Joseph Rowntree Foundation 1 Building Better Credit Unions Charles Ferguson Donal McKillop Peter Goth

Joseph Rowntree Foundation2 Some Statistics  Credit unions are in 91 countries; membership totals 136 million and assets $708 billion.  In the US 46% of the adult population belong to a credit union. Australia (24%), Canada (21%).  In Ireland 70% of the adult population are credit union members (30% in Northern Ireland).  In GB approximately 1% of the adult population are credit union members

Joseph Rowntree Foundation3 The Credit Union Ideal  Credit Unionism; the social, philosophical and ethical imperatives.  The role and objectives of credit unions as financial intermediaries.  The achievement of sustainable credit union development.

Joseph Rowntree Foundation4 Research Objectives  Assess the role played by credit unions in the provision of affordable credit.  Identify the factors contributing to the relative success of individual credit unions.  Assess key trends within the sector; mergers and new start-ups.  Identify measures to help boost the coverage, capacity and sustainability of the sector.

Joseph Rowntree Foundation5 Performance Assessment GB [NI] Group 1 Group 2 Group 3 Group 4 Members 1356 [3589] 449[1924]246[1092]156[746] Exp/Inc (%) 39.7[23.20]82.5[28.24]150.1[33.07]180.9[36.56] Del/Loans(%)2.3[1.7]9.1[2.5]18.9[3.5]19.2[5.1] Cap/Ass(%)10.0[11.5]7.0[10.7]5.3[10.2]2.6[8.0]

Joseph Rowntree Foundation6 Performance Assessment  Data suggests that in excess of 50% of credit unions in GB will face difficulty in surviving long term.   A reduced number of credit unions may be beneficial because – –those that remain will be better, bigger and safer – –trade bodies can concentrate on the development needs of fewer credit unions and so enhance performance – –the trend towards professional management will be reinforced

Joseph Rowntree Foundation7 Recently Established ‘Fast Growth’ Credit Unions  Financially supported by local authorities  High quality premises and high grade staff  Focused on service provision to the financially excluded  High membership growth but some key ratios problematic  Success long term requires attracting a mixed income membership

Joseph Rowntree Foundation8 A Ranking of Merger Drivers  1. To create a financially viable credit union  2. To safeguard members savings  3. Due to difficulties caused by the FSA’s stricter regulatory regime  4. To widen and diversify the common bond  5. (joint) To offer a wider range of services; volunteer burnout; avail of scale economies

Joseph Rowntree Foundation9 Mergers the Reality  The primary driver for mergers has been weak credit unions  Most mergers to date have been reactive  A mopping up exercise involving small problem community credit unions  Few examples of strategy based mergers  Short term difficulties although problems ease in the longer term

Joseph Rowntree Foundation10 Strong Performing Credit Unions  The new model versus ethical/traditional debate is more about theoretical mindsets than hard realities  Irrespective of the ‘label’ strong credit unions are those that satisfy the following:-  1. Serve a varied membership base  2. Are of sufficient size to reap scale and scope economies

Joseph Rowntree Foundation11 Strong Performing Credit Unions  3. Demonstrate financial discipline  4. Are self-sufficient  5. Have appropriate governance structures  6. Have skilled and motivated directors  7. Have skilled and motivated manager

Joseph Rowntree Foundation12 Policy Recommendations  Credit union development that concentrates solely upon serving the needs of the financially excluded, is a weak model of credit union development.  Credit union development based upon a cross section of the population offers a more viable long term model of development  Greater emphasis should be given to this latter model by credit unions, trade associations and the Government. [C,G,T]

Joseph Rowntree Foundation13 Policy Recommendations  The current trend towards widening of common bonds should be encouraged as this may facilitate a diversification of membership mix. [C,G,T]  This should be accompanied by greater use of credit scoring to prevent an increase in bad debt write-offs. [C,T]

Joseph Rowntree Foundation14 Policy Recommendations  It is not in the interests of the Movement to expect strong credit unions to merge with weaker credit unions if this weakens the position of the former. [C,G,T]  Effective Boards can only emerge through investing in the training and development of volunteers. [C,G,T]

Joseph Rowntree Foundation15 Policy Recommendations  Relying upon grants to fund the core business of credit unions leads to a dependency culture  Grants may be appropriate at a particular point in the credit union’s development but should be limited and targeted and not used as a substitute for self reliance. [C,G]

Joseph Rowntree Foundation16 Policy Recommendations  The potential for ‘shared service provision’, particularly in the area of IT should be investigated. [G,T]  Performance benchmarking should be implemented for all credit unions [G,T]  Good research requires detailed data at the level of the individual credit union. This should be made available by the FSA [C,G,T]