Business Irish

Tuesday 12 December 2017

Storm clouds gather as chill winds of recession batter credit unions

The sector hasn't needed a cent in state support, but as 20 members run into trouble many feel they are paying for the incompetence of others

Charlie Weston

Charlie Weston

AT the end of next month thousands of credit union members will gather in Belfast for the annual general meeting of the sector's main representative body, the Irish League of Credit Unions.

The conference venue, the Waterfront, normally plays host to operas, pantomimes and musicals.

But on the weekend of April 30 and May 1 expect the Waterfront to be the eye of a stormy meeting of the league, in what is set to be far removed from the sedate operas often performed at the venue.

Plans to double the payments each credit union has to make into a bailout fund run by the league, known as the Savings Protection Fund (SPS), are set to infuriate many of the delegates heading to Belfast.

Credit unions that are members of the league already collectively pay almost €8m a year into the SPS fund, which is used as a financial buffer for credit unions in trouble.

But the fact that 20 credit unions are now seeking support from this fund means the annual SPS levy will have to be doubled, according to league president Mark Bailey.

This proposal will cause sparks to fly at the Waterfront.

One delegate, who did not want to be named, summed up the feelings of many credit union officials who have run their operations in a conservative way.

"We are being ask to cough up to pay for the incompetence of other credit unions. The league may gets it way but not before a big row. There will be blood on the carpet."

Credit union members feel they have been under the cosh now for a few years, despite not needing a cent in bailouts from the State, unlike the banks.

The sector is upset at what it perceives as heavy-handed regulation from registrar of credit unions James O'Brien in the Central Bank.

His office is about to start a new set of probes to check if the sector can withstand further loan losses as the recession continues.

Those close to Mr O'Brien counter that far from over-zealous regulation, Mr O'Brien and his staff have been engaged in appropriate and measured regulation that is helping the sector withstand the worst of the economic headwinds.

And there can be little doubt that the credit union movement is facing one of the most challenging periods since the first credit unions were founded in Ireland in the 1950s.

The crisis being faced by the sector can be gleaned from the following:

  • Some 20 credit unions have now sought support from an emergency fund put in place to bail out troubled credit unions. The Irish League of Credit Union has already had to put aside €48m in its accounts to cover guarantees it has been forced to give to 13 of the struggling member unions.
  • Loan losses are spiralling as ordinary credit union members are being squeezed from all sides from everything to tax rises to mortgage hikes. Losses could hit €1.7bn on the sector's total loans of €7bn, according to a worst-case scenario modelled by regulators.
  • Credit unions continue to record investment losses, with some of them already "burned" as bondholders that have been forced to burden share.
  • Many credit unions are discovering that they are too small to survive and will be forced to shut down or merge with larger rivals.
  • One in four credit unions were unable to pay a dividend to members with share accounts last year because of mounting loan arrears and investment losses.

Mergers to surge

There are some 414 credit unions in the State with each one run as a separate, independent, entity with its own board of directors.

This structure goes to the heart of the problems of the sector.

Some credit unions, particularly those in rural areas that open maybe twice or three times a week, are too small to be viable.

The ever-increasing time commitments and demands needed to get on top of constantly changing regulations have made it impossible for some credit unions to recruit new blood to go on their boards as directors.

This has prompted a growing trend towards mergers. Last year alone some seven credit unions merged with larger counterparts, with the pace of mergers expected to pick up this year.

Many credit unions are also finding that the services they offer to members, essentially loans and savings with the spare funds of the credit union put on deposit in banks, are far too narrow to generate sufficient income to pay staff, never mind pay dividends to members.

Financial consultant Bill Hobbs, a former chief executive of the Credit Union Development Association (a rival representative body to the league), estimates that loan losses could exceed €1bn.

Once investment losses are added in, the collective losses of the sector could hit €1.7bn before long, he says.

An avid supporter of the sector, he believes what is needed is a change in the business model away from a concentrating on generating dividends to one where maximising value to members from good saving and loan rates are the key objective.

Also needed is a federated network, where individual credit unions draw on the services of a central finance, marketing and compliance body, allowing them to get on with the day-to-day business of servicing members.

And he reckons that radical consolidation of the movement is needed -- the present number of credit unions should come down to around 50, Mr Hobbs says.

Hoping to avoid a bailout

League president Mark Bailey and his fellow league officials are investing much hope for a new dawn for credit unions in a commission to be set up to look at the sector.

This commission is part of the Programme for Government, secured by the league following lobbying during the election.

The Programme for Government states: "In Government, we will establish a commission to review the future of the credit union movement and make recommendations in relation to the most effective regulatory structure for credit unions, taking into account their not-for-profit mandate, their volunteer ethos and community focus, while paying due regard to the need to fully protect depositors savings and financial stability."

But before the commission gets to work, there are more pressing needs.

Questioned if credit unions would now follow the banks in seeking a state bailout, Mr Bailey said he hoped it could avoid seeking state help by relying on its own emergency fund to help ailing member unions.

The hope was that credit unions could trade out of their difficulties.

Stressing that savings in credit unions are protected up to €100,000 as part of the state guarantee for deposits, Mr Bailey insisted that credit unions were different to the banks as they had their own emergency fund, the SPS, which was being used to support credit unions in financial difficulty.

"We would hope to avoid state support. We would hope to trade out of this situation and avoid state funding."

But he admitted that the need for credit unions to pump more money into the SPS would hit dividend payments.

Last year one in five credit unions failed to pay a dividend, or interest, to members on their share accounts. Another third paid a dividend of less than 0.5pc.

Many of the State's 2.9 million members of credit unions rely on a dividend from their savings in credit unions.

Mr Bailey is adamant that credit unions can trade their way out of what is the worst recession in the developed world, at the same time as the new commission looks at modernising the sector to help it cope with the present and future stresses.

The 2.9 million members of credit unions will hope he is right.

One way or the other, the 1,500 delegates from credit unions across the State will have much to ponder next month in Belfast.

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