The World of Credit Unions

1. The World of Credit Unions Dr. Paul A Jones Research Unit for Financial Inclusion

2. 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.

3. Credit unions world wide • 186,000,000 Members • 54,000 Credit Unions • 97 Countries • 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

4. Credit unions in Ghana and US • Youth savings programme • Community Choice Credit Union

5. Credit unions in Europe

6. Credit unions in Europe 2012 • Click for interactive map

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Extent of financial exclusion in UK • Over 1.6 million adults in the UK do not have access to a transactional bank account, (Fin Inclusion Task Force 2010) • Of the 2.7m originally found to be unbanked, 1.1 m have been moved into banking • 54% of unbanked are family households (Policis / FPF 2011) At least 800,000 children live in households without bank accounts (HMT 2006). • 64% of low income households have no cash savings, rising to 74% of those in the lowest income quintile Source : Policis / FPF 2011 • 2.4 m home credit users. Circa 1m payday users. 25% of home credit users and 23% of payday users don’t have other credit options. Source : Policis / FPF 2011 payday use up to near 2m

16. Extent of financial exclusion in UK • 1.1 m low income individuals need to borrow and have been unable to do so in last two years. Policis and FPF 2011 • 35% of low income households – circa 5 individuals - believe that it would be impossible for them to borrow £200 – 500 from a mainstream lender Source : Policis / FPF 2011 • 310,000 users of illegal money lending, 2% of low income population rising to 6% of most deprived communities Source: Policis / BIS 2010 • 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) • 60% of all calls to Citizens Advice about debt and benefits • Around one in four of the issues brought to Scottish bureaux relate to debt

17. Extent of financial inclusion • Two-thirds (67 per cent) of low-income credit users, some 6.7 million individuals, pay behaviour-driven costs on their mainstream credit use. On an annualised basis 3.6 million, or 44 per cent of the 8.2 million low-income borrowers, incur behaviour-driven costs. These account for a total of £630 million per annum and an average per head of £174 per annum. • Friends Provident Foundation 2011

18. 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).

19. 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.

20. 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

21. 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.

22. 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

23. 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

24. 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

25. 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 • ReseauFinancement Alternative

26. 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?

27. 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

28. 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

29. Traditional model credit unions • Social focus rather than business orientated • Small community operations • Entirely volunteer run and vulnerable to burn out • 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

30. 1999 – Business-oriented credit unions • 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

31. 2001 New Model Credit Unions • 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

32. 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

33. 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

34. 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)

35. 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

36. 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

37. 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

38. 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

39. Capital Credit Union Ltd • Capital Credit Union Ltd • Capital’s CE0 talks about combating extortionate lending

40. DWP Growth Fund • DWP - THE GROWTH FUND • 405,134 loans to a total value of £175,351,444. (May 2011) • Circa 100 credit unions delivered GF • 86% of loans and 86% of the money • 76% of credit unions delivering Growth Fund say it had assisted growth (2008) • Eight in ten Growth Fund lenders reported that their organisation had improved its working practices as a result of the Growth Fund and now operated in a more business-like way. (2011)

41. Impact of FI Agenda • From tackling poverty to promoting financial inclusion – change of emphasis • Focus away from solely the provision of loans • Widening access to credit union membership in low income communities • Some concerns: • Danger to long-term sustainability as co-operative and mutual financial institutions? • Impact on image of credit unions? • Concern about return of dependency?

42. Scaling up credit unions • Enabling legislation and proportionate regulation • Sound governance and strong management • Sustainable business models, products and services • Appropriate investment

43. Legislation and regulation Enabling legislation 2012 • More flexible common bond (field of membership test) • Organisational and corporate membership • Once a member always a member • Interest not just dividends on savings deposits Proportionate regulation 2012 • Higher level of capital adequacy than basic solvency, of at least 3% • Additional provisioning for bad debt • FSA to act on credit unions who are out of compliance

44. Governance and Management Sound governance • Corporate Governance Code • Recruitment drive for new board members • Corporate volunteering initiatives. Strong management • 83% of LWCUs now employ paid staff (2008) • Operational training available face to face and online • Leadership development opportunities • Secondment programmes. • Formal mentoring systems

45. Products and services • Affordable credit, but also • Safe Savings, building personal assets • Insurance • Mortgages • Cash ISA, Children’s Accounts, • Christmas Accounts, etc • Financial Education • Flexible payment options – • benefit deduction, payroll deductions, cash collection

46. Credit Union Current Account • 25 credit unions, over 30,000 accounts • VISA Debit card + LINK ATM network • Payment of salary/benefits • Direct Debits and Standing Orders • Not reliant on high penalty charges to cover costs • Uses back office facilities of Co-operative Bank, but accounts are controlled and run by each credit union.

47. 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%)

48. 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

49. 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%)

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