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Home Opinion Recognising the potential of credit unions
Finance • Local Community • Banking Reforms

Recognising the potential of credit unions

Mark Lyonette - 06 June 2012

British credit unions must work with government and European counterparts to ensure directives designed to rein in the banks don’t accidentally hinder their unique sector's growth
Credit unions’ growth in recent years has led to a situation where over 90% of the population has theoretical access to their services and nearly a million people use a credit union for saving, borrowing or other financial services.  

But there are still many people who are paying very high rates of interest for credit or struggling to access transactional accounts that meet their needs.  If credit unions are to address the needs of millions of people on lower and middle incomes, then they need to continue learning from their international colleagues and the changes that have happened in the sector in the past 20 years needs to continue apace.   

Where are credit unions now?

Credit unions vary and so do their members; the smallest may serve just a couple of hundred members in a local area; the largest are fully staffed and many of these offer the Credit Union Current Account.  Most credit unions operate for people who live or work in a certain area, but there are also credit unions for people working in different employment sectors, including the police, fire service and public transport.  

Membership in credit unions in Britain has nearly trebled since 2000 and Savings and loan associations (S&L) have increased more than threefold.  The sector currently looks after assets of approaching £900 million on behalf of nearly a million adult members and junior savers.  

But the largest home credit provider, Provident Financial, which charges upwards of £140 to borrow £300 over six months, had over 1.8 million customers last year.  Around three quarter of a million adults live in households without access to a current account, and in the wake of the financial crisis, many people want to look locally for their financial services.  So if credit unions are to offer an alternative to more people and make a difference to the lives of those that the mainstream financial services providers cannot or will not serve, they need to scale up, both in terms of the services they provide and how they can be accessed.     

What do credit unions need to succeed?

Credit unions exist in over 100 countries, looking after assets of over $1.5 trillion on behalf of 188 million people, so the British credit union movement, still very much in its development phase, has much to learn from colleagues around the world.  

This learning has helped ABCUL (The Association of British Credit Unions Limited) to develop a framework for the British sector, helping to prioritise what the sector needs to sustainably meet the needs of many more people.  While funding, governance, management and products are all essential parts of this framework, the legislation and regulation must be right before any of these will have a proper impact on the sector’s development.  

Appropriate legislation and proportionate regulation

The legislative framework is key to the success of any sector.  Designed for small, volunteer-led organisations, the Credit Unions Act 1979 was credited for many years with keeping the movement small.  A review of the legislation launched in 2007 led to changes in January 2012 which now allow credit unions to add in different groups into membership and provide services to community groups and businesses. Some credit unions will also be able to pay interest on savings, instead of a dividend.

Credit unions have been regulated by the Financial Services Authority since 2002, but mainstream regulation does not mean, and should not mean, that credit unions are treated the same as other regulated firms.  It is essential that the regulation is proportionate to their size, their risk and takes into account their unique characteristics.  Credit unions have a simple business model which does not gamble with its members’ money and their mutual structure brings with it a built in watchdog in the form of its members.   

The break-up and abolition of the FSA (Financial Services Authority) presents challenges for the sector; they will be regulated by two bodies and the likely move of consumer credit regulation to the Financial Conduct Authority could see credit unions facing another layer of regulation.  

But it is not just UK regulators which could put a proportionate regime at risk. Regulation for the financial sector increasingly starts life in Europe, or further afield.  So British credit unions need to work with other European credit union sectors to raise awareness of their unique features in European institutions and work with the UK Government to ensure that directives designed to rein in the banks don’t accidentally trample on credit unions.  

As credit unions grow and develop, the regulation needs to develop in proportion to their size and their risk and the governance and management within the sector needs to keep pace. New opportunities for partnerships and the diversification of membership are bringing a wider range of people onto credit union boards and into management positions and credit unions continue to learn through international links and from the wider financial services community.    

Developing collaboratively

Studies of credit unions and the wider mutual finance sector internationally demonstrate a clear correlation between behind the scenes integration in systems and products and their market share.  

Developing the right products within sustainable business models is another essential ingredient in the development of the sector.  Credit unions in Britain have so far worked together to fund and develop the Credit Union Current Account and a prepaid card was launched by ABCUL last year.  

The increased buying power of credit unions working together - whether that’s through developing products such as the Credit Union Prepaid Card or pooling reserves to get a better return - makes sound financial sense.  

The collaborative model of working means that even smaller credit unions in the US, New Zealand and Canada can provide a full range of services to their members, and national marketing is made easier because of the more uniform standards of service.  

Maintaining a local identity

But as credit union sectors get larger and centralisation begins to play a bigger role in how they operate, fears are often raised about whether they can retain the local identity for which they are valued.  

As credit unions began to merge around ten years ago, and began to cover larger areas such as cities and counties they began to face these problems.   Through networks of local access points, through workplace representatives for employee credit unions and the increasing use of technology and communication they have strived to keep the local links that people value.  

New opportunities to bring community groups, businesses and even local authorities and social landlords into membership will assist in maintaining local identities and indeed increase activity in the local economy, keeping money in the pockets of local people.  

But the challenges of raising awareness and making access easy have not so far been cracked.  More needs to be done to make credit union services easily available to everyone, in their local communities.  

This can be achieved through the collaborative business model: a back office for credit unions could link into the back office of other organisations, including the Post Office.  This would bring easy access to credit union services to communities across Britain, encourage more people to invest in their local communities by investing in their local credit union and greatly increase access to affordable credit and other financial services.  But the speed of how this will happen depends in part on the final ingredient needed to grow a sustainable credit union sector – the appropriate funding.  

Appropriate funding

The first UK government funding for credit unions didn’t come until 2006, with the introduction of the Growth Fund as part of the Financial Inclusion Fund.  This was a very different type of funding from the grants culture which was predominant until that time.  Credit unions were contracted by the Department for Work and Pensions to provide affordable credit to people on lower incomes in their communities.  To March 2011 the Fund enabled over 100 credit unions to provide loans to over 450,000 people and help many of them to start saving for the first time.  

The coalition government recognises the success of the Growth Fund and has carried out a feasibility study into how a potential £73 million in funding could be used to modernise and expand credit unions.  The results of this are expected soon, but a recent report by the DWP1 reported that the study recognised the potential of credit unions to increase access to financial services for people on lower incomes and that the sector could develop in a way that could lead to services becoming accessible through the Post Office network.  

The details of any future funding have not been released, but the recognition of the potential of credit unions is very welcome. We know what credit union sectors already achieve in other countries, both in terms of increasing access to fair finance and in providing competition to the commercial banking sector.  As long as credit unions are not stifled by regulation, they can work together to develop the business models, products and access that will lead to a sector that can meet the needs of millions of people in years to come.  

Mark Lyonette is chief executive officer at the Association of British Credit Unions

1 Social Justice: transforming lives. DWP  2012

This is a contribution to Policy Network's work on Social Policy and Changing Welfare States.

Tags: Mark Lyonette , finance , local community , banking reforms , Financial Services Authority , credit unions , Savings and loan associations , Provident Financial , political economy , post office , Department for Work and Pensions , UK


08 January 2013 11:55

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21 October 2012 09:16

Shifting your existing debt to aehtonr loan isn't the answer. With a bad credit history, you are going to be the target of every loan scam not just high interest but up front fees.Take a close look at your spending habits and figure out how to cut expenses and increase income. Get a second job pizza delivery seems to be pretty flexible. Make a strict budget. Elimnate the extras cell phone, eating out, new clothes, premium cable and internet. Squeeze every penny out of that budget and slap it on your highest interest debt, while paying minimum on the rest. When the highest interest rate debt is paid, move to the next till they are all paid off.It will take 2 or 3 years but you will building a good credit history and won't have to resort to high interest consolidation loans.

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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