Credit Unions Find it Hard to Compete with the Banks

24 March 2017

Credit unions are financial co-operatives owned and democratically operated by the people who save and borrow with them. 

They were originally established to counteract moneylenders who charge exorbitant rates of interest from those who can least afford it. The idea was that a group or community would come together to save their money and this money would then be available to those who needed affordable loans.

Traditionally they were very locally based with an emphasis on community. It was not uncommon for branch officials to do business in the local parish hall after mass on Sunday. The majority of people had great trust and almost affection for their local credit union and identified with the caring and sharing ethos that the credit union movement promoted.

Over the years, credit unions developed and changed with the times and now aim to be an alternative to the banks.  Credit unions now offer a comprehensive range of financial services at attractive and competitive rates for the benefit of members while maintaining the credit union ethos of service before profit.  Most credit unions are developing online systems whereby customers can check balances and transactions, transfer payments in, and in some cases transfer payments out.

The government regards credit unions as essential in providing services to ordinary people and bridging the gap between banks and the moneylenders. However, in order for them to be sustainable they must be professional, and under strict governance befitting modern financial institutions.

The Credit Unions’ position

However, the credit unions now find that additional regulations introduced on top of the constraints they already operated under is severely curtailing their ability not only to be an alternative to banks, but to continue to do business at all.

It is claimed that regulations that have come into force since the Credit Union Act 1997 mean that credit unions can do less business now than a decade ago.  There are regulations governing savings, loans, and payment systems all of which impact on the Credit unions ability to grow and develop their business.

The latest regulations covering areas such as reserves, liquidity, lending, investments, savings and borrowings are added to existing regulations which effectively prevent credit unions from competing in 90% of the Irish credit market. 

They limit individual members to a saving limit of €100,000, impose categories of loans that can be provided. But some credit unions have had to put a cap on deposits in recent times, because of the cost of meeting the requirements of the regulatory reserve, and also restrictions on where they can invest surplus cash.

 Some credit unions fell foul of the Central Bank over the last few months for failing to comply with regulatory controls, and earlier this month a credit union was fined by the Bank for its failure to adopt anti-money laundering and terrorist financing policies among other breaches.

The Irish League of Credit Unions maintains that credit unions do not have a level playing field on which to compete with the banks and that this is to the detriment of ordinary people using the credit unions.

What the Credit Unions need

Credit unions need to be able to provide the sort of loans customers most want, and they need greater freedom to invest surplus cash in order to grow and take on the banks.

One of the main things the Credit Unions would like to see happen is a relaxation of lending limits which would allow them to invest in funds for housing related purposes.

Credit unions can and do provide some mortgages, but are severely restricted in how much they can lend despite having the capital to do more.

 Many credit unions are eager to provide more mortgages. Relaxing lending restrictions in terms of amounts and repayment times would enable them to get a credible foothold in the mortgage market. They claim to have the competency to compete with the banks and want the chance to do so. 

About 18% of credit unions have assets of over €100m so one size does not fit all when it comes to monitoring possible problems or breach of regulations.

Credit unions also require an easing of regulations to allow them to get involved in funding social housing.  They could provide €1bn immediately and up to €5bn over time to fund home building but progress in implementing the necessary changes is slow.

The Central Bank position

The Central Bank remains very critical of both the credit unions regulatory compliance and their quality of financial skill sets. The Bank has noted problems with basic financial requirements, poor systems of control, weak management and weaknesses in credit practices, meaning the credit unions, according to the Central Bank are failing to display good governance and are not in a position to safeguard members’ funds or develop their lending effectively.

Of course not all credit unions have issues of this kind but overall the nation’s credit unions have an average loan to asset ratio of 27% and a quarter have a ratio of less than 20%.  Ideally, according to a Credit Union Advisory Committee report, the loan to asset ratio should be 50%.

Despite its misgivings and outright criticism the Central Bank is prepared to consider amending the long term lending limits, starting with the “most capable and financially-sound credit unions”.

The Bank will continue to engage with the credit unions to work on long term lending aims and how they can be managed successfully in order to meet the changing regulations in the consumer mortgage market.

The Central Bank is also willing to discuss altering regulations to enable the Credit Unions greater scope in investing its surplus cash including in social housing, but needs to be assured that any investment is prudent and that members deposits are protected. 

The last government originally put forward the idea of credit unions investing some surplus funds in social housing and the Dept of Housing is reported to be talking to the Dept of Finance which in turn is talking to the Central Bank.


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