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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.

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the world of credit unions

The World of Credit Unions

Dr. Paul A Jones

Research Unit for Financial Inclusion

what is a credit union
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
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
Credit unions in Ghana and US
  • Youth savings programme
  • Community Choice Credit Union
credit unions in europe 2009
Credit unions in Europe 2009
  • Click for interactive map
european origins of credit unions
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

co operative bank model rabobank system
Co-operative Bank model Rabobank System
  • 174 local banks -- 800,000 members
  • Rabobank Nederland is the central organisation
  • Serves general public – 9 million individuals and corporate clients
  • Common logo, standard services
  • 40% of domestic savings; 29% of the mortgage market
  • 90% of agricultural credit
  • Serves small, medium and large sized enterprises
economic goals
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
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
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
Credit unions in Britain
  • Hampshire Credit Union
  • Southwark Credit Union
  • Hull and East Yorkshire Credit Union

Community Development Credit Unions in the US

  • National Federation of CDCUs
financial exclusion
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
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
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
Extent of financial exclusion in UK
  • Over 1.75 million adults in the UK do not have access to a transactional bank account, (Fin Incl Task Force Report 2009).
  • At least 800,000 children live in households without bank accounts (HMT 2006)
  • 7.8 million people unable to access mainstream credit (NCC 2006)
  • 3 million regular users of the alternative credit market (HMT 2004)
  • 165,000 households using illegal money lenders in the UK (Policis 2006)
  • 43% of all households have no savings at all, with a further 15% only having savings of less than half of one month’s income. (2006 FSA baseline survey)
  • 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)
  • Debt is the number one issue advised on in Citizens Advice Bureau
financial exclusion1
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
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 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
the impact of exclusion
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 exclusion1
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
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
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
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
  • ReseauFinancement Alternative
what can be done
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
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
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
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
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
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
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
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
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 unions1
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
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
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
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
financial inclusion growth fund
Financial Inclusion Growth Fund
  • A Government initiative to increase the availability of affordable personal loans made by third sector lenders
  • Growth Fund - July 2006 to January 2011
    • Circa 100 contracts with credit unions
      • 91% of all growth fund loans
      • 86% of the money
    • £127 million to 377,000 borrowers
    • 18% applications refused or withdrawn
    • Average loan £433
    • 86.5% of contractors achieved less than 10% delinquency on all loans.
capital credit union ltd
Capital Credit Union Ltd
  • Capital Credit Union Ltd
  • Capital’s CE0 talks about combating extortionate lending
scaling up third sector lenders
Scaling up Third Sector Lenders
  • Financial Inclusion Taskforce sub group
    • Mapping what already exists in the sector
    • Mapping what support the banks are already providing
    • Asking the sector and others what is needed
    • Defining what scaling up would mean
    • Defining the inputs of capital and other inputs which would be needed
scaling up credit unions
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
Legislation and regulation

Enabling legislation

  • More flexible common bond
  • Organisational membership
  • Once a member always a member
  • Under 16 membership
  • Interest not just dividends
  • Clarity on objects of credit unions

Proportionate regulation

  • higher level of capital adequacy than basic solvency (0%)?
  • FSA to act on credit unions who are out of compliance
governance and management
Governance and Management

Sound governance

  • New Corporate Governance Code
  • Recruitment drive for new board members
  • Corporate volunteering initiatives.

Strong management

  • Operational training available face to face and online
  • Leadership development opportunities
  • Secondment programmes.
  • Formal mentoring systems
business models products and services
Business models, products and services

Sustainable business models

  • PEARLS monitoring system
  • Market sensitivity on pricing and control of expenses
  • Evidence based decision making e.g. market research
  • Knowledge of who is using credit unions now, what their needs are
  • Attract employers
  • Credit union back office for treasury, liquidity and processing etc
  • Credit Union Direct to provide universal coverage

Products and services

  • Development of appropriate ‘safe savings’ products e.g. Christmas accounts
  • Alternative payday lending model
  • Not for profit home credit ? - see current JRF research on this
  • Savings Gateway, Social Fund and Post Office
  • Partnerships on mortgage lending with BS sector
  • Governments support.
  • Work with banks
  • Private charitable trusts
  • Housing associations, local organisations to become members of credit unions and deposit with them as well as lend them subordinated capital.
  • Attract employers
fi progress since 1999
FI Progress since 1999
  • Shared goal of halving the numbers of the unbanked (into of basic bank accounts)
  • Increase in credit union membership and CDFIs
  • 3rd sector instant loans (Growth Fund)
  • Expansion of debt advice
  • Money Made Clear – focus on financial capability
  • Saving Gateway
  • Child Trust Fund through credit unions
  • Illegal money lending teams

Credit unions and Banks