Money on the margin: Financial exclusion and ethnicity

Matt Ford
Friday, 5 December 2014

Over the last few weeks I have published blogs on various aspects of disadvantage for Black and minority ethnic people. The aim has been to frame discussions about the criminalisaton of young black men within the wider context of vulnerability and discrimination. I have so far covered poverty, compulsory and post-compulsory education and employment. Here I discuss financial hazards. 

The poverty premium

Firstly, it is not unreasonable to believe that a lot of BME people will face the extra costs associated with having a low income. The 'poverty premium' describes the higher cost per unit poor people pay for certain goods and services due to limited choices.

The premium can arise when accessing credit, cash or insurance, and when paying for fuel, food or utilities. For example, people on low incomes are less likely to be able buy essential white goods outright and so spread the cost over a longer period. These payment plans can mean paying hundreds of per cent more for an item. The poverty premium is estimated to add as much as ten per cent more to a minimum household budget.

Since BME people have higher rates of poverty, they are more likely to pay more for essential goods and services. In some cases this could result in BME people falling below a minimally acceptable standard of living.

Financial inclusion

Secondly, Black and minority ethnic people face restricted access to essential/basic financial products and services. They can be excluded from banking, credit, insurance, savings, pensions and financial advice, among other things. 

Financial exclusion can limit people's ability to take advantage of certain opportunities and have a negative impact on their quality of life. For instance, it can restrict people's employment options, make it difficult to cope with planned or unplanned changes in circumstances, and result in a paying a premium for certain transactions. 

Having a bank account is really important as it enables people to carry out everyday activities, and it is the preferred method for paying income of various kinds. Black people are the group least likely to have a transactional bank account, and 6.1 per cent of black men don't have a bank account at all.

Savings provide a safety net against planned or unplanned costs and falls in income. Without savings people are therefore more susceptible to declining living standards and debt when these costs arise. Around 55 per cent of black men have no formal savings, compared to around 35 per cent of white men. For black people who do have savings, the median value, at £2,000, is significantly lower than those of white people, who have average savings of £3,000. In fact, black people have the lowest value savings of any ethnic group.

Pensions are a form of savings which provide income for people when they retire. Out of men of all ethnic backgrounds, black men have the lowest proportion with a private pension. 

Insurance protects people from unexpected costs, enabling them to avoid hardship and debt. Just over 55 per cent of Black Caribbean households have home contents insurance, and astonishingly only 35 per cent of other black households are covered. In contrast, approximately 80 per cent of white households have contents insurance. 

Data on credit and ethnicity is difficult to come by, but we can make some tentative inferences. Given that black people tend to have lower incomes and higher unemployment rates, they are more likely to have limited access to credit. Money they are able to borrow is likely to be charged at significantly higher interest rates than 'prime' credit. Given that black people are more likely to need credit to cover the cost of living, this can cause further hardship.

Similarly, data on access to financial advice and ethnicity is sparse. Recent qualitative research found that because BME people have high unemployment and low incomes, they are likely to need advice around debt and benefit issues. Given that black people have less access to basic banking services they are more likely to be excluded from formal financial advice. Language barriers and distrust of banks were also identified as factors that may prevent BME people's access to financial advice.

To read more about the ethnic penalty click here. If you would like to discuss the reasons behind the criminalisation of young black men please come to our event on Wednesday 28 January.