Credit unions have seen a huge rise in business since the crash of 2008. Now new rules are being introduced which could change the basis on which they’re run. Michael Pooler investigates.
When I hear the words ‘credit union’ I think of the scheme at our church where my mum encouraged me to save as a child. Run out of the back of the church hall by nuns after Sunday Mass, pay-book entries were handwritten and cash locked in a little safe box. However recent trends show that they are shaking off this parochial image.
Today credit unions are worth a total of around £600m and, as mainstream lenders have tightened credit lines, they have recorded a 40 per cent increase in membership between 2007 and 2010.
Boasting 14,000 members and 20 staff across its eight branches in east London, the London Community Credit Union is one of the greatest success stories. As a financial co-operative owned by its members, it encourages savings and provides loans at cheap rates to people often excluded from conventional banking.
Joy Everest, Community Relations Manager at LCCU, explains how the credit union works at the moment: “As soon as you become a member we ask you to contribute on a regular basis – it can be a small amount such as a pound a week or fiver a month. That money is pooled together and it is where we get the money for our loans.”
With 800 people signed up since their Hackney branch opened just one year ago, this couldn’t be further from the church hall cash box mentality. However some people now worry that LCCU and other unions like them are about to become victims of their own success.
In response to increasing demand, the government has introduced changes to the rules on how they operate, and there are fears these changes could undermine their co-operative spirit and community-focused nature. Could this be another misplaced financial liberalisation of the kind that nearly destroyed the building societies in the 1980s?
Paying interest to savers
Changes to be implemented later in the year will both allow credit unions to offer interest-bearing accounts and loosen strict rules on who can sign up.Until now, credit unions have been prevented from paying interest on savings. Instead, a dividend can be paid to depositors if the business is in surplus at the end of the year. While this can be higher than savings rates offered by banks, it can also mean a zero return if no profit is realised. At the Hackney branch of LCCU, for example, which opened just a year ago, members voted against a dividend in order to build up the branch’s reserves and lending capacity.
The new rules aren’t just changing the financial aspects of the unions; some feel they are also undermining their democratic nature. The philosophical underpinning of paying dividends is found in the ideas of mutualism and solidarity, according to which the bad times – as well as the good – are shared proportionally among members. On first inspection, interest payments appear to run contrary to this, as people making repayments on loans could effectively be filling the pockets of savers.
Relaxing membership requirements
The second reform will relax the membership requirement that people in a credit union share a ‘common bond’. As things stand this usually means living or working in the same geographical area; in the words of Vernella Dyer it means “the money stays in the community”.
However, as a result of the changes, people from outside the immediate area will now be able to join, paving the way for local businesses and organizations to open accounts. While some applaud the aim of expanding affordable and ethical finance, this too has raised fears that the community link could be severed.
Vernella Dyer, 40, who has lived in Hackney all her life, says this democratic model of ownership is central to the values the credit union promotes: “The structure is geared around the community and that’s what makes it totally different to a bank – it is actually thinking about people from the area and gives them the chance to build.”
According to Joy Everest, rather than open the floodgates, membership will be restricted to organizations the union already has links with: “It means that any employee or tenant of a housing association we work with could become a member. But we have to be careful how we manage it. It has to be sustainable”.
Supporting the changes
Paul Joynes, Researcher at the Unit for Financial Inclusion at Liverpool John Moores University believes the changes ‘will not compromise’ the co-operative model but help them to compete on an even footing with banks and building societies: “Credit unions work by attracting savings from members and lending back to them.
Now they will have one tool which, combined with good governance and leadership, will allow them to grow and develop successfully. A person will be able to have all the services they need – savings, current account and insurance – in a mutual organisation. This can’t be a bad thing, especially strengthening the link with the social housing sector”.
Mark Lyonette, Chief Executive of the Association of British Credit Unions, which lobbied the government for the new rules, takes an equally pragmatic stance. For him interest payments are a necessary step for rolling out financial services: “Credit unions need to attract savings
to make affordable loans, and savings is a competitive business. By being able to offer a fixed rate of interest, they will be able to compete with other savings providers on a more equal basis and members will be able to compare rates more easily.”
He says most credit unions will continue to offer dividend-bearing accounts while offering some interest-based savings accounts such as ISAs. Additionally, he points out they will have to satisfy certain levels of capital reserves “and prove their systems are robust enough”.
From this perspective the change does not signal a fundamental shift in credit unions’ operations, especially if it results in higher turnover and therefore dividends – which are equivalent to interest. And the decision whether to introduce these payments will be democratic: at LCCU it
is to be decided by the elected members’ board.
True to values
From speaking with LCCU members, the rule changes appear not as important as what makes the credit union so attractive in the first place – providing small loans at low-interest to people who otherwise struggle to secure credit. This is summed up by Maureen Gloria Carboniero, 71,
who recently signed up with LCCU after bad experiences with her bank: “I think there is the chance for everybody to use the service at the credit union – it is for the poor person.”
By law credit unions are limited to charging an APR of 26.9 per cent, a rate much lower than exorbitant pay-day loans (which can amount to more than 3,000 per cent annually). This is not set to change. LCCU for example offers loans at 2 per cent monthly interest on a decreasing balance. In practice, somebody borrowing the average amount of £500 will only pay back £566 over 12 months, translating to weekly payments of £11.
In an age where emergency credit – which can mean the difference between the electricity being turned off or bailiffs knocking on the door – credit unions have an increasingly important role to play for the financially marginalised. As long as they don’t lose sight of this they can prosper while remaining true to their founding values.