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 a significant sum in Accel Partners, a private equity group that helped to launch Wonga.

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 the 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 Radio Four's Today programme that the Church was "not trying to set up a rival set of companies or credit unions" but considering what it could do to support the community finance sector in becoming "much more robust".

He suggested that the Church could tackle obstacles to the further expansion of credit unions: a lack of appropriate expertise and dearth of outlets. It had "quite a lot of fairly expert people, not always in the right place" and 15,000 buildings.

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

The Archbishop has been an outspoken critic of lending in both the mainstream financial and payday-loan sectors (News, 15 March). Last year, he described in the House of Lords how credit unions in his "greviously underbanked" diocese of Durham had "made good finance and access to credit available in an extremely deprived area" (News, 21 December). He noted that the Church of England had branches in every community,was "rather good" at handling money, and needed to "get involved and contribute to this in a powerful and effective way". He told Total Politics  that this 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 (all are requested by the customer and none can be extended more than three times). It charges interest of one per cent a day, and its typical loan is £200 for 15 days.

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".

Papiss Cisse, a footballer who plays for Newcastle United, has refused to wear the team's strip branded by Wonga, citing his Muslim beliefs.

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."