Andrew Lilico of Europe Economics has an article in today’s Telegraph with which I at once agree and disagree. I join his affirmation of the Church of England’s proposed move to more proactively support credit unions like London Mutual Credit Union. This can provide a more ethical alternative to payday lenders and their exploitative interest rates. However, I don’t believe credit unions can ever be an alternative to the regulation of payday lenders.

First, it seems to me (admittedly I’m not an expert in this area) that even if credit unions successfully scale up, they will (rightly) be more conservative in their lending practices than less ethical payday lenders. Sometimes people want to (or feel compelled to) borrow but, for their own good, should not be allowed to, and certainly not at extremely high interest rates. People can get into debt traps. When this happens they need help to climb out (e.g. Christians Against Poverty), not help to dig themselves deeper in. (Sometimes paternalism is another word for “helping vulnerable people”.) Credit unions may not lend to such people. But some other less scrupulous payday lender will be ready to make the loan if they calculate can make a quick buck. Such a loan would be profitable to the unethical lender at the expense of other lenders already owed money by the unwise borrower; and/or at the expense of (harm to) the borrower themselves in the longer run.

Second, even the most proactive credit union will not be known to everyone who could benefit from their services. When the unethical payday lender comes knocking they will not know they have a better alternative. An un- or underregulated payday lender will lure them into an exploitative debt contract.

Potentially unethical and exploitative activities will always need to be regulated. Additional competition from credit unions is to be welcomed, supported and financed by us all. But it will not magic away the unhealthier practices of the payday loan industry.