understanding as to how these programs work or how best to adapt various options to best serve local community needs. And finally, there is a growing awareness of the pressing need to promote critical financial literacy skills. More than simply understanding concepts in basic finance, we see the importance of critically assessing the institutional arrangements for and social dynamics implicit in financial transactions with marginalized people - understanding how, why, and whose benefit.

Current debates about how to address these public issues are confounded by fundamentally different views of citizenship, social responsibility, and individual obligation. These different views surface as a profound communication gap between poverty advocates and financial experts. The question of how best to advance financial inclusion is often taken up as a debate about the relative merits of educating individuals for greater financial literacy versus regulating for greater consumer financial protection. Borrowing John Stapleton's (Open Policy Ontario) imagery, we need to understand when it is appropriate to educate Canadians in reading a map of the complex road system that is Canadian consumer finance and when it is appropriate to engage the finance industry and government policy makers, together with experts in the lived experience of poverty, in designing a simpler consumer financial road system.