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.
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 Europe
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-ops Italy, 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
Financial exclusion in Europe A more cohesive society for a stronger Europe Financial Services Provision and Prevention of Financial Exclusion Country reports European consumer debt network Financite
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 forward Ensuring 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
Nos. of CU’s vs. Nos. Of Members Number of credit unions Credit union membership