A "community bank" offering low interest loans and credit to people struggling with crippling debts and household bills is to be set up by Kent County Council.

The proposal for the Kent Credit Union is expected to be agreed by county councillors on Monday.

It is one of a series of steps aimed at helping the county weather the recession and comes after KCC agreed to pump more money into the Kent and Medway Citizens Advice, which has reported a 27 per cent increase in demand for debt and benefits advice this year.

Under the scheme, which would be regulated by the Financial Services Authority, people would be able to take out loans to help meet bills and other costs without facing the prospect of escalating interest rates.

An estimated 40,000 people in Kent are unable to access bank accounts and other services. Frequently, they are forced to resort to loan sharks for cash and end up in even greater debt because of crippling interest charges. KCC says the bank would be available to about 1.3million residents.

A recent report suggested Kent suffered from a lack of community-based financial services and that the economic downturn meant many more people could face problems. Problems are more acute for people living in Gravesham, Swale and Dover.

The county council has already agreed to pump £250,000 into the initiative and is now in talks with a number of groups, such as housing organisations, and district councils about raising the capital needed to get the scheme up and running.

Cllr John Simmonds, who is to act as KCC’s representative on the board of directors, said it was important to offer a service that stopped people falling foul of loan sharks. It is possible that the new scheme will work alongside existing credit unions run in Thanet, Canterbury and Medway.

"There is an awful lot of people who do not have any direct form of credit and it is a very difficult market to reach. We will have to be very sensible about how we operate things and there will be firm controls in place. The problems in the economy are the most severe we have seen for a long time and this is an important part of our wider initiatives to support independence."

KCC recently launched a campaign to help people during the downturn, dubbed "Backing Kent People."

Cllr Kevin Lynes (Con) cabinet member for regeneration, said the aim was to draw together different organisations to help make it easier for people to get help.