Transcript Credit Union Research

The World of Credit Unions
Dr. Paul A Jones
Research Unit for Financial Inclusion
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.
Credit unions world wide
• 186,000,000 Members
• 54,000 Credit Unions
• 97 Countries
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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
Credit unions in Ghana and US
• Youth savings programme
• Community Choice Credit Union
Credit unions in Europe
Members
Penetrati
on
Penetrati
on
2006
2005
2006
2005
2006
2006
550
543,359
501,879
1.33%
1.25%
838,081,811
977,109,401
525
620
3,050,000
3,000,000
109.98%
110.61%
17,546,637,114
19,921,369,957
Poland
70
76
1,550,660
1,394,433
5.66%
5.14%
1,906,673,081
2,053,326,919
Romania
11
11
52,477
48,869
0.34%
0.31%
20,512,951
26,236,191
Russia
238
213
366,954
277,776
0.37%
0.27%
204,820,288
246,096,806
Ukraine
760
746
1,790,414
1,297,000
5.55%
4.00%
528,954,468
615,785,393
Estonia
10
2,634,095
10,447,537
Latvia
30
30
22,601
22,005
1.44%
1.39%
11,688,640
13,984,969
Lithuania
59
56
68,841
55,458
2.78%
2.24%
156,440,694
173,001,786
1
1
6,105
5,245
0.43%
0.37%
2,728,973
4,605,573
Moldova
485
504
106,400
96,299
3.39%
3.09%
7,742,729
24,834,536
TOTAL
2729
2863
7,560,504
6,704,674
3.31%
2.92%
21,226,914,844
24,066,799,068
Country
No
No
2006
2005
Great Britain
540
Ireland
Macedonia
Members
2,693
0.30%
Savings
Assets
Credit unions in Europe 2009
• Click for interactive map
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
Co-operative Bank model
Rabobank System
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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
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
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
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
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
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
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
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
Extent of financial exclusion in UK
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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
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).
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.
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
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.
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
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
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
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
• Reseau Financement Alternative
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?
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
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
Traditional model credit unions
• Social focus rather than business orientated
• Small community operations
– Entirely volunteer run and vulnerable to burn out
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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
1999 – Business-oriented credit unions
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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
2001 New Model Credit Unions
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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
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
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
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)
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
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
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
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
Financial Inclusion – action plan
• HM Treasury Action Plan
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
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£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/
Capital Credit Union Ltd
• Capital Credit Union Ltd
• Capital’s CE0 talks about combating
extortionate lending
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
Scaling up credit unions
• Enabling legislation and
proportionate regulation
• Sound governance and strong
management
• Sustainable business models,
products and services
• Appropriate investment
Legislation and regulation
Enabling legislation
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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
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http://www.hmtreasury.gov.uk/consultations_and_legislation/creditunions/consult_creditunions_ind
ex.cfm
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
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
Instment
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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
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
Finale
Credit unions and Banks