The Central Bank and the Government have been accused of holding back the development of credit unions.
False claims that the sector would end up needing a €1bn bailout were used during the worst of the downturn to clamp down on the lenders, members of the Oireachtas Finance Committee said.
Committee chairman John McGuinness said the member-owned lenders were being restricted, which was one of the key reasons they were not growing fast enough.
The committee has recommended in a report that smaller credit unions should not be subject to the same stringent regulation as ones with multi-million euros in assets or savings.
It has also recommended that credit unions be allowed to lend more of their money for the likes of mortgages, and should be allowed to invest in social housing.
There are currently restrictions on the level of long-term lending.
For most credit unions, just 10pc of the loan book of a credit union can be lent out for more than 10 years, severely restricting the amount of mortgage lending they can do.
The TDs and senators said this strict rule should be relaxed.
The committee also wants the Central Bank to move to tiered regulation, which would mean tougher rules for larger lenders.
But as part of this, the bigger ones would also be able to introduce services that smaller, and less sophisticated, credit unions would not be allowed to offer.
"The credit union sector should be allowed to grow, and should not be regulated out of business," Mr McGuinness said
He said statements by former finance minister Michael Noonan in the Seanad in 2011 that the credit unions would need a €1bn bailout from taxpayers proved far off the mark. But this was used by regulators and policy makers to hold back the development of credit unions.
"I feel the credit union movement is often restricted in what it can do," added Mr McGuinness
The committee said it was concerned that lending was at such low levels at the State's credit unions. Only a quarter of the assets of credit unions are loaned out and the figure should be nearer half.
At the moment there are fewer than 300 credit unions, and they are subject to one-size-fits-all regulation, whether they have €20m in assets or €400m.
Mr McGuinness said the low level of lending was despite the fact that on the surface the sector appeared robust.
Sector assets have increased by €2bn between 2011 and 2016 from €14bn to €16bn.
The committee said the ability of credit unions to withstand additional financial stress was strong, despite the High Court-ordered wind-down of Charleville last month. The committee said the sector had about €880m of surplus capital.
Both the Irish League of Credit Unions, and the other representative body, the Credit Union Development Association, welcomed the report.