Credit Unions side step financial crisis but now face major upheaval
The banking crisis shows no signs of easing, and the credit unions are the only financial institutions with spare lending capacity. With Finance Minister Brian Lenihan having ordered a large-scale review, the sector is set for the biggest shake-up in its more than 50-year history
Who would have thought it possible? Even three years ago, with the banks still apparently invulnerable, the credit unions seemed to have been consigned to the margins of the Irish financial services market.
With the banks shovelling out money to all and sundry, the credit unions were finding it increasingly difficult to recruit new members in the key 18-35 age group and were steadily losing market share to the big lenders.
What a difference three years makes. With all of the Irish-owned banks and building societies either broke or on life support and the foreign-owned banks either on the boat home or desperately trying to recover some of the money they so rashly lent during the good times, the credit unions are suddenly being seen in a whole new light.
At the end of September 2009, the 508 credit unions affiliated to the Irish League of Credit Unions (ILCU), which includes more than 100 credit unions operating in Northern Ireland, had gross assets of €14bn, while the rival Credit Union Development Association's (CUDA's) 13-member credit unions had a further €1.3bn of gross assets.
Figures published recently by the Financial Regulator showed that credit unions operating in the Republic of Ireland had gross assets of €14.5bn, savings of €12.6bn and loans to members of €6.8bn.
Despite these assets, the credit unions are relatively under-lent, with their loans representing just 47pc of their total assets. By comparison, most of the banks were lending about two-thirds of their gross assets at the height of the credit boom.
This means that the credit unions have significant extra lending capacity. If the credit unions were to increase their lending to two-thirds of their gross assets, it would result in them lending another €2.6bn.
With all of their other lenders reducing their loan books as quickly as they possibly can, that's a lot of spare lending capacity going abegging.
Of course the main reason that most credit unions are so hugely under-lent is that the vast majority of them lack the capacity to lend more money.
When analysing the credit union movement it is important to bear in mind that, unlike the banks, it is not a monolithic organisation run by top-down management. Instead each credit union is a legally separate organisation. While individual credit unions may co-operate with one another to deliver joint services, they are not legally obliged to do so.
While the ILCU and CUDA can encourage and advise individual credit unions to offer new services to their members, they cannot force them to. As member-owned financial co-ops, the vast majority of which are still run by volunteers, all of the key decisions are still made at local rather than national level.
This is both a strength and a weakness. Credit unions are embedded in their local communities in a way that the banks, who have been busy closing branches and pushing their customers to conduct their banking transactions online, can only dream of.
The downside is that most credit unions are still run by part-time volunteers and many of them are either unwilling or unable to devote the extra effort required to offer their members new products and services.
Unless they can widen their range of products and services, the credit unions will be unable to attract significant numbers of new members and will gradually atrophy.
"Most credit unions are savings and loans institutions. They do not provide the range of services that people, particularly young people, expect from a credit union such as electronic funds transfer (EFT) and current accounts," says chief executive of the ILCU Kieron Brennan.
The relatively narrow range of services on offer from most credit unions contrasts sharply with their untapped lending capacity.
"The banking sector is in a mess. Compare that with where the credit unions are. They have weathered the storm reasonably well and are in a good position. The opportunities are there for the credit unions," according to Mr Brennan.
If the credit unions are to increase their range of services and products, they will have to up their game, both technologically and from a regulatory point of view.
We have been here before. Around the turn of the century the ILCU embarked on a technology project, ISIS. Designed to allow the credit unions to offer a full range of financial services and compete head-on with the banks, ISIS quickly turned into an unmitigated disaster with €34m having been spent before it was abandoned in 2001.
The fall-out from the ISIS debacle split the credit union movement down the middle with several of the larger credit unions leaving the ILCU to form the CUDA. Although the ILCU eventually managed to survive more or less intact, it was a close-run thing.
It is only now, almost a decade on, that the wounds caused by ISIS are finally beginning to heal.
One result of the failure of the ISIS project is that the ILCU is taking a far more cautious approach to technology. Instead of centralised, one-size-fits-all projects such as ISIS, it is now seeking to put in place a technology platform, ILCUnet, that allows an individual credit union to offer as many or as few new products and services as it wishes.
Earlier this year, the ILCU signed a deal to provide business intelligence software to individual credit unions over ILCUnet. This will allow credit unions to analyse their performance against that of their peers.
The ILCU is also developing the Credit Union Services Organisation, which will provide credit unions with EFT capability. This could see credit unions providing their members with debit cards, allow them to pay their bills, transfer money to or from bank accounts, or have their wages paid directly into their credit union account.
The ILCU hopes to be in a position to provide EFT services to credit unions in the Republic of Ireland by the end of 2012.
"We now have the IT foundation in place. We can now roll out the services. Individual credit unions can make as much or as little use of it as they wish," says Mr Brennan.
The likelihood that at least some credit unions will want to offer their members more products and services raises the vexed question of regulation.
Ever since the role was transferred to the Financial Regulator in 2003, the regulation of credit unions has been a contentious issue.
Traditionally, with the ILCU's savings protection scheme protecting members' deposits, the credit unions were left pretty much to their own devices.
Following the establishment of the Financial Regulator in 2003, the era of hands-off regulation came to an end. The banking crisis, for which the credit unions bear absolutely no responsibility, further tightened the regulatory screw. Not everyone in the credit union movement approved.
The Financial Regulator has taken a tough line on credit union arrears. Currently, 13pc of all credit union loans are in arrears, although Mr Brennan points out that not alone does this figure include loans on which even one repayment has been missed, but one-third of loans in arrears are tied to matching deposits.
While Mr Brennan accepts that credit unions that choose to offer their members a wider range of services will have to accept a greater regulatory burden, he argues that credit unions that confine themselves to traditional savings and loan activities should be treated differently.
"There is a regulatory backlash. The regulatory system has failed the country. We are now putting two or three bolts on the stable door.
"We [the credit unions] are paying part of that price. We didn't need recapitalisation.
"We sent nothing to NAMA and cost the taxpayer nothing. We have our savings protection scheme," says Mr Brennan.
"We welcome regulation. It is important that we are seen to be effectively and appropriately regulated.
"Credit unions have to realise that if they provide an extensive range of services, they will have to accept the regulatory burden that goes with that. However, other credit unions that do not wish to change have to be facilitated."