Crossroads for credit union movement

For years they have helped promote the values of thrift in local communities but the credit union sector is fragile due to some poor lending practices in the boom and so many debtors being unable to repay loans, says Kyran Fitzgerald

IRELAND has reason to be proud of its community based co-operative savings and loans institutions.

There are over 500 credit unions across the country. They have helped to promote the values of thrift in neglected communities, saving many from penury in the process.

However, some credit unions got sucked into crazy boom-time lending practices and are now paying a high price.

Many others are coping with significant member bad debts through no fault of their own.

It is no exaggeration to suggest that Ireland’s credit union movement is at a crossroads.

This week, a commission on the future of the credit unions chaired by Professor McKillop of Queens University issued a series of findings and recommendations. It concluded that 51 credit unions out of 404 in the Republic examined had insufficient capital to withstand loan losses, while 25 were considered to be “seriously undercapitalised”. Total loan arrears stand at €1bn, while €800m has been set aside to meet bad debts incurred.

Six months ago, Finance Minister Michael Noonan indicated that the state would have to pump around €1bn into the credit unions in an effort to rebuild their capital base.

At the time, the scale of the financial requirement was disputed by Kieron Brennan, the chief executive of the Irish League of Credit Unions, the main industry body.

A second grouping, the Credit Union Development Association, CUDA, emerged in 2003.

The League has yet to release its annual report for 2011 so up-to-date data on the state of the country’s credit unions is lacking.

However, the regulator has sent in outside managers to run Newbridge Credit Union and there are concerns about several others.

The importance of credit unions to the wellbeing of communities, particularly less well off ones, cannot be over-stressed.

They owe their existence, in Ireland to the determination of three volunteers, two of them teachers, including a redoubtable woman, Nora Herlihy.

Herlihy grew up in Ballydesmond on the Cork-Kerry border before moving to Dublin to teach in the 1930s.

Working in a deprived area of the city, she was alerted to the international credit union movement while attending an adult education course.

The credit union idea, based on the notion of the “common bond”, either centred on a geographical, or vocational community, first emerged in Germany in the 19th century before spreading to places such as Canada, where forestry mill workers formed credit unions.

In Oct 2010, a Combat Poverty working paper analysed the role of credit unions in building financial capability among the less well off.

It gave the movement the thumbs up. It found that most engaged in some form of financial education in their community, but that much more needed to be done in this regard.

Credit unions often work closely with the state run, money advice bureau, MABS, and with local chapters of St Vincent de Paul to combat the activities of predatory moneylenders. But the challenge is growing.

Financial products have grown in sophistication — too often, the less well educated are left at sea.

In the current crisis, banks are withdrawing from poorer areas, leaving credit unions as the main linchpin for ordinary people.

Credit unions offer finance at competitive rates to members of credit unions with a history of saving with the credit union in question.

According to the 2010 annual report of the Irish League of Credit Unions, the average rate on a standard loan was 10%, while the annual cost of social finance was 5.22%, with secured loans at 5.6%, community loans at 5.2%, student loans at 5.58%, and car loans at 6.97%. Some credit unions offer loans at up to one percentage point below these average rates. Interest is charged on the reducing balance, not the total amount of the initial loan, and there are no charges for early redemption.

Credit unions do not engage in the practice of expensive add-ons (such as payment insurance).

Some credit unions have been highly innovative.

The Mabs debt advice and counselling service is modelled on work pioneered by the Lough Credit Union in Cork City, while the Tipperary branch has been an outlier in running financial education courses for the local community.

Combat Poverty surveyed 74 credit unions. It found all had websites and half published newsletters. Fifty-eight partnered with Mabs while 11 provided social finance. Thirty-five were involved in the “wolves from door” initiative targeting moneylenders. Credit unions use text messages to warn people off using moneylenders.

Tralee Credit Union has also sought to divert people away from personal finance companies through an “easy pay” initiative under which people can access consumer goods finance at an annual rate of 8.3%.

One national store group wants the initiative rolled out nationally.

However, few other credit unions have come on board.

A key obstacle is that the Irish League of Credit Unions is a relatively loose umbrella group federation, although one or two regional groups of credit unions have begun to emerge.

Regrettably, not all the local credit unions avoided the pitfalls of the boom. Much money was lent out on little or no security. There are cases where elderly parents are being hounded on foot of loan guarantees.

It is all a far cry from the high principles of the early days of the movement, yet it must be said that credit unions retain a huge loyalty base among the population with a claimed membership base of 2.9m.

Moves to overhaul the law on personal debt enforcement could deepen the sector’s problems. This is accepted by Paul Joyce, legal adviser to Flac, the free legal aid service.

“A lot of money was lent out on flimsy evidence of capacity to repay. Many credit unions are not members of the Irish Credit Bureau which records details of current credit agreements,” he said.

However, in Mr Joyce’s view, current proposals are conservative with a requirement of 65% creditor approval. The real problem is many people may simply be unable to repay loans, regardless of what repayment regime is put in place.

It is too early to assess whether credit unions will be major losers in any debt relief scheme, but a requirement for a major recapitalisation would appear to be undeniable.

The McKillop Commission appears to have taken a cautious approach to reform, arguing that all future mergers of credit unions should be voluntary.

It is accepted that some significant slimming down will be required.

The proposed restructuring body, ReBo, will be largely composed of people from the two associations, leading to suggestions that the Central Bank has been frustrated in its ambition to carry out a major overhaul of the sector.

A key proposal is that levels of supervision be linked to the size of the local credit union.

It is imperative that the valuable work of credit unions continues at a time when ordinary people have rarely been more bereft of financial support and guidance.

Factfile

* Origins: First working credit unions set up in Germany in the 1850s centred on the concept of the “common bond of association”. Loans are handed out to qualifying members with a record of saving with the credit union in question.

* March 1954: Establishment of the Dublin Central Co-operation Society by Nora Herlihy, Séamus P MacEoin, and Sean Forde.

* 1960: Establishment of the Irish League of Credit Unions — runinitially from Herlihy’s living room.

* 401: Total number of ILCU-affiliated credit unions in the Republic of Ireland.

* Total assets: 2010: €13.9bn.

* Savings: €11.9bn.

* Loans: €6.2bn.

* Loan provisions: About 10% of total loans (end 2010).