THE Archbishop of Canterbury has vowed to force Wonga, the payday lender, out of business, by using the Church of England's resources to bolster the country's credit-union movement.

But his campaign was damaged on Thursday when it was discovered that the Church Commissioners had invested in Accel Partners, a private equity group that helped to launch Wonga.

On Friday, the Archbishop told Radio Four's Today programme that he was "embarrassed" and "irritated" by the news - uncovered by the Financial Times - but that he had "no illusions" about the complexity of investment.

Lambeth Palace said that they had been unaware of the investment. "We will be asking the assets committee of the Church Commissioners to investigate how this has occurred and to review the holding."

The Archbishop told Total Politics magazine, while at this month's General Synod, that he had had a "very good conversation" with Wonga's chief executive, Errol Damelin: "I said to him quite bluntly we're not in the business of trying to legislate you out of existence, we're trying to compete you out of existence. He's a businessman; he took that well."

On Thursday, Dr Malcolm Brown, director of Mission and Public Affairs at the Church of England, told Today that the Church was "not trying to set up a rival set of companies or credit unions" but could support the community-finance sector in becoming "much more robust" by providing expertise and using its 15,000 buildings to address a dearth of outlets.

The Church was already in the process of setting up a credit union for clergy and staff in the Church of England.  

On Friday, the Archbishop confirmed that £75,000 of the Church Commissioners fund of £5.5 billion had been invested in Wonga "through an indirect holding".

"It shouldn't happen, it's very embarrassing, but these things do happen," he said. "We have to find out why and make sure it doesn't happen again."

The Church of England Ethical Investment Advisory Group (EIAG) recommends against investment in any company that derives more than 25 per cent of its revenues from "high interest rate lending" (the same applies to tobacco, gambling, alcoholic drinks, and human embryonic cloning).

The Archbishop said that his own view was that this was "probably too high a level. . . I think we have to review these levels and make sure that we are consistent between what we're saying and what we're doing."

However, citing the "complexity" of the markets, he argued that "If you exclude any contact with anything that directly or indirectly at any point gets you anywhere bad you can't do anything at all."

The Church of England would not itself be investing in credit unions, he admitted, because "it's a business model that we can't quite see how you can make work well".

By supporting the sector, the Church could "put our money where our mouth is", he argued: "If we can't get it right, then we don't do it, that's the answer. But it's better to a have a go than just to stand and wring your hands and say 'it's all terrible'. . . We get it wrong plenty often, we're fallible as anyone. We don't stand on the sidelines, on some kind of great podium, lecturing everyone else, that's just not how it works."

The Archbishop has been an outspoken critic of lending in both the mainstream financial and payday-loan sectors (News, 15 March). He told Total Politics that expanding the credit-union sector would be a "decades-long process".

There are currently 400 credit unions in Britain, serving just two per cent of the adult population, compared with Ireland (75 per cent) and the US (44 per cent). Nine credit unions have collapsed this year, taking the total in the last two years to 21.

In April, the Government announced that it would invest £38 million to "modernise and grow" the sector.

Asked about Archbishop Welby's comments, the Chancellor George Osborne told the BBC: "We are now regulating the [payday] sector. I am all in favour of credit unions and all sorts of other channels to allow families to get credit. I want to see as many options for families as possible."

On Thursday, Mr Damelin of Wonga said of his meeting with the Archbishop: "There is mutual respect, some differing opinions, and a meeting of minds on many big issues. On the competition point, we always welcome fresh approaches that give people a fuller set of alternatives to solve their financial challenges. I'm all for better consumer choice."

Some financial commentators have defended Wonga in recent weeks, arguing that it is more transparent than banks or credit-card providers. The company says that it is "only interested in lending to people who we believe can afford to repay us without undue financial stress". Its website home page allows customers to select a precise amount to borrow (up to £400), and length of repayment (up to one month) and shows the total cost of repayment.

It rejects 60 per cent of applicants, the default rate on its unsecured personal loans is 7.5 per cent, and nine per cent of loans are extended, at the customer's request. None can be extended more than three times. It charges interest of one per cent a day.

If the repayment date is missed, interest will continue to accrue for up to 60 days at which point the balance is frozen.

An online video explains how an annual percentage rate (APR) - of 5853 per cent in the case of Wonga - is calculated. The company argues that APR was not designed with short-term loans in mind and its rate is based on the assumption that the loan is extended several times during a year and never paid off.

A review of the payday-lending sector conducted by the Office of Fair Trading (OFT) earlier this year found that about a third of loans in the sector are repaid late or not at all. In June, the OFT referred the market to the Competition Commission, after expressing concern about "deep-rooted problems with the way competition works".

The Archbishop said on Friday that it had not been his intent to single out Wonga, which was a "very professionally managed company . . . There are plenty of others much worse."

The Archbishop was not the only character in the Wonga story to be embarrassed this week. Papiss Cissé, a footballer who plays for Newcastle United, who had refused to wear the team's strip branded by Wonga, citing his Muslim beliefs, agreed to put it on this week, after photos emerged of him visiting a casino.

From Angela Tilby's Church Times column last week (Comment, 19 July)

"Here's an idea. Credit unions make a real difference to those who are on the edge of survival. A credit union has just been launched to help the clergy. It's a shame that it started this way, but the Archbishop has suggested that the Church could build on this, using church halls as a base for local credit unions, as an alternative to pay-day loans.

"If this really worked, and the Church facilitated a network of credit unions, it could put the loan sharks out of business. Forget about bums on pews. Humility, like charity, begins at home."