Regeneration: Lending help to inner-city companies: A community initiative based on a US model aims to fill the gap in Birmingham as banks abandon poorer urban areas

THERE are often no banks in poor areas, and local people who try to start businesses are likely to be turned down if they ask for credit. In the United States, President Bill Clinton has therefore made the establishment of community banks, lending money in the inner cities, a central plank of his economic policy, an idea that is being copied in Birmingham, in the West Midlands.

The big banks have closed 1,000 branches in four years, and there are now far fewer in deprived areas. A third of the people in Birmingham, according to a Bank of England survey, have either no local bank or are about to lose their only branch.

Birmingham Settlement, a charity that gives financial advice, believes it is the decline of banking that relies on relationships with customers that has led to the loss of local branches. But while poorer people are unable to borrow from banks, bad debts have nevertheless increased. Pawnbrokers and money lenders are able to charge between 60 and 600 per cent as they step in to bridge the gap.

To fill this need in the US, the Senate last month passed the Community Development Act, which sets up a dollars 382m ( pounds 246m) fund to create community banks in poor areas. Community banks should be able to borrow from this fund within a year, enabling them to invest in their own areas. Mainstream banks will also be able to borrow, if they increase lending in deprived areas.

'Local economic health requires local reinvestment and local banking,' said Pat Conaty, an American with experience of community banking in the US who is development director of the Birmingham charity. 'Inner city areas need regular reinvestment like agricultural areas need seasonal rain. Without this, economic deserts and social dislocation result.

'The American example indicates loss rates of only 1 per cent on a turnover of dollars 100m ( pounds 63m) of reinvestment by 40 different community banking ventures. This reinvestment has attracted a further dollars 1.7bn of conventional banking and other banking to the same poor communities. The poor are definitely bankable, and the UK initiative could make a similar difference.'

Without massive government support, it will be impossible to imitate the US initiative in Britain.

But Birmingham Settlement believes its Aston Reinvestment Trust, a community banking initiative for the city's most deprived area, could help local people. Final arrangements to finance it have not yet been resolved, but negotiations are in hand with the local City Challenge, Birmingham Training and Enterprise Council and the Government's taskforce. It is expected that the trust will start with an asset base of pounds 3.5m.

Although it will be a year before the scheme is up and running, recruitment of staff is due to begin next month, and the private sector will be approached for financial support next year. The trust has already appointed Sir Adrian Cadbury, former chairman of Cadbury Schweppes, as chairman, and Sir Richard Knowles, a former leader of the city council, is to be deputy chairman. Bank of England restrictions mean that it will be at least three years before it can accept deposits that it can use to lend. Instead, it will be constituted as an industrial and provident society to issue shares, that will provide capital.

Mr Conaty is development director of the trust. He says some some British local authorities have financed community businesses, but they have too little cash to lend and are too bureaucratic to be helpful.

'Existing loan funds tend to be rather small,' says Mr Conaty, 'and getting a loan is a very slow process which often takes two months. The typical local authority loan fund is about pounds 300,000, where it needs to be pounds 1m or more.'

Mr Conaty says the trust's initial portfolio will be a mixture of safe investments in social housing and the more risky responsibility of financing enterprise. The trust will be particularly sympathetic to people with good business ideas, but whose circumstances make them seem too risky to the main clearing banks.

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