Is the British credit union model broken? Is a collaborative system the answer ?

1. Is the British credit union model broken? Is a collaborative system the answer? Mainstreaming Co-operation: An Alternative for the 21st Century? 3rd July 2012, Manchester Paul A JONES, Reader in the Social Economy Research Unit for Financial Inclusion

2. Community finance for London • A RUFI research study 2010-11 • Supported by DWP (Government) and funded by Santander • Prompted by ending of Financial Inclusion Growth Fund • To provide a platform for the development of credit solutions and community finance. • Focus on scaling-up the credit union sector • Launched in House of Commons in July 2011

3. Approach and method • Collaborative and action-oriented inquiry • Leading credit unions in the capital; the DWP, local government and social housing sector • Demand side research • Quantitative consumer research data • Analysis and geo-spatial mapping of the Government index of multiple deprivation • Supply side research • Interviews with 15 credit unions, partners and stakeholders, research workshops, financial analysis of annual returns

4. Demand for financial services • Much of inner London is in the top decile of the index of multiple deprivation • Almost 25% of housing stock is social housing, rising to half in some boroughs in East London. • Average household income for Londoners on low incomes, is £11 ,240 p.a. lower than the national average of £12,175. • Ethnic minorities represent 57% of the low-income population. • 57% of low-income Londoners are credit users. • 61% of Londoners have no savings • Three quarters (74%) of Londoners on low incomes would find it difficult or impossible to raise £200 – £300 in an emergency without borrowing • Many low income Londoners not able to access credit – 39% no credit in last 5 years, rising to 45% in BME households

5. Credit unions in London • 35 credit unions in Greater London • Serving 27 of London’s 33 boroughs • Strong social and community focus • Growing faster than in Britain generally • 2005 – 2009 • Assets up 92% (national increase, 44%) • Loans up 70% (national increase, 36%) • Savings up 79% (national increase, 39%)

6. Modest penetration • In 2009, 60,000 credit union members in London • 1% of Greater London population • Growing at 18% per annum • Demand-side research revealed 0.75m individuals, (30% of low-income Londoners and 42% of social tenants), lacked access to credit

7. Financial Inclusion Growth Fund • September 2006 and to March 2011, 11 credit union contractors in London have: • Granted over 44,000 loans to low-income borrowers, 78% of whom are women and over 80% social housing tenants • Made loans to total value of over £19 million • Opened over 25,000 current or savings accounts for Growth Fund borrowers • Maintained less than 10% DWP target delinquency rate16 on loans in 87% of the participating credit unions • GF credit unions grown most significantly • 80% increase in savings since 2005 – 2009 (non GF 43%)

8. Financial challenges • Low income to average assets (10 GF cus) • 50% negative net income • High operating expenses • 9 exceed 10% expense to average asset ratio (four in excess of 15%) • Endemic to serving segments of low income market • Bad debt • GF credit unions 9%; non-GF 11.7% • Loan to asset ratio – 57% GF and 56% others • Need to maximise savings – but linked to maximising loans • Need to price realistically • Dependency on external subsidy

9. Organisational challenges • Leadership, governance and management • Consistency in products and services • Serving wider target market • Developing information technology • Developing effective partnerships

10. Rationalisation and strain • Focus on business efficiencies • Expansion and merger • Current approach to increasing efficiency and driving down costs • Current credit union model under strain • Organisational and financial strain • Impact of new legislation and regulation

11. Collaboration • Current model – atomistic and competitive • Need for radical new approach • WOCCU – greater collaboration, greater market share • Fischer (2002, 2005) • Need for cohesive, networked and integrated system • To drive scale, efficiency and performance

12. A cultural shift • A focus on commonality rather than uniqueness and a radical increase in operational excellence (Grace 2010) • Focus on shared back and front office services • Dependent on trust and commitment

13. Harnessing technology • The electronic hub – or the back office • Promoted by ABCUL • Collaboration on back office functions • Facilitate new products and services • Enable link with the Post Office and other partners

14. Government support • Coalition Government – success of the Growth Fund • Modernisation and Expansion Fund (£73 million announced ) • Looking for step change in organisational capacity • Dependent on Experian feasibility study

15. DWP Credit Union Expansion ProjectExperian feasibility study report • credit unions only option to serve low-income communities • potential consumer market of at least 7 million working age adults • movement has expanded • but costs are high, • some of their processes and their systems are not currently fit for your purpose, • and a major programme of cultural and behavioural change required to achieve modernisation and expansion • 80% of the 95 credit unions consulted said they recognised the need for fundamental change

16. DWP Credit Union Expansion Project • £38 million committed yesterday • credit unions that have demonstrated progress, to participate in a programme of behavioural, process and systems change. • Aim to double membership in 7 years • Issue not one of demand but capacity • Focus on sustainability, efficiency and costs • Increase of interest rate cap to 3% pcm

17. The future is collaborative • Current business model broken • Collaboration – a radical change • Not easy - a major opportunity • Linked to new legislation and regulation • Climate is right – increasing interest in the co-operative and mutual sector • Government, local government, social housing providers and general public