It's a curious time for credit unions. On the one hand, those in the movement would like to see the sector move into the gap left vacant by the departure of foreign banks and the retrenchment of domestic players. But on the other, credit unions are pushing back strongly against efforts by the Central Bank to exert a stronger regulatory oversight on the sector; regulation which, some would argue, is needed if credit unions want to compete with the banks.
So is it a case of credit unions wanting to have their cake and eat it? And, if credit unions do succeed in broadening their range of services and becoming a viable “third force” in the Irish financial services sector, can they do this without loosening the foundations on which the movement was formed?
During the summer, the Central Bank released new regulations for the sector, raising the ire of many credit unions. (The regulator received about 120 submissions for the consultation.)
These regulations come on the back of high-profile failures, such as Newbridge Credit Union, rising arrears and ill-advised investments by the sector.
The sector has still not emerged from the stormy waters of the downturn. Some 162 credit unions (44 per cent) are still bound by lending restrictions imposed by the Central Bank, while a further 74 (20 per cent) are on the regulator’s “watch list”, meaning it keeps a close eye on a host of issues, including levels of arrears and bad-debt provisions.
As such, some would argue that such a level of oversight is warranted. As recently as last month the International Credit Union Regulators’ Network (ICURN) found evidence of “poor-quality underwriting and a failure to understand and apply the principles of sound lending” among Irish credit unions.
But chief executive of the Irish League of Credit Unions (ILCU) Ed Farrell finds this criticism "hard to accept", noting that arrears have fallen from 20 per cent a few years ago to about 16 per cent today.
“We’re confident that any weakness in lending policies has been ironed out,” he says, noting that credit unions have between €5 billion and €6 billion available to lend. Better regulation There are signs of improvement on the regulatory front. Earlier this year, the regulator wrote to relevant credit unions asking them to apply for a review of their lending restriction. At the time, 52 per cent of credit unions still had a lending restriction.
Of these, a little more than half (57 per cent) asked for a review and, of those that have been fully assessed, 90 per cent have had their lending restriction removed. A number of applications are still in the review process, with the deadline to apply September 30th.
Others, such as Fianna Fáil finance spokesman Michael McGrath, have been singing the credit unions’ tune, arguing that the sector has not been an undue burden on the financial resources of the State.
So far ReBo – the body set up to restructure the sector – has had operating costs of about €4.5 million, while of the €250 million credit-union fund set up to recapitalise the sector, just €35.4 million has been drawn down and €27 million of that went to Newbridge Credit Union.
It is a far cry from the €500 million to €1 billion that Minister for Finance Michael Noonan said would be needed to plug the hole in credit unions back in October 2011.
Now credit unions argue that they are sufficiently robust to push the boat out and move into new business areas. But, they argue, the Central Bank is holding them back. “It’s totally over-burdensome and restrictive, and will stop credit unions developing,” says Farrell.
For chief executive of Dundrum Credit Union Gerard McConville, it's about credit unions retaining their original ethos, but doing so in a "modern, progressive way", by offering electronic funds transfer, SEPA payments and home loans etc.
But regulation is hampering this says McConville, noting that in exchange for tighter regulation and higher standards, credit unions should be able to extend their range of services.
“But we have all of the regulation and very little of the extra services,” he says.
Of most concern to credit unions in the new regulations is the carry-over of lending restrictions from 1997, which only allow 10 per cent of credit union loans to have a term of more than 10 years. This, says Farrell, restricts any “meaningful move” into larger loans for houses etc, while credit unions have also complained about the move which will prevent consumers from saving more than €100,000 with their local credit union, seeing it as a “reputational slight” on credit unions.
Credit unions also have to keep 10 per cent of assets in a reserve fund, but this figure is “too high”, says Farrell, pointing to the banks, who only have to keep 10 per cent of risk-weighted assets on reserve.
“We see ourselves as being more regulated than the banks, with a higher capital requirement than the banks,” says Farrell.
Third force
But hoping for a change in the new regulations is not the credit union movement’s only option. It’s also opening up on another front, in positioning itself as the much vaunted “third force” to compete with the two domestic pillar banks.
To this end, the ILCU has hired consultant Eddie Molloy to review the current structure of credit unions and potential for change, with a view to presenting at the ILCU's agm next April.
Under a new structure, akin to that of co-operative banks across Europe, there would be more co-operation and standardisation between the ILCU’s 352 or so credit unions, with loan decisions for example, potentially centralised.
“It would do lots the same and do lots differently,” says Farrell.
In terms of capital requirements, Farrell notes that credit unions would need to have €1.3 billion in excess capital to transition to this structure, but notes that credit unions almost have €2 billion in excess capital. “We have the capital to do what we want,” he says.
Moving closer to a banking model is something many in the industry would support.
Chief executive of Link credit union in Cavan Sean Newcombe says, "I'm very positive about the future of credit unions. It's coming to a point where we will operate at a level playing field with banks and will be soon able to offer the same services as banks."
But is there a risk that going down this road would pull credit unions away from their core ethos?
Newcombe doesn’t think so, saying credit unions will do banking “in a more ethical and friendlier way”.
Farrell agrees. “It would be the same products and services you could get in a bank, delivered in a different manner,” he says.
Already, however, there are signs of change in the sector.
Voluntary directors
With some 9,200 volunteers actively involved in the credit-union movement, it is one of the largest volunteer-led organisations in the country. However, the introduction of new regulatory standards mean that for some, volunteering is not as straightforward as it used to be.
This means that in rural areas across the country, getting voluntary directors can be a problem. “It’s not that people don’t want to volunteer,” says Newcombe. “People’s altruistic tendencies are still there, but the reality is it’s a more complex business now.
“Being a member of a board of directors is extremely complex and requires specialist knowledge from its board. For a lot of people the responsibilities outweigh what they’re prepared to take on.”
As he notes, the responsibilities of a credit union director are not about “meeting up once a month for an hour to have a cup of tea and go through the agenda”.
A director of a credit union now has to pass a fitness and probity test similar to that presented to the director of any other financial institution.
In urban areas such as Dublin, however, the issue isn’t as keenly felt.
According to manager of Dundrum Credit Union Gerard McConville, the credit union has a waiting list for the board, while in Clontarf, the credit union got 10 volunteers within six months of putting up an advertisement.
Community movement
Clontarf, in north Dublin, is no longer serviced by a bank, and the nearest branch is now in Killester. As well as a post office, however, the seaside village still has a credit union and for many being able to access their local office is an important element of the movement.
It is this local presence, representing communities, workplaces and educational institutions across the country that is seen to be at the heart of the credit union movement. But as more credit unions close or merge, either at their own behest or that of the Central Bank, the fear is that the local nature of credit unions, and their role in the heart of the communities in which they service, will be diluted.
According to ReBo, it has approved 39 mergers to date, involving 87 credit unions. Of these, 23 have been completed. While the work of ReBo is due to finish at the end of this year, chief executive officer John Doyle says it is still working with a further 111 credit unions at varying stages of the process. Whether it closes at year-end or not is a matter for the Minister for Finance, Doyle says.
A key concern for the 5,500 members of Bailieborough Credit Union when it entered merger talks during the summer was keeping the local offices open and keeping the links with the local community. "We're a rural community and the big concern is that in many towns, the banks are no longer there, and people don't want to see the credit unions going the same way," says Newcombe.
Nonetheless, during the summer, its members voted to approve a merger with neighbouring credit unions in Kingscourt and St Mary’s Moynalty.
The new credit union, which goes under the name Link, has 15,500 members, is retaining its four offices, and is bringing a broader range of services and products to them, Newcombe says.
Education is also supposed to be at the heart of the credit-union movement.
As McConville says, “Our ethos is to encourage people to save, to give them reasonable access to affordable credit and to educate them in the wise use of money”.
Clontarf Credit Union is acting on this and has been helping girls and boys at nearby Belgrove Senior School to save, visiting the schools once a week. As the credit union says, it's about getting children into the habit of saving.
One failing of credit unions in recent years – identified even by those in the movement – is its apparent inability to halt the rampant rise of moneylenders, licensed or otherwise.
Earlier this year Martin Sisk, a former president of the ILCU, said that credit union members were increasingly turning to moneylenders for short-term loans as it was easier than dealing with red tape and too much paper work in credit unions.
But as Newcombe notes, credit unions have been put under strict instructions to do significant due diligence on loans, even on very small loans for members who have excellent records for 20 years or more.
“Our situation is that we can do loans up to €1,000 with relative ease without having to go through a lot of information,”says Newcombe. But it’s far from as snappy as a service offered by the likes of Provident, which promises cash of between €50 and €500 delivered to your door, and with few questions asked. Of course the APR it charges is a hefty 157.3 per cent, compared to about 7 per cent with your credit union.
Another problem is that credit unions like Link want to see members build up a savings record before they will lend. This can then preclude people who may be in most need of short-term loans, as they feel it will take too long to get a loan.
“The financially excluded won’t become part of the system unless the likes of credit unions embrace them,” says Newcombe, adding that he hopes it’s something credit unions can move pro-actively on.
This now looks to be taking shape, and the Department of Social Protection is set to pioneer a pilot micro-lending scheme, aimed at enabling people to borrow up to €1,000 from their credit union at a rate of 12 per cent with approvals given within the hour. Pilot scheme Minister of State at Department of Social Protection Kevin Humphreys says that about 30 credit unions are now prepared to run a pilot scheme, willing to lend up to about €500 at a rate of 12 per cent, thereby significantly undercutting the moneylenders. "We're anxious to keep red tape at a minimum," he says, noting that borrowers won't have to be members of credit unions in the first instance, but will once they take out a loan.
He’s hopeful that the scheme will be up and running by Christmas, noting that it’s currently working on getting an IT platform in place, and is ironing out some regulatory issues with the Central Bank.
In the meantime, credit unions will continue to lobby against what they see as overly-restrictive regulations. Since July, credit unions have been lobbying the Government hard and, while the ILCU hasn't yet been granted an audience with Minister for Finance Michael Noonan, it has met with junior minister at the department Simon Harris.
Between now and January 1st, Noonan will have to sign the new Central Bank regulations into law. Once he has done so, thereby cementing these restrictions, Farrell expects it would be another three to five years before they could again be reviewed. So he says he is "hopeful" that there can be some relaxation of the rules between now and then. In numbers: Credit unions 422 Number of credit unions in 2007 368 Number of credit unions in 2015 9,200 Number of volunteers 74 (20%) Credit unions on Central Bank's watch list
162 (44%) Credit unions with restricted lending €250m Amount outstanding of ReBo’s €245m Credit Union Fund
23 Number of mergers to date 111 Credit unions still in merger talks
