Plan de Gestión del Alcance

As credit is an essential part of our modern economy it is essential that people on low incomes have access to affordable credit from responsible lenders when they need it. Credit union loans are not inherently devoid of problems, however their low cost and the increased forbearance shown by credit unions mean they are less likely to cause problem debt. Britain’s network of credit unions is currently very small, but over time with the correct support and development it could play a much larger role in Britain’s financial system. Credit unions not only provide affordable loans, but also mortgages, current accounts and savings products. They are not a direct replacement for banks or payday lenders, but rather offer a new system of community finance. However, there are significant hurdles that need to be addressed if this is to become reality.

579 Ibid 580 Ibid

4.4.1 Credit unions in the UK

Perhaps the most troubling aspect of the development of credit unions as a provider of low- cost credit is simply the scale of expansion necessary in order to become an established alternative to banks and high-cost lenders. Membership in credit unions is significantly lower in the UK than in other developed countries. There are now 390 credit unions in the UK offering services to just over a million members, around two per cent of the adult population.581 _{In contrast in Ireland 70 per cent of the population are members of credit}

581 Bank of England, Introduction to credit union Statistics, London: Bank of England, 2013 [accessed via: http://www.bankofengland. co.uk/statistics/Documents/ms/articles/art1jul13.pdf (24/10/13)]. ONS, Population estimates for UK, England and Wales, Scotland and Northern Ireland, mid-2011 and mid-2012 [accessed via: http://www.ons.gov.uk/ons/publications/re-reference-tables. html?edition=tcm%3A77-319259 (24/10/13)]

A credit union is a community-based financial co-operative that takes deposits from its members and also allows them to take out affordable loans funded from the communal deposits of other members. Services are only available to members and all members must meet the requirement of a ‘common bond’ in order to join. Common bonds include membership in a particular organisation, working for a particular employer or living in a certain area. In this way credit unions are embedded in the local community to which they provide a benefit and are often staffed by volunteers from that community.

Because of their unique co-operative structure and ethical aims, credit unions are able to offer affordable loans to people who would often be rejected by mainstream banks. Interest rates on loans are capped by law at two per cent per month, or 26.8 per cent APR. These affordable loans can be used effectively to help people on the edge of financial ruin take control of their lives.

What is a credit union?

B

Step 6

Credit Union overhead + reinvest extra profits to increase saving rates and lower loan rates and fees

Step 7

Principal amount loaned to another member Step 5 0.25% savings account interest paid by Credit Union Step 4

£936 loan repaid with 4% interest Step 3 £900 loan given by Credit Union Step 2 £100 Reserved in Credit Union Step 1 £1,000 Savings Deposit A C Credit Union

four

unions, in Canada and the USA around 43 per cent of the population are members.582 _Even within the UK the figures vary widely, with significantly higher membership rates in Scotland and Northern Ireland.583

Credit unions have been growing in terms of membership and loans provided since 2004, however, not all have been successful. Almost 300 credit unions, 43 per cent of the total, have

582 Ibid

583 Bank of England, Introduction to credit union Statistics, London: Bank of England, 2013 [accessed via: http://www.bankofengland.co.uk/ statistics/Documents/ms/articles/art1jul13.pdf (24/10/13)]. ABCUL, An international movement [accessed via: http://abcul.org/credit- unions/international-movement (24/10/13)]

584 ABCUL – in evidence to the CSJ

‘In Britain the credit union sector lags far behind that of other

countries, in terms of size, professionalisation and integration within

the financial system. In order to expand the sector we need to

ensure that the services offered by credit unions are professional

and competitive, specifically in regards to IT infrastructure and

offering innovative products. Most importantly though, credit unions

need to be run in a sustainable manner, which will negate the need

for long-term subsidy from the government.

Mark Lyonette, Chief Executive, ABCUL – in evidence to the CSJ

1,000,000 800,000 600,000 400,000 200,000 0 500 400 300 200 100 0 700 600 2012 917,544 807,377 605,787 956,614 389 2007 604,945 456,326 403,671 548,453 504 2002 406,564 272,491 246,138 318,877 686 1997 224,674 107,394 98,811 123,979 596 1992 88,007 28,505 26,877 32,489 383 1987 27,162 6.079 5,754 7,025 108 1982 14,179 1,959 1,794 2,223 81 Members Shares (£000’s) Loans (£000’s) Assets (£000’s) Number of credit unions

Members Shares (£000’s) Loans (£000’s) Assets (£000’s) Number of credit unions

ceased to operate since 2002, however this has slowed considerably with only 18 closures since the beginning of 2011.585 _{It has been suggested that the majority of these closures were} smaller credit unions, some with under 100 members, and that this therefore represents a consolidation and professionalisation of the sector.586

4.4.2 Changing the image of credit unions and expanding membership

Unlike in other countries credit unions in the UK are often seen as a niche provider run by philanthropists who lend money to the poor and financially excluded. This reputation does not reflect the goals of the industry and is counterproductive to gaining membership and creating a sustainable business.

A recent survey found that fewer than one in 10 people thought a credit union would be able to help them, a figure that rose to 60 per cent upon learning more about credit unions.588 _The CSJ has heard that the current reputation of credit unions does not represent their ambitions and is hindering their development.

585 Civitas, Credit unions: A solution to poor bank lending, London: Civitas, 2013 [accessed via: http://civitas.org.uk/pdf/CreditUnions.pdf (24/10/13)]

586 Ibid

587 DWP, Press release, Credit union £38 million expansion deal signed, 16 April 2013 [accessed via: https://www.gov.uk/government/news/ credit-union-38-million-expansion-deal-signed (24/10/13)]

588 DWP, Credit Union Expansion Project: Feasibility Study Report, London: DWP, 2012 [accessed via: http://www.dwp.gov.uk/docs/credit-union- feasibility-study-report.pdf (16/10/13)]

‘The recent drop in the number of credit unions is mostly due