Loans to help poor become entrepreneurs

A loan system devised to aid some of the world's poorest people in Bangladesh is helping hard-up Londoners cope with the recession.

The scheme, known as micro-credit or micro-finance, works by lending small sums of money to high-risk or "non-creditworthy" customers which they pay back in instalments.

The idea was pioneered in the Seventies by Muhammad Yunus, 69, an economics professor in Bangladesh who gave poor villagers small loans to help them start businesses. He received the Nobel Peace Prize in 2006.

More than 100 Londoners — some on jobseeker's allowance — have used loans from Fair Finance, a firm set up on a council estate in Stepney, to start businesses from market stalls to management consultancies.

Fair Finance's managing director, Faisel Rahman, 33, said the scheme had saved hundreds from being harassed by door-step lenders or being evicted from their homes.

"These customers are the ones who fall prey to door-step lenders who charge hundreds of per cent interest, go to pay-day lenders who do the same, or go to pawn shops and get loans by depositing their valuables," he said.

The Office of Fair Trading estimates the door-step lending market is worth £2 billion, and in July the children's charity Barnardo's published a study which showed some were charging interest of up to 545 per cent APR.

Mr Rahman gave the example of a woman who approached him three months ago. "She had a loan from a door-step lender where the interest rate was 4,000 per cent. She took £200, but was paying £286 each month. So we took the loan off her and paid it off, and then she paid us back."

The biggest Fair Finance personal loan is £2,000, but the average is £500. Interest is usually 35 per cent APR, and customers repay the money over a year with a £25 administration fee.

Mr Rahman said: "Although the interest does seem high, you have to appreciate the nearest rivals to us are door-step lenders who charge hundreds of per cent."

Customers who pay early get interest rebates, and the firm has no fines for missed payments. It has a 94 per cent loan recovery rate, 80 per cent of which are paid on time.

Fair Finance's average business loan is £3,000, repayable over three years with interest of 12 to 19 per cent.

Mr Rahman says the company has lent to 1,600 people, and helped 150 start a small business. He said: "There is a lot of entrepreneurialism in people, even among the poorest. But banks would not lend money to them."