Banking alternatives
Where should you put your money?
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Andy McKechnie is head of sales and marketing for Savings at Halifax, the UK's biggest provider of savings accounts. |  |
Friday, 17, Oct 2008 05:41
With savers panicking their cash will be swallowed up by a financial black hole and borrowers struggling to persuade banks to lend to them, consumers are losing their faith in the high street banks.
The people who made the most of the high interest rates available to those willing to shop around are feeling nervous after the demise of table-toppers Kaupthing Edge and Icesave; and the customers who stuck with their building society even after it became a bank are now seeing their shares shrink before their eyes.
But what are the alternatives to banks and building societies? Sticking your savings under a mattress is certainly ill-advised and your family and friends may not be keen to lend you cash.
Sarah Routledge takes a look at a few other options out there for you.
Credit Unions
Taking personal finance back to basics, credit unions are straightforward as a concept.
A credit union accepts people with a 'common bond' and pools their savings. When the pool is big enough, members can borrow from the union and the interest they pay is distributed as dividends to encourage members to deposit their cash.
The 'common bond' differs from union to union, but is usually a condition of living or working locally, or belonging to an organisation.
Although the union employs some staff for its day-to-day running, decisions are made by a voluntary board of members, elected by other members.
According to the Association of British Credit Unions (ABCUL), many credit unions in Britain have seen a surge in interest in recent months as people look for a safe haven for their savings and access to affordable loans.
Mark Lyonette, chief executive of ABCUL, says: "The recent crisis has highlighted the benefits of mutual ownership and credit unions have been successful in this country and all over the world because of the way they look after their owners - the members.
"The members of credit unions have been sheltered from financial turbulence because credit unions don't speculate with their members' money on global markets. The money they raise locally through savings is ploughed back into the community in the form of affordable loans to those who need them."
To find your nearest credit union and to see if you can join one, go to www.abcul.org.
Zopa
Zopa.com– which means 'zone of possible agreement' – has been around for three years now and since the credit crunch last year, business has doubled.
The website acts as an intermediary through which members can meet, agree a rate and lend or borrow from each other.
As no bank is involved taking a slice of the profit, lenders can get a much better return than in a bank account – typically around ten per cent fixed for three years – while borrowers can expect to get a discounted rate for their cash.
While investing money in this way is not protected by the Financial Services Compensation Scheme (FSCS) as it would be in a bank or building society, the returns are higher. It is also looking like a potentially far less risky proposition than the volatile stock market at the moment.
There are also several important safety features to protect your money if you want to be a lender.
Spokesperson Martin Campbell says: "We turn away far more would-be borrowers than the banks do. So we are in no way sub-prime lenders."
Borrowers coming to the site tend to be creditworthy people who could get a loan from a bank but decide to try Zopa instead to get a better deal – borrowers can expect a discount of up to 20 per cent, according to Mr Campbell.
However, Mr Campbell says there are people coming to the site now who are considered creditworthy but have been turned away by cautious banks.
Zopa thoroughly checks every potential borrower and issues them a credit rating. The lender can then decide how much risk they want to take. However, all amounts over £500 are spread among at least 50 people, so in the event one person defaults on their loan, the lender simply loses some interest.
But the vetting process is so thorough, the default rate is just 0.04 per cent, Zopa says.
Islamic banking
Islamic institutions have steered clear of the money markets that have caused the credit crunch by drying up – instead they only raise funds through depositors and shareholders. This gives them liquidity, when other banks are finding their funds drying up.
Accountants BDO Stoy Hayward point to the fact Islamic banks are one of the few financial institutions that still have significant sums of money available to finance individuals and businesses.
Dan Taylor, head of banking at BDO Stoy Hayward, explains: "Growth of Islamic banking in the UK will be attributed to their more conservative approach to financing, as the risks are shared with the investor, much like the private equity model.
"In addition, it is more difficult for Islamic financial institutions to use leverage; therefore their risk profile is naturally lower,” continues Mr Taylor.
Islamic finance is not just for people seeking a banking service that is acceptable to their religious beliefs – its more conservative and arguably more ethical approach to finance appeals to a wide range of people.
Currently 20 major global banks operating in the UK have set up units to provide Islamic Financial Services. They have been joined by five stand-alone Islamic banks.
This compares with Switzerland which has five Islamic financial institutions and France and Luxembourg with four each.
"In light of the market turmoil, we could expect the number of stand alone Islamic financial institutions present in the UK to double over the next three years, further reaffirming London’s position as the pre-eminent centre of choice for the provision of Islamic Finance," Mr Taylor predicts.
Seek professional advice
In these troubled times, it may be best to seek the advice of a professional. An independent financial adviser (IFA) could help you asses your options and look at the best places to put your cash.
Unbiased.co.uk spokesperson Karen says: "An IFA can help you because they are in a perfect position to know what is going on in the market.
"They can asses what risks you want to take and advise you on products. You can find a financial adviser local to you through unbiased.co.uk."
The website recommends you ask lots of questions when meeting with an adviser. "Don't feel overawed because they know lots about finance – it is your money!" Karen says.
Find out why they are recommending certain products and be clear about what you want from your investment – whether it is safety, or higher growth.
The important thing is not to panic. Alistair Darling and Gordon Brown have made it clear the government will step in if banks are in trouble. But if you are disillusioned with big banks, there are alternatives to consider.
Sarah Routledge