Good leadership key to credit union consolidation

This is a chance to create a modern credit co-operativesystem, writes BILL HOBBS

AS predicted, Government has had to intervene to stabilise the credit union sector. Where appropriate, credit unions are to be consolidated and, where warranted, consolidation will be funded by the state.

It seems outright closure for some has not been ruled out.

The Central Bank is to establish and operate a statutory resolution scheme. By the end of the month, Government says it will also appoint a commission on credit unions to design a strategy for the future of the sector.

Government’s intervention illustrates how the Central Bank’s, as yet unpublished, extensive diagnostic and stress test has revealed the damage wrought by the credit crisis and scale of funding required to put the sector on a firmer financial footing.

By the end of this month, the bank will produce a plan to underpin the solvency and viability of undercapitalised credit unions. It may indicate the level of state aid required to fund a large scale consolidation programme.

The bank has said consolidation could result in a hub and spoke configuration along county lines, with perhaps one credit union per county having a number of satellite branches.

The number of credit unions may shrink from just over 400 to between 100 and 150.

In a related move, in orchestrated press releases, the Central Bank and Department of Finance welcomed ILCU’s press statement on its decision to enter discussions on a statutory resolution mechanism.

Only last year it lobbied politicians to have credit union regulation removed from the Central Bank and rejected the bank’s proposals for a statutory resolution scheme in favour of its own private scheme.

After incurring significant losses in supporting a small number of credit unions, it appears leading credit unions rejected its plan to double contributions to shore up its controversial stabilisation fund.

Northern Ireland members are said to be demanding their contributions be ring-fenced from losses in the Republic. While ILCU’s decision is a welcome development, many are deeply frustrated that responsive leadership is not emerging from the sector.

Taken together, Government’s intervention, the Central Bank’s regulatory strategy and credit union commission could facilitate the creation of a modern credit co-operative system similar to those found in Europe, North America and Australia where , through sophisticated networks, individual co-operatives pool resources through central corporate bodies.

These central bodies, many of which operate as wholesale banks, provide a range of services to their member co-operatives.

Customer owned, professionally managed and governed, cohesive networks provide tens of millions of ordinary people with a full range of high quality, affordable financial products and services.

Had credit unions here evolved similarly they could have generated the capital required to build a modern credit co-operative system. But for various reasons, including a lack of effective leadership and committed followership, they have been unable to do so.

The Central Bank is showing responsive regulatory leadership to put credit unions on a sounder footing. However, it will take responsive credit union leadership if it is to work. And while regulatory strategy may build a better, safer road, it’s also necessary to figure out where the road goes.

What credit unions of the future look like, how they will be governed and managed, what products and services they provide, what enabling IT systems and operational models they deploy and how they will co-operate with each other to leverage their combined strength, are some of the issues to be addressed by the commission.

Whatever strategy the commission recommends it can only be executed if there is effective leadership and committed followership.

As credit unions have become quite skilled at non-collaboration, solving for the vacuum in progressive leadership and followership will not be easy.

It’s important the credit union commission encourages new leaders to emerge.

These will be people who are committed to building great credit unions. Only when credit unions are governed and managed efficiently and perform at the highest standards can they deliver on their objectives.

Creating a modern credit co-operative system will take resources and expertise credit unions do not have. On its own a Central Bank can only do so much. Transforming credit unions will require a leadership and decision making system capable of realising the full potential of the credit union co-operative banking model.

A change agent with powers, resources and expertise to work with the bank to ensure that transformation happens and potential is realised will be needed. Such a change agent would be tasked by Government with creating a modern federated credit co-operative system.

Governed by professional credit union stakeholder representatives, it would employ the expertise required and working closely with the Central Bank, effect the change required.

In time it could become the governing body and manager of any central corporate facility established to support a cohesive federated network of consolidated credit unions.

Bill Hobbs is a banking commentator and former head of banking strategy at ACC Bank