Successful Credit Unions: Insights from our Research Anne Marie Ward (Ulster University) (since 2009) John Forker (University of Sussex)

Studies  Most of our studies are empirical (data based) – there are no opinions or views and we aim to remain totally objective when undertaking our research.  History of studies on the Credit Union sector that may be of interest to you.  Before the FSA (now the Financial Conduct Authority and the Prudential Regulatory Authority) we focused our attention on UK data but the FSA would not allow access to data on individual credit unions and hence our studies have focused on Northern Ireland Credit Unions.

Studies – Full UK Data  2005: Examination of industry growth patterns using Gibrat’s law to determine if growth was random  found that growth was not random –in particular past growth (performance) was a predictor to future growth and other factors were considered influential.

Studies – Full UK Data  2005: Investigation of the link between credit union success (in term of generating surpluses on assets invested and separately providing payback to members) and credit union characteristics and location – where the characteristics included size, age, common bond type, trade association type and location deprivation  KEY FINDINGS (Year 2000 ONLY)  Size is important – larger credit unions perform better  Age is important – older, more established credit unions perform better  Trade association is important – ILCU affiliated credit unions perform best, ABCUL affiliated credit unions perform the poorest.  Common bond is important – Credit unions with an occupational common bond perform best, those with a residential common bond perform worst.  Location is important – credit unions in more affluent areas perform better than those in more deprived.

Studies – Full UK Data  2006: Investigation to determine if there are economies to scale (UK wide study)  FINDINGS  Yes – larger credit unions, in general, perform more efficiently.

Studies – NI study  2006: An examination of the levels of subsidisation received by credit unions (data sourced from questionnaires).  Findings – No credit union in Northern Ireland receives grants towards running costs – grant income was received in only 4 occasions by 4 credit unions when they received capital funding to either buy their building or to refurbish the front of it (in the previous 5 years).  All small credit unions are volunteer run and operated. Volunteers and the local community supply many of the required running costs. Orange lodges and community centres provide premises and subsidise the running costs and volunteers use their mobile phone if required.  Many of the medium sized credit unions are 100% volunteer run and one large credit union (Clonard – total assets of over £2million) was totally volunteer run (this is no longer the case – it has 4 employees now).  In general most of the credit unions use volunteers alongside paid staff to support social activities (school work for example, competitions, etc)  It would seem that credit unions only hire staff when they can afford to and that all small and many medium sized credit unions are totally reliant on their community to operate.  No credit union reported losses in the period under investigation (2005) nor in the 5 years prior to it (this has changed)

Studies – NI study  2006: An examination volunteer motivation (Northern Ireland study – questionnaire – Why Volunteer?)  Findings  Altruism – they get a kick of doing good in the community, they are community spirited.  Social interaction – the credit union is part of the community and volunteers see it as a cohesive social capital organisation – they get to meet people and consider that what they do is important and that their reputation is improved by their actions.  Opportunity – work experience, learning on the job, possibility of obtaining work afterwards.  Analysis of the statistics would suggest that people who volunteer for anything other than altruistic, community, or social interaction reasons – usually move on.  Altruism is the key motivator – volunteers are used on the social side as much as possible and staff on mundane operational activities.

Studies – NI study  2006: Who volunteers (Northern Ireland study – questionnaire – Aim – help credit unions target potential volunteers – segmented approach)  Findings  Tested for ‘dominant status theory’ – this theory suggests that relative to the population high status people are more likely to volunteer.  Volunteers were mostly – middle aged people, employed, self- employed or retired people, married people with 2-4 kids, all white, volunteering elsewhere and there was a predominance of males to board positions and females in operating activities.  If credit unions want to hire volunteers – approach busy people who are volunteering elsewhere also – they have a taste for it and a commitment to the community.

Studies – NI study  2012: Regulation – do credit unions comply  Findings  YES predominately  In a study covering 9 years of data, credit unions complied with the legislation in respect of capital reserve transfers and balances in about 92% of the observations noted. 15% of UFCU affiliated credit unions did not comply, 12% of those not registered with a trade body, 4% of ILCU credit unions did not comply. Non-compliance was not an issued and was typically resolved within a year or two.  Most credit unions also provided for the minimum recommended loan loss provision.  ILCU credit unions, larger credit unions, older credit unions and those experiencing less growth were most likely to comply.

Studies – NI study  2014: Management model  Two schools of thought  ‘Old model’ – focus on social aspects, financial performance is important but secondary (REST).  ‘New model’ – focus on running as a business, financial performance first, social secondary (ILCU).  Our interest – which model works best in terms of financial and social performance  Findings  Support for new model: higher surplus funds  Registrar’s provisions for loan losses are lower  Social activities are not crowded out – in fact spend more ‘£’ in the community on social activities and pay back a higher percentage to members in term of loan rebates and dividends.  In addition, they typically provide more services, are open longer hours, employ more people, use volunteers, contribute more taxation.

Studies – NI study  2015: Gender diversity  Does diversity matter to the performance of credit unions  There is a social case for female involvement on boards, is there a business case? We investigate the relationship between the % of women on the board and financial performance. In NI boards range from 100% men to 100% women so this can be tested. Data tested  Findings  Support for diversity  We find gains from increasing the % of women on the board up to about 51% after-which performance starts to fall.  Female diversified boards performed better in the period of austerity.

Studies – NI study  2016: Current study  Follows on from our last three studies. In 2012 we reported that ILCU credit unions comply with legislation and perform best – quarterly monitoring using PEARLS (WOCCU)  In 2015 we report gains from having females on the board – confirms prior research that they act as independent monitors  Our current study investigates whether governance choices of independent financial monitoring by trade association and gender leadership impacts on the relationship between financial management and community deprivation. Theory identifies incremental benefits from females is greater in more deprived communities (better networked and gender economics)

Credit Unions in Northern Ireland  Independent financial monitoring  ILCU mandates quarterly monitoring of WOCCU financial ratios (PEARLS)  UFCU Public annual regulation by FSA only

Gender leadership Weighted average of female (male) board influence A continuous measure calculated using data on six key influential positions or indicators within governing boards. The underpinning indicators are president (coded 1 if female, 0 if male and a weighting of 2/14), the vice president (coded 1 if female, 0 if male and a weighting of 1/14), the secretary (coded 1 if female, 0 if male and a weighting of 1/14), the treasurer (coded 1 if female, 0 if male and a weighting of 1/14), the percentage of female signatories (weighting of 2/14) and the percentage of females on the board (weighting of 7/14). This continuous measure is split into two bands, wherein female leadership is assumed at 60.92% and above (mean 38.62% plus one standard deviation), otherwise the sample is classified as male dominated. Restricting the sample to the extreme top (bottom) quantile values is also investigated.

Financial management Dependent variable measured by three PEARL ratios  Loan Book Quality: Registrar’s recommended loan loss provision  Return on assets  Capital reserve ratio

Deprivation Community deprivation is captured by the multiple deprivation measure assigned to the credit unions postcode by the Northern Ireland Statistics and Research Agency (NISRA). Comprises a low income factor, a low employment factor, an education factor, a housing factor, an access to services factor, a social environment factor and a health factor

Model specification

Provisional Findings Loan book quality  Female monitored > Female unmonitored  Male monitored > Male unmonitored  Interaction with deprivation; LBQ is positively related to deprivation  Female unmonitored > Male unmonitored  Female unmonitored > Male monitored  Female unmonitored > Female monitored