Those on the financial fringes who can least afford it pay the most to borrow money, writes Caroline Madden

IN RECENT YEARS it may have seemed like everyone was making hay while the Celtic Tiger sun shone, but in fact a significant portion of society remained in the shade.

And now that dark economic storm clouds are gathering, once again it is those on the financial fringes - the unemployed, lone parents, asylum seekers, low-income families - who are feeling the chill.

Astonishingly, in an era where most people regard multiple bank accounts, credit and debit cards, overdrafts and loans as bare necessities, almost one in four households do not have a current account and 10 per cent of people don't have any bank account at all.

Falling outside the mainstream banking system in this way creates difficulties in gaining employment, paying bills, saving, and accessing credit, and can perpetuate a cycle of poverty. So why are so many people unable, or unwilling, to access a basic financial service like a bank account?

"The main barrier to opening a bank account is the money-laundering legislation," says Caroline Corr of Combat Poverty Ireland (CPI). For most people, the requirement to present a passport or driving licence and a utility bill to verify their address is simply an annoying formality, but for those on the poverty line, it can represent an insurmountable obstacle.

Many low-income individuals don't drive or travel and can't afford to get a passport. And for recently-arrived immigrants or anyone living in temporary accommodation, obtaining a utility bill in their name is next to impossible. "It's absolutely crazy," says Corr. "If you're laundering money, I'm sure you could get your hands on a false passport or utility bill."

Combat Poverty recommends that the focus of anti-money-laundering legislation should shift from identification requirements to monitoring irregular account transactions.

Credit unions are seen as the friendly face of financial services, but they must also comply with the anti-money-laundering regulations. And, according to Corr, it can actually be more frustrating trying to open a credit union account, as the staff may know the applicant but still have to turn them away if they don't have the necessary documentation.

So for those who are unable to access a bank or credit union account, or whose chequered financial past means that they have been declined credit by mainstream lenders, what are their options when they need a loan to pay for an important family event, or to tide them over in an emergency?

Many people turned down by traditional lenders fall into the eager clutches of moneylenders. There are currently 50 licensed moneylenders operating in this country and, although they are regulated by the Irish Financial Services Regulatory Authority, there is no cap on the interest rates that they can charge.

They tend to target vulnerable people when they are most likely to be experiencing financial pressure, for example around Christmas time and first communions.

Agents often call door to door in disadvantaged areas, offering small loans that will be collected on a weekly basis, and charging extortionate rates of interest, in some cases as high as 188.5 per cent APR (according to the financial regulator).

One of the biggest moneylenders operating here is British company Provident Personal Credit, which has 70,000 Irish customers, and which advertises rates as high as 150 per cent APR on its website. "Other lenders do not include their administration and penalty charges in their APRs, have lower bad debt charges and do not have the expense of making 80 million home visits a year," Provident responded when asked to justify this exorbitant rate.

Nonetheless, it seems inequitable that those who can least afford it are paying the highest rates of interest. A survey carried out by the financial regulator found that 71 per cent of moneylender customers did not know the rate of interest they were being charged, and 80 per cent did not compare interest rates between lenders. According to Barry O'Flynn, manager of Sligo Credit Union, the cost of credit from moneylenders can be more than 10 times higher than the cost of borrowing from a credit union.

"The cost of this type of credit is abhorrent and we would love to see stronger consumer protection for this type of selling which puts families under enormous pressure," he says.

In parts of Sligo, as in many other areas of the State, there is a strong tradition of borrowing from moneylenders, even if the individuals have access to other sources of loans. "That's been the way it has been for many generations, and people don't question the price of the credit," O'Flynn explains.

He has encountered many people who have fallen prey to illegal loan sharks operating in the Sligo area. "A lot of mothers come to us and their children have been sucked into this," he says. "It's a very difficult thing to get people out of, because how do you prove you've ever paid a moneylender?"

Illegal moneylending is often used as a means of laundering money from other criminal activities, and unlucky borrowers who get sucked in by these unsavoury characters are usually reluctant to take a case against them for fear of retribution. "It's your worst nightmare because it's an illegal process," O'Flynn says. "You borrow €100 from these people and they're looking for €400 next week."

Declan Duggan, manager of Ballyfermot Credit Union, has noticed that moneylending is becoming more prevalent now as the repercussions of the credit crunch are beginning to be felt. Ballyfermot Credit Union will help borrowers to get rid of their loan shark debt immediately, but only if the person has a reasonably good track record with them. If the credit union can't assist them, they will refer them to the Money Advice and Budgeting Service (Mabs).

Working together with the credit union movement, Mabs enables its clients to regain control over their finances by opening a special budget account. And by helping them to start saving small amounts with credit unions, Mabs also enables people to access affordable credit in the future and move away from their reliance on moneylenders.

Mabs also administers a loan guarantee fund, which is used to guarantee loans advanced by the credit unions to Mabs clients who do not satisfy the normal criteria. Although Combat Poverty's Corr feels that this is a great service, she says it is not adequately promoted, "which is a pity".

Other operators occupying the same murky financial sector as loan sharks - or the "sub-subprime sector" as Corr calls it - include pawnbrokers, and financial suppliers offering cheque cashing and pay advance facilities.

Traditional pawnbrokers, dubbed "the poor man's bank", flourished in years gone by but are now a dying breed, with just a handful still in existence in Ireland. But although the pawnbroker in his original incarnation has almost vanished, new replacements are popping up to fill the gap. Take the Cash Converters franchise, for example. Part pawnbroker, part retail outlet, the chain is spreading rapidly in Ireland, with seven stores already open here.

In addition to pawnbroking, where the customer receives a loan in exchange for an item left with Cash Converters for up to six months, after which point the retailer can sell the item on if the loan is not repaid, it also offers a buy-back facility (a short-term version of pawning), and payday advances. When the Irish headquarters was contacted, they were unwilling to disclose the standard rate of interest charged on the financial services offered.

They did reveal that the current economic climate is leading to a surge in business. "We've seen some expensive stuff coming through our doors," general manager Shaun Gavin says. "We've seen an uplift in buybacks being put in place." People are selling off expensive branded belongings (such as televisions) and replacing them with cheaper second-hand or graded goods.

The National Consumer Agency (NCA) is responsible for regulating and issuing licenses to pawnbrokers, so anyone with a complaint or query should contact them. Consumers should also note that licensed pawnbrokers are required to indicate the interest rate charged on a notice in their premises and on all pawn tickets issued.

A step up from moneylenders and pawnbrokers in the financial pecking order are the sub-prime operators, who brand themselves as "specialist lenders". These lenders target people whose mortgage applications have been declined by mainstream lenders due to a tarnished credit history or difficulty verifying their income because of being self-employed.

As a result of new legislation introduced earlier this year, sub-prime lenders in Ireland now face the same level of scrutiny as traditional mortgage lenders. They are now authorised and supervised by the Financial Regulator and must comply with the consumer protection code.

If the cautionary tale of sub-prime meltdown in the US isn't enough to deter people from these "open-minded" lenders, the high interest rates charged should certainly give them pause for thought.

In the past, Mabs has warned that the sub-prime route should be avoided where at all possible. For those who have no other choice, it should only be viewed as a short-term means of improving their credit rating, before switching to a cheaper mortgage as soon as possible. As with most financial products, the sooner you can get back on the mainstream track, the better.