Credit unions have received a heightened profile over the past 12 months, but will they be a simple replacement for payday lenders?
These savings and loan co-operatives date back to 1960 in Derry and 1964 in Wimbledon. The first legislation, in 1979, was the dying act of the Labour government, drawing on the supportive recommendations of the National Consumer Council. The UK government since then has taken successive steps to upscale credit unions, including some relaxation of the requirements on members sharing a common bond and an increase in the cap on interest rates they can charge.
Last year, the government signed a contract with Abcul, the leading credit union association, worth up to £38m and as noted in the previous blog, Unity Trust bank is operating a modest credit union development fund. In the devolved setting, the Welsh administration and Scottish government have also promoted credit unions. But, is it credible that credit unions are seen both as alternatives to predatory lenders, by Justin Welby, the Archbishop of Canterbury among others, and yet also as potential challengers to the dominance by the high street banking behemoths of current account banking? To mount such a twin challenge, they would need a massive investment in back-office capacity – unless they could pool resources to buy agency services, perhaps from another established socially oriented bank. Growth for mutuals works best when it is targeted with care on new members and new needs.
In a similar way, socially oriented community development financial institutions (CDFIs) are seen as helping to plug the micro and SME lending gap faced by ‘non-bankable’ firms. Many of these are micro mutuals, such as the Aston Reinvestment Trust, Black Country Reinvestment Trust, London Rebuilding Society, Fair Finance, Moneyline Yorkshire and the longest-standing CDFI operating on a self-sustaining basis – Co-operative and Community Finance. In an international setting, a forerunner is Shared Interest.
Recent initiatives include the proposal to refer enterprises that are turned down by mainstream banks to CDFIs as a matter of course – something that would require a remarkable growth in the sector. To serve only half of unmet demand in the UK economy, one estimate is that CDFIs would have to expand their operations 123-fold in the case of business loans (as well as 4-fold in the case of social enterprise loans and 71-fold in the case of personal loans).
To some extent that growth is already underway. In 1999, community finance in the UK was in its infancy with just a handful of community loan funds and credit unions were mainly volunteer run. That year, the report, Small is Bankable, was published by Joseph Rowntree Foundation. It was based on the work of a research team led by Ed Mayo, director at the time of the New Economics Foundation and now secretary general of Co-operatives UK, that included me, Pat Conaty and Professor John Doling, of Birmingham University.
The report set out a radical vision and successfully influenced national policy. All its recommendations were put into practice, if not always in full, and much has been achieved over the past 12 years to bring the vision closer to fruition. There are now over 65 CDFIs, and the sector has formed the Community Development Finance Association (CDFA) to share best practices and monitor the economic and social impact of its members.
Further, some, as with credit unions, have taken on paid staff and moved into shop fronts and their finance provision has diversified into several growing fields, including: affordable personal credit, housing improvement loans, community share raising, social venture capital and finance for community land trusts. In 2012, CDFIs lent £200m to 33,400 customers. In 2013, credit unions passed the one million members mark in Britain.
In the research for ‘Small is Bankable’, we drew key lessons from the CDFI movement in the USA. At that time, 15 years ago, the US community investment movement was already 10-15 years old and had already diversified and formed a trade association to lobby on its behalf, as it has now done in Britain. So then what happened in the US?
In the decade that followed, assets in community development loan funds grew from $1.7bn to $11.9bn, assets in community development credit unions grew from $610m to $11.1bn, assets in community development venture capital funds grew from $150m to $2bn and assets in community development banks grew from $2.9bn to $17.3bn. The point is clear, community investment in America has come of age and the post crisis decline in regional commercial banking has created opportunities for them to expand, ironically sometimes in competition with longer-established US credit unions.
The US movement has been aided by the Home Mortgage Disclosure Act and subsequent Community Re-investment Act (CRA) that requires commercial banks to re-invest in areas from which they take deposits. This requirement was enhanced under the Clinton administration and banks had an incentive to comply in order to gain permission to diversify into investment banking following the passing of permissive ‘de-regulatory’ regulation in 1999 which repealed the 1933 Glass-Steagall Act that had separated investment and commercial banking following the previous major financial crisis.
Many banks preferred to supply capital to CDFIs to lend into the communities form which they were extracting deposit, rather than incur the costs of setting up branches to do so themselves. Importantly, however, the research by John Doling and I in Chicago revealed, in a memorable interview with a legendary community activist, Gail Cincotta, that the required detailed, zip-code level, disclosure of lending activity by banks was a vital tool for pressurising commercial banks to fund CDFIs. This was confirmed at a conference held in London a few years back by another prominent US community activist, who addressed the conference as a keynote speaker, the Rev Jesse Jackson.
The UK does not have a Banking Disclosure Act, which is what arguably we need, but we do have the stepping stones. The Financial Services (Banking Reform) Act passed in December 2013 did however contain provision for a requirement for UK banks to disclose some lending details at the post code level. Additionally, HM Treasury implemented in 2002 a Community Investment Tax Relief for investors helping to capitalise CDFIs, and the government provided capacity building funding for CDFIs through the ‘Phoenix Fund’ in the early ‘noughties’.
Growth, however, is not always a good thing, nor is it always a mutual thing. The ‘common bond’ requirement, that defines the community that a credit union serves, has been progressively relaxed in the UK (and increasingly circumvented in the US, allowing credit unions upscale As they do so they will they cease to be community banks, as some of the building societies did before them. The biggest already tend to be work-place based and research by the Woodstock Institute, inter alia, in Chicago, which we visited as part of the research for ‘Small is Bankable’, has shown that ‘upscaling’ commonly leads to credit unions and CDFIs serving the near bankable, but not more of the poor.
A degree of such ‘mission drift’ is also observed among micro-finance institutions around the world as they try to achieve ‘financial sustainability’, or ‘commercialise’. In summary, they fill a gap left by the banks, but do not eliminate the financial exclusion at the ‘bottom of the pyramid’. It seems some subsidisation is needed to achieve the latter and this makes it unlikely that credit unions will in fact simply replace ‘payday lenders’ and the like, as Justin Welby hopes.
Upscaled CUs may thus become less willing to attract the users of predatory lenders and to inculcate the Victorian value of thrift (‘The Mother of Riches’ which ‘Radiates Happiness’, as the motifs on the ceiling of the old Birmingham Municipal Bank’s banking hall on Broad Street exhort) in a time when self-insurance through saving becomes more necessary, because national insurance through the welfare state is being ‘downscaled’. If credit unions are to be encouraged to grow into potential challenger banks or mainstream enterprise financiers, it may be that they, and CDFIs that follow that route, face a tension in terms of remaining as community banks – and their good governance will become harder to assure.
A mutual alternative is what one member-owned agricultural co-operative in Canada calls “growing without losing sight of each other”. While not all are strictly mutual institutions, the key to the community investment success in the USA has been the kind of capital that they have attracted to enabled it to grow.
This matters, because if mutual lending institutions grow on the back of impatient capital, they may be hard to distinguish in a wider field of impatient capitalists. Key in the USA was the development of innovative and effective methods for providing patient capital and quasi-equity. Secondly, collaborative work with government opened up access to public sector loan guarantee funds, a success that has now been repeated in the UK. A third key factor for success was the establishment of the CDFI Coalition, a broad-based consortium that united all the relevant trade bodies to enable the movement to achieve joint advocacy to speak with one powerful, ‘community investment’ voice to campaign for change.
In the UK, the credit union and CDFI sectors will want to learn from that policy action and co-operative advocacy.
• This article is part four of six. Read the first article (Mutuals have always been a longstanding force in banking), second article (The big bang; how demutualisation of building societies failed) or third (Who decides? Governance and mutuality of the co-operative and mutual sectors). This series has been commissioned by Co-operatives UK in the run-up to ‘Co-operation: How?‘ – the 2014 participative Congress that is exploring the scope for a co-operative economy, from banking to farming.