Access to financial services and credit is generally regarded as a necessity to lead a normal life. Whether it is basic bank and saving accounts, a mortgage to buy a house or loan to start a business, these are some of the essential components of the modern economy – and modern living.
Yet financial exclusion – the inability to access these financial services – is a problem for many people. And there is mounting research to show that certain sections of society are affected more than others. There are two main areas where access to finance is needed: consumer credit and mortgages. In both areas, there is a large amount of evidence to show that ethnic minorities are worse off than white households.
Financial exclusion plays a critical role in increasing poverty and limiting prosperity for all. The link between ability to access finance and prosperity is a simple one. Take, for example, consumer credit. It enables spending that exceeds our monthly budgets and gives us the ability to stretch the cost of big (and often important) purchases over time. Credit allows us to smooth our income and broaden investment opportunities. This can lead to, for instance, better housing or further education and training.
Access to mortgages is also very important. Being a homeowner is an essential component of wealth acquisition and can increase status and standing in society. Restricted access to finance, on the other hand, can exacerbate economic disadvantage that may lead to social exclusion.
Investigating the causes
Ethnicity is one of many factors that influence access to finance. These include a person’s level of income, their net worth, education, employment status and age. Yet in advanced economies, the financially excluded include a disproportionate number of ethnic minorities.
Some credit applicants may be excluded because they do not fulfil the minimum economic criteria (such as insufficient income, net worth and so on). But there may also be discrimination on non-economic grounds.
Financial exclusion has been widely researched in the United States, particularly access to mortgages. Studies show that ethnic minorities – in particular African Americans and Hispanics – not only have lower access to mortgage funding, but they pay more for mortgages when they get them and are more likely to be subject to predatory lending practices. Findings for consumer credit is not as clear-cut, but there is a strong indication that minorities often face disadvantages.
Racial prejudice is also an issue in the UK. Research illustrates economic disparities manifesting themselves in terms of minorities living in poorer-quality housing, worse health and being disadvantaged when it comes to job opportunities. These structural disadvantages faced are most likely fed through into poorer access to finance and financial services.
In a recent paper with my colleagues Solomon Y Deku and Philip Molyneux, we studied 59,000 households in the UK and found there was clear discrimination when it comes to consumer credit. Our analysis found that ethnic minorities are less likely to have consumer credit compared to white households with similar income levels and other characteristics (such as employment, education and age). Even if they are able to obtain financing, their intensity of borrowing is lower compared with white households.
In another recent paper, Philip Molyneux and I also looked at access to mortgages, where we find less inequality. For the average household, there is no difference in the chances of obtaining a mortgage between ethnic minorities and other households, especially at higher income levels. However, black households with low incomes are at a disadvantage in comparison to other households with comparable economic and other characteristics. In contrast, Asian households do not seem to face such inequality.
The exact reasons for this discrimination are unclear. But, its existence is very clear and should be investigated further. Back in 2011, the then deputy prime minister Nick Clegg launched a probe into discriminatory lending practices by banks. He claimed that businesses owned by black Africans were four times more likely to be denied bank loans than “white firms”. Research only partly confirms Clegg’s claims. Ethnic minority-owned UK businesses are found to be more likely to report problems in obtaining loans. But loan denials are also linked to differences in creditworthiness, rather than ethnic discrimination.
Limited access to financing by ethnic minority businesses may in some cases be due to discouragement rather than overt discrimination by banks – ethnic minority businessman may stop themselves from applying for loans because they fear prejudicial treatment. The fact that the problem is ongoing, however, warrants further investigation and the non-economic barriers to ethnic minorities obtaining credit must be removed.