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UNREGULATED: Lending schemes in minority communities are popular alternatives to borrowing from banks (Photo: Bart Chan)

MEMBERS OF minority communities are borrowing and lending to another within their locality, eschewing regulated channels of bank loans.

One such person to take advantage of community lending is mother Mariam Abdullah, who borrowed £12,000 from her community in north London in order to fund her eldest daughter’s masters and PhD at the University of Oxford.

Abdullah told The Guardian: “I knew the bank wouldn't give me a loan because I had a poor credit rating, so I turned to my local community for the money.

“I had no contingency plan. If my community didn't lend me the money then my daughter wouldn't have been able to go to university.” It worked out for Abdullah; she managed to repay the loan within a year and her daughter gained her Oxford PhD in Islamic banking and finance, and landed a top in one of the country’s top law firms.

“I've borrowed money multiple times since then and I trust the people I do it with. There are no hidden fees and it is pretty stress-free,” Abdullah says.

Nevertheless, there are risks involved when using informal, unregulated schemes, where both borrower and lender are potentially more vulnerable than when dealing with an authorised bank, warns the Financial Services Authority (FSA).

People who have invested money in such schemes could lose it all if the scheme fails, because the Financial Services Compensation Scheme does not cover them. Also, participants have no access to the Financial Ombudsman Service where they would be able to bring their financial complaints.

A FSA spokesperson told The Guardian: “These schemes are very high risk and our advice to participants is do not invest any money you wouldn't be prepared to lose.” Nonetheless, it is apparent that these unregulated lending schemes are gaining in popularity.

The way the schemes operate differs. The one in which Abdullah was involved with has a group of family and friends paying a sum of around £100 a month, which is combined and given as a lump sum to the recipient to spend as they please. The sum paid in and period of repayment depends on the figure that the borrower requires and how much the lenders can afford.

These transactions often take place behind closed doors, and organisers claim they are more widespread than what is commonly thought.

An organiser of a different scheme in the capital is Khadija, a Somali-British woman who says such financial lending schemes are taking place by a whole host of communities across the UK. She told The Guardian: “Indians, Arabs, Sudanese, West Indians, Filipinos, etc. They all do it.”

Different communities call this informal lending and borrowing activity different names. In the Caribbean community it is known as Pardner; some African communities call it Sou Sou.

Khadija believes that peer-to-peer schemes have remained in use by minority communities are because there is often no interest paid, no handling fees nor administration and late fees. Additionally, participants do not need to face loan sharks.

The financial crisis in the banking sector is another reason why these schemes have seen a renewal of activity in minority communities, thinks Khadija. “I get lots of people asking if they can become part of it, but I have to be careful about who I get into it with,” she says.

Due to the transactions often occurring between family and friends, the bonds of trust and respect already exist. Thus, things usually go according to plan, says Mohamed, a scheme organiser who was born in Kenya. “We screen people before they are allowed to join and we make sure everyone can afford to pay.

“It has always worked and it is the best thing we have found.”

*Some names have been changed