Credit unions ‘can help cure bank sector’

CREDIT unions could be an antidote to the stagnant banking sector and a vital tool in improving financial inclusion, the head of their trade body has claimed.

Mark Lyonette, chief executive of the Association of British Credit Unions Ltd, said more companies should be setting up member-owned financial cooperatives to provide an alternative to mainstream banking.

Credit unions lend small sums and are funded by customers’ deposits, but make up a fraction of the UK banking sector, which is dominated by listed banks and customer-owned building societies.

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“The coalition Government is committed to diversity in financial services,” said Mr Lyonette. “We’ve got support from all three major parties who say one of the challenges for the UK is to have a bit more diversity in the banking space.

“Credit unions are a very successful counter to that.”

The big four banks – Lloyds, RBS, Barclays and HSBC – control about 74 per cent of the UK’s personal current accounts.

“In the mortgage market, there’s a range of players, mutual and non-mutual,” he said. “There is not a range of players in the current account market.”

Yorkshire is home to about 15 credit unions of various size. They range from the likes of Hull and East Yorkshire, with almost 10,000 members and £7.7m of assets, to St Patrick’s Save and Credit Union in Huddersfield, which caters for members and friends of St Patrick’s RC church and club.

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According to the World Council of Credit Unions, the UK has about 400 credit unions and around 1m members, about 2.4 per cent of the population.

More than 72 per cent of Ireland’s population belong to a credit union – some 15m people. In North America, about 45 per cent are members.

However, the sector has been tarnished by a number of notable failures in recent years. North Yorkshire credit union collapsed late last year with 5,000 members owed a total £1.9m.

“That’s a credit union that had a lot of goodwill and support from the city council and North Yorkshire council,” said Mr Lyonette. “It is always a tragedy when a credit union like that does not keep itself in good financial order. You have to manage your bad debt. You cannot be giving out loans to everybody left, right and centre because some people will not repay them.”

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Leeds City Credit Union also came close to collapse in 2009 after chronic mismanagement, and was only saved by a £4m bailout from public funds.

“For that to have gone down would have been a really dreadful story,” said Mr Lyonette. “It was a big turnaround, but they seem to have done it.”

However, he said the sector’s delinquency levels have not risen despite the downturn, and credit unions have high levels of capital.

He argued the movement provides a much cheaper alternative to pawnbrokers and payday lenders for people on low incomes.

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Payday lenders such as Wonga, which can charge a 2,300 per cent annual interest rate (APR), are under pressure from the Office of Fair Trading to reform. However, credit unions cannot charge more than 27 per cent APR, or two per cent a month, and are not driven by profit. “If you’re borrowing £300, 27 per cent APR is a bargain,” said Mr Lyonette.

The Government is consulting on raising the cap on interest credit unions can lend at to three per cent per month, as often they are unable to break even on small, short-term loans. Mr Lyonette said raising this cap is vital as many local authorities are cutting subsidies for credit unions. “Credit unions need to deliver these services on a sustainable basis.”

Many started out with local councils or police forces, and companies including British Airways, Stagecoach and First Group are behind large credit unions.

The Church of England is also setting up a credit union, the Anglican Mutual Credit Union.

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Mr Lyonette said encouraging more firms to set up credit unions is vital “if you want to build a good habit of saving and want to make it painless”.

“It should be structurally more efficient. They collect it from your payroll. It’s a painless way to save.

“It’s almost an employee benefit. It’s something your employees will thank you for. It’s providing good, affordable credit to help them balance their books and avoid using payday lenders.”

Credit unions are regulated by the Financial Services Authority and deposits of up to £85,000 are covered by the Financial Services Compensation Scheme.