Monday 24 June 2019

Revealed: Half of credit unions heading for collapse

Your credit union is likely to be in trouble if the Central Bank has not allowed it to hold an AGM or pay a dividend for at least two years

Photo: Stock Image
Photo: Stock Image
Charlie Weston

Charlie Weston

LARGE numbers of credit unions will close unless they urgently change how they do business, a sobering report commissioned by a research body set up by the sector warns.

Already half the State’s credit unions are on course to make losses by the end of this year. The merger mania, which has seen a third of credit unions disappear, has not led the enlarged bodies to perform any better.

The Centre for Community Finance Europe, a research body set up by credit unions in Ireland and Britain, warns people love credit unions – but few are borrowing from them, opting for bank loans instead.

That is despite a credit union often offering better value – a rate of 6pc for car loans is not unusual, which is half the typical bank rate.

Paul Jones, the report’s author along with two others, says credit unions are in ongoing decline. They need to radically change their business model to offer more than just loans, or their “long-term future is in doubt”. One-third of credit unions has disappeared since 2015, taking the total down to 286 in the Republic.

Your credit union is likely to be in trouble if the Central Bank has not allowed it to hold an AGM or pay a dividend for at least two years.

Meanwhile, there has been a frenzy of recent mergers – but worryingly, this has not led larger bodies to perform better.

“Disturbingly, greater size has not translated, at least yet, into better financial trading performance,” says the report, ‘The Irish Credit Union Business Model: Is it still fit for purpose?’.

The authors said it was “alarming” that the loans of the lenders only account for a quarter of their assets. Many of them have ended up becoming savings unions.

Credit unions are trying to earn income by investing members’ savings in the likes of bonds. But the report says: “With returns on new investments nearing 0pc, the Central Bank of Ireland projects that, if lending does not improve, 50pc of credit unions will be running annual losses by year-end 2018.”

This prompted the report to conclude: “Even though credit union capital is strong for now, ongoing losses would not only destroy their ability to pay dividends on shares, but also, in time, lead to their failure if losses were not reversed.”

Lending caps introduced in the aftermath of the financial crash are mostly lifted, but some credit unions are using them to blame the Central Bank for their lack of lending, the report says.

A survey in the report found credit union members regard borrowing from a bank as involving less hassle and paperwork, with a faster turnaround and lower interest rates.

This is despite the fact banks have higher interest rates.

“People may still love their credit union; they just don’t borrow from it as much

anymore,” the report says.

Credit unions’ share of consumer loans has dropped from half of the market to around a third between 2006 and 2016.

This has seen lending by the unions fall by €1bn since 2003, and banks are targeting their market for short-term loans.

The report questions if the sector has the capacity to change. “The problem so far, however, is not enough action is being taken. This raises the question of whether the Irish credit union movement has the will and determination to change in whatever way is necessary so that its people-focused ethos will survive and thrive for many years to come.”

The study was delivered at a conference sponsored by credit union insurer Cuna Mutual.

Cuna chief executive Paul Walsh said the key to the future of the movement depended on it developing more leaders with the drive and dynamism to change its business model.

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