The World of Credit Unions

Dr. Paul A Jones

Research Unit for Financial Inclusion

What is a Credit Union?

• Credit unions are democratic, member-owned financial cooperatives

• Credit unions exist to serve their members and communities.

• Credit unions are safe, convenient places to access affordable financial services.

Credit unions world wide

• 186,000,000 Members • 54,000 Credit Unions • 97 Countries

– Canada – 1,068 credit unions – 48% penetration– USA – 8,536 credit unions – 43% penetration– Australia – 144 credit unions – 26% penetration– Dominica – 14 credit unions – 147% penetration

• Credit unions in Ecuador

Credit unions in Ghana and US

• Youth savings programme

• Community Choice Credit Union

Credit unions in EuropeCountry No No Members Members

Penetration

Penetration Savings Assets

2006 2005 2006 2005 2006 2005 2006 2006

Great Britain 540 550 543,359 501,879 1.33% 1.25% 838,081,811 977,109,401

Ireland 525 620 3,050,0003,000,00

0 109.98% 110.61% 17,546,637,11419,921,369,95

7

Poland 70 76 1,550,6601,394,43

3 5.66% 5.14% 1,906,673,081 2,053,326,919

Romania 11 11 52,477 48,869 0.34% 0.31% 20,512,951 26,236,191

Russia 238 213 366,954 277,776 0.37% 0.27% 204,820,288 246,096,806

Ukraine 760 746 1,790,4141,297,00

0 5.55% 4.00% 528,954,468 615,785,393

Estonia 10 2,693 0.30% 2,634,095 10,447,537

Latvia 30 30 22,601 22,005 1.44% 1.39% 11,688,640 13,984,969

Lithuania 59 56 68,841 55,458 2.78% 2.24% 156,440,694 173,001,786

Macedonia 1 1 6,105 5,245 0.43% 0.37% 2,728,973 4,605,573

Moldova 485 504 106,400 96,299 3.39% 3.09% 7,742,729 24,834,536

TOTAL 2729 2863 7,560,5046,704,67

4 3.31% 2.92%21,226,914,84

424,066,799,06

8

Credit unions in Europe 2012

• Click for interactive map

European origins of credit unions

Originated in Germany in the 1840’s and evolved in three general directions:

• European Co-operative Banks

France, Germany, Netherlands

• Small Savings Co-opsItaly, Greece

• North American Model

Britain, Ireland, Eastern Europe

Spread throughout the world by the World Council of Credit Unions - WOCCU

Economic Goals

• “Not for profit, not for charity, but for service”

• Profits go to the member• Giving people a better deal on financial

services• Providing financial services to people

excluded by the for-profit sector• Creating jobs in the community

Social Goals

• “People helping people”• Giving people control over their financial

destiny• Mutual self-help and reliance• Building community• Education in the wise use of money• Instilling democratic and co-operative

values

Park Road Credit Union

• Operates in Toxteth, Liverpool 8• Many people excluded from financial

services• Many do not have a bank account• A group of 25 volunteers, mostly

women, mobilised community support• Created their own financial institution

Credit unions in Britain

• Hampshire Credit Union• London Mutual Credit Union• Hull and East Yorkshire Credit Union

Community Development Credit Unions in the US

• National Federation of CDCUs

Financial Exclusion

• The inability of people to access the financial system

• Part of the much wider concept of social exclusion

• Disproportionately effects people on low incomes

Social Exclusion

• “is a shorthand term for what can happen when people or areas suffer from a combination of linked problems such as unemployment, poor skills, low incomes, poor housing, high crime environments, bad health, poverty and family breakdown” Kempson et al FSA 2000, p 7

What’s financial exclusion?

– No bank account– No savings– No assets– No access to money advice (or financial

capability education)– No insurance– No access to affordable credit

• PAT 14’s 1999 report, Access to Financial Services and HM Treasury 2004

Extent of financial exclusion in UK• Over 1.6 million adults in the UK do not have access to a

transactional bank account, (Fin Inclusion Task Force 2010)– Of the 2.7m originally found to be unbanked, 1.1 m have been moved into

banking

• 54% of unbanked are family households (Policis / FPF 2011) At least 800,000 children live in households without bank accounts (HMT 2006).

• 64% of low income households have no cash savings, rising to 74% of those in the lowest income quintile Source : Policis / FPF 2011

• 2.4 m home credit users. Circa 1m payday users. 25% of home credit users and 23% of payday users don’t have other credit options. Source : Policis / FPF 2011 payday use up to near 2m

Extent of financial exclusion in UK• 1.1 m low income individuals need to borrow and have been

unable to do so in last two years. Policis and FPF 2011• 35% of low income households – circa 5 individuals - believe

that it would be impossible for them to borrow £200 – 500 from a mainstream lender Source : Policis / FPF 2011

• 310,000 users of illegal money lending, 2% of low income population rising to 6% of most deprived communities Source: Policis / BIS 2010

• 3 million households in social housing lack contents insurance, while they are twice as likely to be burgled as people living in privately owned properties (Widening the safety net; Demos, 2005)

• 60% of all calls to Citizens Advice about debt and benefits– Around one in four of the issues brought to Scottish

bureaux relate to debt

Extent of financial inclusion

• Two-thirds (67 per cent) of low-income credit users, some 6.7 million individuals, pay behaviour-driven costs on their mainstream credit use. On an annualised basis 3.6 million, or 44 per cent of the 8.2 million low-income borrowers, incur behaviour-driven costs. These account for a total of £630 million per annum and an average per head of £174 per annum. – Friends Provident Foundation 2011

Financial Exclusion

• Originally seen as a geographical issue (Leyshon and Thrift 1995)– Reduction of financial retail outlets in poorer

communities– Bank and building society closures– Problems of physical access and car ownership

• 'the inability to access necessary financial services in an appropriate form. Exclusion can come about as a result of problems with access, conditions, prices, marketing or self-exclusion in response to negative experiences or perceptions' (Sinclair, 2001).

FSA 2000 – Kempson

• access exclusion: restricted access via the processes of risk assessment;

• condition exclusion: where the conditions attached to financial products make them unsuitable for the needs of some people;

• price exclusion: where some people can only access financial products at prices they cannot afford;

• marketing exclusion: where some people are effectively excluded by targeted marketing and sales;

• self-exclusion: people decide that there is no point in applying for a financial product because they believe that they would be refused. These beliefs can arise from many experiences and perceptions.

The financially excluded • the long-term unemployed;• old-age pensioners;• those excluded from earnings because of

sickness or disability;• female single parents;• certain ethnic minority groups, especially

Pakistani and Bangladeshi households;• those reliant on state welfare benefits or

living in rented accommodation.– Sinclair 2001

• CHANGING NOW AS RESULT OF RECESSION

The impact of exclusion• higher charges for basic financial transactions and credit –

lack of access to a bank account means that certain financial transactions such as money transfer and cheque cashing may be more expensive;– Pre-payment meters can mean an extra £215 pa on energy bills

• no access to certain products or services – a range of services, such as contract mobile telephones, require a bank account for regular Direct Debits;

• lack of security in holding and storing money – operating solely on a cash budget leaves people more vulnerable to loss or theft;

• barriers to employment – a bank account for receipt of wages is a basic requirement for most employers; and

• entrenching exclusion – having no formal banking or credit history at all can be as much of a disadvantage as an impaired credit history in accessing certain financial services.

The impact of exclusion• To the community and society

– Linked to child poverty– Costs of the benefit system– Greater links to social exclusion

• HM Treasury 2004

• Lack of access to finance is often the critical mechanism behind both persistent income inequality and slow economic growth.

• Hence financial sector reforms that promote broader access to financial services should be at the heart of the development agenda. World Bank

Life on a Low Income

• "I've got to put my money away for bills before I can relax and even think about food."

• "When you're pushing the trolley around and you see people pushing one that's almost full and yours isn't, I think 'I wish I could just put what I wanted in and not have to worry', but I can't."

• "You feel degraded. You think other people know that you are in debt. You think you have done something wrong."

• "Little things that never mattered before are suddenly major issues and you fight over them. I fight with him [her husband], I shout at the kids, he does as well and the kids cry."

• KEMPSON

The impact of recession

• Credit refusals rising for all• Higher risk borrowers experiencing

refusals • Home credit borrowers – finding it difficult

to access credit in the last year – double the refusals

• Greater moves to access third sector and higher cost credit by people on more moderate incomes

• A more cohesive society for a stronger Europe

• Financial Services Provision and Prevention of Financial Exclusion

• Country reports• European consumer debt network• Financite

Financial exclusion in Europe

What can be done?

• Does Government have a role?• Do banks and other financial

providers have a role?• Does third sector finance have a

role?

The role of credit unions in Britain

• So let me take this opportunity to recognise the value of third sector lenders – like credit unions – who have a huge role to play expanding the provision of affordable credit, and opening up opportunities for people. 

• Let’s be clear on this – they can’t solve everything, but they can do much to help out. They’re excellent at targeting people who’re financially excluded from financial services.

• Economic Secretary to the Treasury 2005

Changing Credit Unions

• The Path to Quality Credit Unions– Traditional model credit unions – Business-oriented credit unions– New Model Credit Unions– Regulated Credit Unions– Quality Credit Unions

Traditional model credit unions

• Social focus rather than business orientated • Small community operations

– Entirely volunteer run and vulnerable to burn out• Personal and community development• Not built for expansion and growth• Influence on industrial sector• Impact – real but marginal

– By 1998, average membership community credit union was around 200 members

– 40% of community credit unions in England and Wales were financially weak

1999 – Business-oriented credit unions

• Towards sustainable credit union development• Move to become more business focused• Business plans, leadership and promotion• Employing staff, high street premises,

computerisation• Serving a more diverse membership • Support of Government and local authorities• Signs of growth within individual credit unions

2001 New Model Credit Unions

• Learning from the International Movement • Business and market orientation• Radical financial and organisational restructuring• Financial discipline – introduction of PEARLS• Commercialisation and mainstreaming

– to be successful, credit unions must attract a varied membership base

• Fundamental to developing capacity to serve low income communities

• Rationalisation of the movement– Significant growth within individual credit unions

Facing into the paradox

• New model, poverty alleviation and financial exclusion

• If credit unions are to achieve the social goal of combating poverty and financial exclusion, they have to first attain economic viability and commercial success

2002: Regulated credit unions

• The impact of FSA regulation• Introduction of Approved Persons Regime• Established operational standards and financial

discipline• Development of a culture of compliance• Impact on service delivery

– Financial Services Compensation Scheme • 59% of directors think Approved Persons Regime

is a good thing. More likely to say this in larger CU:– 76% directors in 5,000 plus member CU– 50% directors in 200 or less member CU

2005: Quality Credit Unions

• New Model in the British context– learning from the West Midlands

• Modern and professional, accessible and visible• Commitment to good governance

• BBCU – credit unions not meeting WOCCU standards

• Customer focused• researches, understands and meets member wants• understands dynamics of the low income market

• Accessible savings, affordable credit, transaction services, insurance, money advice, money management support

• Access to Credit on a Low Income (Co-operative Bank 2001)

2005: Quality Credit Unions

• Emphasising savings mobilisation• Child Trust Fund and ISAs

• Flexible and responsible approaches to lending• BBCU – includes greater use of credit scoring

• Development of transaction services• ABCUL and The Co-operative Bank new project

• Benefit direct accounts • Insurance services • Money advice and financial education

Effective promotion and delivery

• Through partnerships and networks– Working strategically with other organisations– Reaching out to the community through others– Councils and local authority departments, Sure

Start, Primary care trusts, housing associations, employment agencies, schools, refugee councils, CAB offices, community and charitable organisations, victim support groups, churches and faith groups

• Promoting mutual benefits

Financial Inclusion - HM Treasury

• Promoting Financial Inclusion 2004– Free face to face money Advice– Access to Banking– Access to affordable Credit

• Financial Inclusion: the way forward 2007– Save savings– Insurance– Helping people with financial distress – including

how banks can help

Financial Inclusion the way forwardEnsuring that everyone has access to appropriate

financial services, enabling them to –• Manage their money on a day-to-day basis,

effectively, securely and confidently• Plan for the future and cope with financial

pressure, by managing their finances to protect against short-term variations in income and expenditure and to take advantage of longer-term opportunities

• Deal effectively with financial distress, should unexpected events lead to serious financial difficulty

Capital Credit Union Ltd

• Capital Credit Union Ltd • Capital’s CE0 talks about combating

extortionate lending

DWP Growth Fund• DWP - THE GROWTH FUND• 405,134 loans to a total value of £175,351,444.

(May 2011)• Circa 100 credit unions delivered GF

– 86% of loans and 86% of the money• 76% of credit unions delivering Growth Fund say

it had assisted growth (2008)• Eight in ten Growth Fund lenders reported that

their organisation had improved its working practices as a result of the Growth Fund and now operated in a more business-like way. (2011)

Impact of FI Agenda

• From tackling poverty to promoting financial inclusion – change of emphasis• Focus away from solely the provision of loans

• Widening access to credit union membership in low income communities

• Some concerns: • Danger to long-term sustainability as co-operative and

mutual financial institutions?• Impact on image of credit unions? • Concern about return of dependency?

Scaling up credit unions

• Enabling legislation and proportionate regulation

• Sound governance and strong management

• Sustainable business models, products and services

• Appropriate investment

Legislation and regulation

Enabling legislation 2012

• More flexible common bond (field of membership test)• Organisational and corporate membership• Once a member always a member• Interest not just dividends on savings deposits

Proportionate regulation 2012

• Higher level of capital adequacy than basic solvency, of at least 3%• Additional provisioning for bad debt • FSA to act on credit unions who are out of compliance

Governance and Management

Sound governance• Corporate Governance Code• Recruitment drive for new board members• Corporate volunteering initiatives.Strong management• 83% of LWCUs now employ paid staff (2008)• Operational training available face to face and online• Leadership development opportunities• Secondment programmes.• Formal mentoring systems

Products and services

• Affordable credit, but also– Safe Savings, building personal assets– Insurance– Mortgages– Cash ISA, Children’s Accounts,– Christmas Accounts, etc– Financial Education– Flexible payment options –– benefit deduction, payroll deductions, cash collection

Credit Union Current Account

• 25 credit unions, over 30,000 accounts• VISA Debit card + LINK ATM network• Payment of salary/benefits• Direct Debits and Standing Orders• Not reliant on high penalty charges to cover

costs• Uses back office facilities of Co-operative

Bank, but accounts are controlled and run by each credit union.

Credit unions in London

• 35 credit unions in Greater London• Serving 27 of London’s 33 boroughs• Strong social and community focus• Growing faster than in Britain generally• 2005 – 2009

– Assets up 92% (national increase, 44%)– Loans up 70% (national increase, 36%)– Savings up 79% (national increase, 39%)

Modest penetration

• In 2009, 60,000 credit union members in London

• 1% of Greater London population• Growing at 18% per annum• Demand-side research revealed 0.75m

individuals, (30% of low-income Londoners and 42% of social tenants), lacked access to credit

Financial Inclusion Growth Fund

• September 2006 and to March 2011, 11 credit union contractors in London have:– Granted over 44,000 loans to low-income borrowers, 78% of

whom are women and over 80% social housing tenants– Made loans to total value of over £19 million– Opened over 25,000 current or savings accounts for Growth

Fund borrowers– Maintained less than 10% DWP target delinquency rate16

on loans in 87% of the participating credit unions

• GF credit unions grown most significantly – 80% increase in savings since 2005 – 2009 (non GF 43%)

Financial challenges

• Low income to average assets– 50% negative net income

• High operating expenses– 9 exceed 10% expense to average asset ratio – Endemic to serving segments of low income market

• Bad debt – GF credit unions 9%; non-GF 11.7%

• Dependency on external subsidy• Loan to asset ratio – 57% GF and 56% others• Need to maximise savings • Need to price realistically

Organisational challenges

• Leadership, governance and management• Consistency in products and services• Serving wider target market• Developing information technology• Developing effective partnerships

Rationalisation and strain

• Focus on business efficiencies • Expansion and merger

– Current approach to increasing efficiency and driving down costs

• Current credit union model under strain– Organisational and financial strain – Impact of new legislation and regulation

Collaboration

• Current model – atomistic and competitive • Need for radical new approach• WOCCU – greater collaboration, greater

market share• Fischer (2002, 2005)• Need for cohesive, networked and integrated

system– To drive scale, efficiency and performance

A cultural shift

• A focus on commonality rather than uniqueness and a radical increase in operational excellence (Grace 2010)

• Focus on shared back and front office services

• Dependent on trust and commitment

Harnessing technology

• The electronic hub – or the back office • Collaboration on back office functions• Facilitate new products and services• Enable link with the Post Office and other

partners

Government support

• Coalition Government – success of the Financial Inclusion Growth Fund

• Credit Union Expansion Project (£35.6 million)

• Looking for step change in governance and organisational capacity

• Project to be managed by Cornerstones and ABCUL – from 2013 to 2015

57

Nos. of CU’s vs. Nos. Of Members

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

2010*

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

-

100

200

300

400

500

600

700

800

0 0 0 0 0 0 0 0 0 0 0 0 0 0

780251

138,582

659,281

- -

475

530 550

596

630

666 687 698 686

665

594 569

554 532 520

454 436

YEAR (*2009-2010 figures based on incomplete set of unaudited CQ returns)

Nu

mb

er

of

Me

mb

ers

Nu

mb

er o

f re

gis

tere

d c

red

it u

nio

ns

Number of credit unionsCredit union membership

Credit Union Growth 1982 - 2012

1982 1987 1992 1997 2002 2007 2012* 1982 1987 1992 1997 2002 2007 2012*

Mem-bers

14179 27162 88007 224674 406564 604945 883670

Shares (£000's)

1959 6079 28505 107394 272491 456326 795720.43639

Loans (£000's)

1794 5754 26877 98811 246138 403671 605053.37743

Assets (£000's)

2223 7025 32489 123979 318877 548453 960993.3108

Number of credit unions

81 108 383 596 686 504 389

50,000

150,000

250,000

350,000

450,000

550,000

650,000

750,000

850,000

950,000

50

150

250

350

450

550

650

MembersShares (£000's)Loans (£000's)Assets (£000's)Number of credit unions

Finale

This is our credit union