With confidence in banks at an all-time low, many more savers and borrowers are seeing credit unions as a valid alternative. Unlike the banks, they have not lost stacks of money in high-risk financial derivatives and, with borrowing from banks now much more limited, credit unions are an attractive option — especially as they comply with constraints on interest rate charges.
But there has been a downside. Some credit unions became over-exposed during the recession. In particular, several Irish credit unions loaned too much money to property developers at the most inflated point of the property market bubble. Several collapsed as a result. This is another strong argument for credit unions, like building societies, to avoid high-risk activities.
The situation in the Irish Republic has become so acute that widespread consolidation of credit unions is essential, with substantial rationalisation likely to see many fewer unions survive than the current 409.
Jonathan McMahon, director of the credit institutions at the Irish Central Bank, has congratulated the Irish League of Credit Unions for running an effective system of financial guarantees that prevented savers from losing their funds.
But, in an important recent speech, he added: “While the ILCU support has been important to the maintenance of the sector’s stability, the Central Bank considers that somewhat more definitive actions will also be required if the sector is to be placed on a stable long-term footing.”
Mr McMahon warned a finance conference that the credit union sector must move to a different structure, not least because while in Ireland it has assets of over €14.3 billion (about £12.5bn), this was held in unsecured personal loans. Given the depth of crisis in the Irish financial system at present, there are obvious uncertainties about the capacity of borrowers to repay these sums and over what time scale.
But the main focus of Mr McMahon’s speech was that Ireland still has a large number of small credit unions — with over half having assets of less than €20 million (£17.5m) and another 21 per cent with assets of less than €40m (£35m). On this basis, he suggested, consolidation offered not only a route towards greater efficiency and solidity, but also for the re-emergence of a viable financial mutual sector in Ireland following the collapse of the Educational Building Society and the Irish Nationwide Building Society.
“In a world where there are no large mutuals, there is now an opportunity for the credit union sector through a process of consolidation to step into the gap which has been left by the disappearance of those two institutions,” said Mr McMahon. This process is even more attractive, he believes, because the consolidation across the main banking sector in Ireland will leave only two major players standing: Bank of Ireland and Allied Irish Banks, both with huge levels of support from the government and limited capacity to lend.
The Irish League of Credit Unions seems sympathetic to the proposal. A spokeswoman for ILCU said: “Discussions about the strategic direction of the credit union sector are
ongoing. However, we welcome recommendations in relation to the most effective regulatory structure for credit unions taking into account our not-for-profit mandate, volunteer ethos and community focus, while paying due regard to the need to fully protect depositors’ savings and financial stability, and our need to serve our members in the most efficient way possible.
“Credit unions have not been immune to the current financial crisis and when our members suffer, we suffer. However, we have weathered the financial storm well, increased our membership and continue to serve local communities across the country as we have done for over 50 years. The vastly different financial services landscape in which we are now operating offers great opportunity for the credit union movement. This is a very important time for us.”
But with consolidation of the Irish credit union sector under way, there are equally relevant questions about whether this should be the right direction for the movement in Britain. While the sector is, in general terms, in good health, there have been problems with some smaller credit unions, particularly in relation to their conformance with best practice in corporate governance.
Mark Lyonette, Chief Executive of the Association of British Credit Unions, told the News: “There are some great examples of effective and successful smaller credit unions, so whether a credit union can operate efficiently and sustainably does not depend entirely on its size. But great benefits can come from consolidation and credit unions that may be struggling with a lack of resources may benefit from merging with other credit unions. This ensures members can continue to receive services, produces economies of scale and increases sustainability. It can result in new products being offered to all members of the new credit union, such as the Credit Union Current Account.”
He says an upcoming change in the law will help this consolidation process. “Credit unions in Britain currently have to prove that everyone who is eligible to receive its services has something in common, whether that is working for the same employer, living in the same area, or belonging to the same association.
“Once changes come into force this year, credit unions will have much more flexibility around which credit unions they can merge with — a credit union serving residents of a city could, for example, merge with a credit union providing services to employees of a certain business, even if the two groups have nothing in common.
“Another way credit unions can benefit from working together is by sharing resources behind the scenes. ABCUL’s plans for a central banking platform will enable many important routine tasks to be carried out behind the scenes, leaving credit unions to get on with the important work of assisting their members and developing their businesses.”
He added: “Like any other business, co-operative or otherwise, credit unions have felt the effect of the financial crisis. But as well as the challenges of coping with more members who are struggling to repay their loans, and reduced levels of interest on money they keep on deposit, credit unions have also benefited from an increased mistrust in mainstream banks.
“Many have reported an increase in large deposits from new members keen to put their money in a local and ethical financial services provider with a simple business model. In the wake of the financial crisis, in April 2009, nearly two thirds of credit unions reported an increase in the levels of savings deposits over the previous year.”
All of which suggests the credit union movement in Britain is also set for a process of rationalisation. Many readers will mourn the loss of local identity — in the same way that they have with consolidation in the retail co-operative sector.
But in the finance sector there is a new reality following the banking crisis. Financial institutions must now be better governed and better led than before and demonstrate conformity with tougher regulatory requirements. It may well be that larger credit unions are in the best position to comply with this — on both sides of the Irish Sea.