Proposals brought before Cabinet this week to allow credit unions to expand their business by offering higher-risk loans led to concerns from a number of ministers, with claims they could pave the way for “aggressive moneylending”.
Under the plans, credit unions would be allowed to double the level of interest rates they can charge at present to allow them to offer a wider range of loans and financial products.
The Minister for Finance Paschal Donohoe argued that the changes which would see legislation changed to allow the interest limit for credit unions double to 2 per cent per month, or 24 per cent per year – would allow credit unions to roll out out new loan products.
However, a series of Ministers raised concerns and it is understood the Cabinet did not approve the move, with Mr Donohoe expected to return to the issue in the weeks ahead.
The Dublin Central TD wants to give credit unions greater flexibility to offer borrowers different interest rates and loan terms depending on risk factors such as their creditworthiness.
“This change would provide credit unions with greater flexibility to risk price loan products and in doing so may create an opportunity for new product offerings,” a memo for the meeting said.
Moneylenders
Allowing credit unions to increase their interest rates would also allow them to offer an alternative to “high-cost moneylenders”, it was argued by Mr Donohoe, who cited a recent UCC study which made a similar recommendation.
The interest rate proposal stems from a recommendation from the Credit Union Advisory Committee, which operates under the Department of Finance.
Cabinet papers do not refer to previous suggestions from the Central Bank on easing long-term lending restrictions imposed on credit unions to allow them to grow their mortgage and commercial loan books, which is understood to be a separate issue.
However, sources disclosed there was unease at Cabinet about the interest rate suggestion, with some figures expressing concern that credit unions should be allowed to engage in riskier lending, similar to mainstream banks.
“Credit unions are not banks,” said one Minister, adding that they usually “look after” people who may usually have difficulty accessing credit from banks. Another said there was anxiety about credit unions engaging in “aggressive moneylending”.
Minister for Social Protection Regina Doherty and Minister for Business Heather Humphreys expressed concern about the proposals, as did Finian McGrath, the Minister of State with responsibility for Disability Issues. Ms Humphreys has a background working in the credit union sector.
Sources suggested there was worry about changes to the traditional ethos of credit unions.
Mr Donohoe told his colleagues that 2019 could be an important year for credit unions, which could see them expand the products they offer, including larger branches offering debit cards and current accounts.
In addition, mortgage lending could expand across the entire credit union sector and lending to farmers and small and medium-sized enterprises could increase.
Some credit unions already provide mortgages, but most do not because they are not capable of engaging in long-term lending.
The sector would also faces challenges, he noted, such as savings growth at a time of low interest rates, the need to expand and diversify loan books and competition from personal contract plans and financial technology. Some of the competitors to credit unions are unregulated or lightly regulated, it was added.
