How Irish credit unions are holding up against the financial crisis

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Ireland has one of the world’s largest credit union sectors, per capita. While the movement is perceived to have been around for generations, the first credit union in the Irish Republic was actually started in 1956. Its roots were firmly in a co-operative movement, with co-operatives established in Dublin to promote jobs and economic activity.

According to the World Council of Credit Unions, as of 2010 – when its most recent figures were compiled – there were 487 credit unions operating in the Irish Republic. (There are fewer now, because of amalgamations.) These represented 3.2m members. Bearing in mind the total population of the Republic is not much more than 4.5m, this is an enormously large percentage of the adult population.

The most recent research by the main trade body, the Irish League of Credit Unions, found that about 65% of Irish adults belong to a credit union. Presumably many of these belong to more than one credit union.

In addition, there are about 180 credit unions in Northern Ireland – which means that almost half of all the UK’s credit unions are located there. This is despite Northern Ireland representing only about 3% of the total UK population.

Last year’s public survey for the Irish League of Credit Unions reported substantial satisfaction with the sector from its members. Some 79% of the public believed that the financial crisis meant the credit unions had become more relevant and 40% of members reported higher levels of services from their credit union than from other service providers – a mere 2% said the service standards at credit unions were inferior to those of other financial institutions. One in three non-members expressed an intention to join a credit union during the course of this year.

Despite difficult trading conditions, credit unions have done at least as well as the Irish banks in terms of managing their loan books – despite a membership that is likely to be suffering particularly badly from the recession. Most loans to members are being serviced, with 18.5% of issued loans in repayment arrears. Ireland’s Central Bank reports that around 20% of banks’ mortgage lending is in arrears.

Ireland’s credit union loan arrears are fully covered by provisioning, so the unions will be able to continuing trading with relatively little damage, even if all the debts in arrears go bad (and they won’t). In September last year, the credit unions held members’ savings of more than €10bn (£8bn), while debt arrears were a little over €700m (£570m). There is some evidence that members’ commitment to their own credit unions helps to keep defaults reasonably low.

Despite this, the credit unions have found the financial crisis a difficult time. The Irish government agreed with the European Commission to bail-out bondholders, who had invested in the Irish banks – Allied Irish Banks, the Bank of Ireland, Anglo Irish Bank, Permanent TSB and the Irish Nationwide.

This cost to its taxpayers was about €40bn (£32bn), after allowing for subsequent fund recoveries. By comparison, the cost of the UK’s bail-out of its banks at present stands at about £500bn, but is likely to fall significantly as the banks are returned into the private sector (for example, with the sale of Lloyds’ shares). But the UK’s economy is about ten times larger than that of Ireland.

But while the Irish government succumbed to pressure from the European Commission, the International Monetary Fund and the European Central Bank to bail out the big investors – which were primarily the big European and US banks – it rejected calls to provide comparable support to the credit unions. This was despite the fact that it was its own electorate whose savings were in the credit unions and who owned the credit unions.

Irish credit unions held much of their members’ savings in bonds in the Anglo Irish Bank – it was offering interest rates significantly higher than those of other banks. This seemed a reasonable investment at the time, given that the credit ratings agencies had given Anglo Irish an A rating.

At the time Anglo Irish crashed, some 16 Irish credit unions held about €16m (£13m) in savings in the bank. Under the standard compensation scheme, the state provided compensation of less than 10% of this amount. The credit unions say they suffered a total loss of about €15m (£12m) as a result. This is in addition to other investment losses by the credit unions because of the financial crisis of more than €22m (£18m) in bonds held in Anglo Irish and another €90m (£73m) on bonds held in Allied Irish Banks, the Bank of Ireland and Permanent TSB.

Irish credit unions are suffering another problem, as well. The downturn has encouraged people to reduce their spending, which in turn has reduced their appetite for loans. As a result, the credit unions are earning less from interest on loans to members.

Despite this, demand for lending is strong with some credit unions – to the extent that the Central Bank is concerned at the capacity of some to service their lending requests. The Central Bank is now keeping a close eye on credit unions – and has issued directions to one of the largest, in Dublin, to restrict the size of its lending.

However, the issue of how the current and previous governments have addressed the financial crisis has continued to affect the electorate’s approach to the main political parties.

It seems that the current government – a coalition of Fine Gael and Labour – and the previous government – of Fianna Fail and the Greens – are blamed equally by voters. Sinn Fein has benefited from a surge in support as the vocally anti-bail-out party, with the result that it recorded a strong vote in the recent European elections.

There is now a widespread perception that the main political parties are more sympathetic to the big global banks than their own credit unions. And those parties have accordingly been punished by the voters in the European elections.

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About Paul Gosling

Paul Gosling is a journalist, broadcaster, author, researcher, copywriter, public speaker and co-operative analyst. He specialises in the economy, public services and personal finances.