The World of Credit Unions

1. The World of Credit Unions Dr. Paul A Jones Research Unit for Financial Inclusion

2. What is a Credit Union? • Credit unions are democratic, member-owned financial cooperatives • Credit unions exist to serve their members and communities. • Credit unions are safe, convenient places to access affordable financial services.

3. Credit unions world wide • 186,000,000 Members • 54,000 Credit Unions • 97 Countries • Canada – 1,068 credit unions – 48% penetration • USA – 8,536 credit unions – 43% penetration • Australia – 144 credit unions – 26% penetration • Dominica – 14 credit unions – 147% penetration • Credit unions in Ecuador

4. Credit unions in Ghana and US • Youth savings programme • Community Choice Credit Union

5. Credit unions in Europe

6. Credit unions in Europe 2009 • Click for interactive map

7. European origins of credit unions Originated in Germany in the 1840’s and evolved in three general directions: • European Co-operative Banks France, Germany, Netherlands • Small Savings Co-ops Italy, Greece • North American Model Britain, Ireland, Eastern Europe Spread throughout the world by the World Council of Credit Unions - WOCCU

8. Co-operative Bank model Rabobank System • 174 local banks -- 800,000 members • Rabobank Nederland is the central organisation • Serves general public – 9 million individuals and corporate clients • Common logo, standard services • 40% of domestic savings; 29% of the mortgage market • 90% of agricultural credit • Serves small, medium and large sized enterprises

9. Economic Goals • “Not for profit, not for charity, but for service” • Profits go to the member • Giving people a better deal on financial services • Providing financial services to people excluded by the for-profit sector • Creating jobs in the community

10. Social Goals • “People helping people” • Giving people control over their financial destiny • Mutual self-help and reliance • Building community • Education in the wise use of money • Instilling democratic and co-operative values

11. Park Road Credit Union • Operates in Toxteth, Liverpool 8 • Many people excluded from financial services • Many do not have a bank account • A group of 25 volunteers, mostly women, mobilised community support • Created their own financial institution

12. Credit unions in Britain • Hampshire Credit Union • Southwark Credit Union • Hull and East Yorkshire Credit Union Community Development Credit Unions in the US • National Federation of CDCUs

13. Financial Exclusion • The inability of people to access the financial system • Part of the much wider concept of social exclusion • Disproportionately effects people on low incomes

14. Social Exclusion • “is a shorthand term for what can happen when people or areas suffer from a combination of linked problems such as unemployment, poor skills, low incomes, poor housing, high crime environments, bad health, poverty and family breakdown” Kempson et al FSA 2000, p 7

15. What’s financial exclusion? • No bank account • No savings • No assets • No access to money advice (or financial capability education) • No insurance • No access to affordable credit • PAT 14’s 1999 report, Access to Financial Services and HM Treasury 2004

16. Extent of financial exclusion in UK • Over 1.75 million adults in the UK do not have access to a transactional bank account, (Fin Incl Task Force Report 2009). • At least 800,000 children live in households without bank accounts (HMT 2006) • 7.8 million people unable to access mainstream credit (NCC 2006) • 3 million regular users of the alternative credit market (HMT 2004) • 165,000 households using illegal money lenders in the UK (Policis 2006) • 43% of all households have no savings at all, with a further 15% only having savings of less than half of one month’s income. (2006 FSA baseline survey) • 3 million households in social housing lack contents insurance, while they are twice as likely to be burgled as people living in privately owned properties (Widening the safety net; Demos, 2005) • Debt is the number one issue advised on in Citizens Advice Bureau

17. Financial Exclusion • Originally seen as a geographical issue (Leyshon and Thrift 1995) • Reduction of financial retail outlets in poorer communities • Bank and building society closures • Problems of physical access and car ownership • 'the inability to access necessary financial services in an appropriate form. Exclusion can come about as a result of problems with access, conditions, prices, marketing or self-exclusion in response to negative experiences or perceptions' (Sinclair, 2001).

18. FSA 2000 – Kempson • access exclusion: restricted access via the processes of risk assessment; • condition exclusion: where the conditions attached to financial products make them unsuitable for the needs of some people; • price exclusion: where some people can only access financial products at prices they cannot afford; • marketing exclusion: where some people are effectively excluded by targeted marketing and sales; • self-exclusion: people decide that there is no point in applying for a financial product because they believe that they would be refused. These beliefs can arise from many experiences and perceptions.

19. The financially excluded • the long-term unemployed; • old-age pensioners; • those excluded from earnings because of sickness or disability; • female single parents; • certain ethnic minority groups, especially Pakistani and Bangladeshi households; • those reliant on state welfare benefits or living in rented accommodation. • Sinclair 2001 • CHANGING NOW AS RESULT OF RECESSION

20. The impact of exclusion • higher charges for basic financial transactions and credit – lack of access to a bank account means that certain financial transactions such as money transfer and cheque cashing may be more expensive; • Pre-payment meters can mean an extra £215 pa on energy bills • no access to certain products or services – a range of services, such as contract mobile telephones, require a bank account for regular Direct Debits; • lack of security in holding and storing money – operating solely on a cash budget leaves people more vulnerable to loss or theft; • barriers to employment – a bank account for receipt of wages is a basic requirement for most employers; and • entrenching exclusion – having no formal banking or credit history at all can be as much of a disadvantage as an impaired credit history in accessing certain financial services.

21. The impact of exclusion • To the community and society • Linked to child poverty • Costs of the benefit system • Greater links to social exclusion • HM Treasury 2004 • Lack of access to finance is often the critical mechanism behind both persistent income inequality and slow economic growth. • Hence financial sector reforms that promote broader access to financial services should be at the heart of the development agenda. World Bank

22. Life on a Low Income • "I've got to put my money away for bills before I can relax and even think about food." • "When you're pushing the trolley around and you see people pushing one that's almost full and yours isn't, I think 'I wish I could just put what I wanted in and not have to worry', but I can't." • "You feel degraded. You think other people know that you are in debt. You think you have done something wrong." • "Little things that never mattered before are suddenly major issues and you fight over them. I fight with him [her husband], I shout at the kids, he does as well and the kids cry." • KEMPSON

23. The impact of recession • Credit refusals rising for all • Higher risk borrowers experiencing refusals • Home credit borrowers – finding it difficult to access credit in the last year – double the refusals • Greater moves to access third sector and higher cost credit by people on more moderate incomes

24. Financial exclusion in Europe • A more cohesive society for a stronger Europe • Financial Services Provision and Prevention of Financial Exclusion • Country reports • European consumer debt network • ReseauFinancement Alternative

25. What can be done? • Does Government have a role? • Do banks and other financial providers have a role? • Does third sector finance have a role?

26. The role of credit unions in Britain • So let me take this opportunity to recognise the value of third sector lenders – like credit unions – who have a huge role to play expanding the provision of affordable credit, and opening up opportunities for people.  • Let’s be clear on this – they can’t solve everything, but they can do much to help out. They’re excellent at targeting people who’re financially excluded from financial services. • Economic Secretary to the Treasury 2005

27. Changing Credit Unions • The Path to Quality Credit Unions • Traditional model credit unions • Business-oriented credit unions • New Model Credit Unions • Regulated Credit Unions • Quality Credit Unions

28. Traditional model credit unions • Social focus rather than business orientated • Small community operations • Entirely volunteer run and vulnerable to burn out • Personal and community development • Not built for expansion and growth • Influence on industrial sector • Impact – real but marginal • By 1998, average membership community credit union was around 200 members • 40% of community credit unions in England and Wales were financially weak

29. 1999 – Business-oriented credit unions • Towards sustainable credit union development • Move to become more business focused • Business plans, leadership and promotion • Employing staff, high street premises, computerisation • Serving a more diverse membership • Support of Government and local authorities • Signs of growth within individual credit unions

30. 2001 New Model Credit Unions • Learning from the International Movement • Business and market orientation • Radical financial and organisational restructuring • Financial discipline – introduction of PEARLS • Commercialisation and mainstreaming • to be successful, credit unions must attract a varied membership base • Fundamental to developing capacity to serve low income communities • Rationalisation of the movement • Significant growth within individual credit unions

31. Facing into the paradox • New model, poverty alleviation and financial exclusion • If credit unions are to achieve the social goal of combating poverty and financial exclusion, they have to first attain economic viability and commercial success

32. 2002: Regulated credit unions • The impact of FSA regulation • Introduction of Approved Persons Regime • Established operational standards and financial discipline • Development of a culture of compliance • Impact on service delivery • Financial Services Compensation Scheme • 59% of directors think Approved Persons Regime is a good thing. More likely to say this in larger CU: • 76% directors in 5,000 plus member CU • 50% directors in 200 or less member CU

33. 2005: Quality Credit Unions • New Model in the British context • learning from the West Midlands • Modern and professional, accessible and visible • Commitment to good governance • BBCU – credit unions not meeting WOCCU standards • Customer focused • researches, understands and meets member wants • understands dynamics of the low income market • Accessible savings, affordable credit, transaction services, insurance, money advice, money management support • Access to Credit on a Low Income (Co-operative Bank 2001)

34. 2005: Quality Credit Unions • Emphasising savings mobilisation • Child Trust Fund and ISAs • Flexible and responsible approaches to lending • BBCU – includes greater use of credit scoring • Development of transaction services • ABCUL and The Co-operative Bank new project • Benefit direct accounts • Insurance services • Money advice and financial education

35. Effective promotion and delivery • Through partnerships and networks • Working strategically with other organisations • Reaching out to the community through others • Councils and local authority departments, Sure Start, Primary care trusts, housing associations, employment agencies, schools, refugee councils, CAB offices, community and charitable organisations, victim support groups, churches and faith groups • Promoting mutual benefits

36. Financial Inclusion - HM Treasury • Promoting Financial Inclusion 2004 • Free face to face money Advice • Access to Banking • Access to affordable Credit • Financial Inclusion: the way forward 2007 • Save savings • Insurance • Helping people with financial distress – including how banks can help

37. Financial Inclusion the way forward Ensuring that everyone has access to appropriate financial services, enabling them to – • Manage their money on a day-to-day basis, effectively, securely and confidently • Plan for the future and cope with financial pressure, by managing their finances to protect against short-term variations in income and expenditure and to take advantage of longer-term opportunities • Deal effectively with financial distress, should unexpected events lead to serious financial difficulty

38. Financial Inclusion – action plan • HM Treasury Action Plan

39. Financial Inclusion Growth Fund • A Government initiative to increase the availability of affordable personal loans made by third sector lenders • Growth Fund - July 2006 to January 2011 • Circa 100 contracts with credit unions • 91% of all growth fund loans • 86% of the money • £127 million to 377,000 borrowers • 18% applications refused or withdrawn • Average loan £433 • 86.5% of contractors achieved less than 10% delinquency on all loans. • http://www.dwp.gov.uk/advisers/growthfund/

40. Capital Credit Union Ltd • Capital Credit Union Ltd • Capital’s CE0 talks about combating extortionate lending

41. Scaling up Third Sector Lenders • Financial Inclusion Taskforce sub group • Mapping what already exists in the sector • Mapping what support the banks are already providing • Asking the sector and others what is needed • Defining what scaling up would mean • Defining the inputs of capital and other inputs which would be needed

42. Scaling up credit unions • Enabling legislation and proportionate regulation • Sound governance and strong management • Sustainable business models, products and services • Appropriate investment

43. Legislation and regulation Enabling legislation • More flexible common bond • Organisational membership • Once a member always a member • Under 16 membership • Interest not just dividends • Clarity on objects of credit unions Proportionate regulation • higher level of capital adequacy than basic solvency (0%)? • FSA to act on credit unions who are out of compliance • http://www.hm-treasury.gov.uk/consultations_and_legislation/creditunions/consult_creditunions_index.cfm

44. Governance and Management Sound governance • New Corporate Governance Code • Recruitment drive for new board members • Corporate volunteering initiatives. Strong management • Operational training available face to face and online • Leadership development opportunities • Secondment programmes. • Formal mentoring systems

45. Business models, products and services Sustainable business models • PEARLS monitoring system • Market sensitivity on pricing and control of expenses • Evidence based decision making e.g. market research • Knowledge of who is using credit unions now, what their needs are • Attract employers • Credit union back office for treasury, liquidity and processing etc • Credit Union Direct to provide universal coverage Products and services • Development of appropriate ‘safe savings’ products e.g. Christmas accounts • Alternative payday lending model • Not for profit home credit ? - see current JRF research on this • Savings Gateway, Social Fund and Post Office • Partnerships on mortgage lending with BS sector

46. Instment • Governments support. • Work with banks • Private charitable trusts • Housing associations, local organisations to become members of credit unions and deposit with them as well as lend them subordinated capital. • Attract employers

47. FI Progress since 1999 • Shared goal of halving the numbers of the unbanked (into of basic bank accounts) • Increase in credit union membership and CDFIs • 3rd sector instant loans (Growth Fund) • Expansion of debt advice • Money Made Clear – focus on financial capability • Saving Gateway • Child Trust Fund through credit unions • Illegal money lending teams

48. Finale Credit unions and Banks