Recent legislation has weakened the value and the values of Ireland’s Credit Unions, writes Dan Boyle (above)
A couple of years ago my local Credit Union decided to give up its distinct identity to become part of a larger, merged entity. This saddened me. Five credit unions now operate as one, under a new single banner.
Two of the five credit unions have no geographic connection at all, with the area that had been served by the three core credit unions.
More worryingly still there is no obligation to have the original communities represented on the Board of the new entity.
The drive for less but larger credit unions has been the result of a decades long campaign of harassment, I would argue, by other financial institutions abetted by financial regulatory bodies, underlined by the Department of Finance.
This climate of competing with banks by achieving economies of scale has led to recent moves by credit unions to request that the interest ceiling on loans given by them, currently and traditionally 1% a month, around 12.8 % APR. should be raised to twice that amount.
From the late 1950s’, the 12% rate has proved a simple maximum rate for the credit union model. When combined with an established savings habit it gave confidence when granting a loan.
While the loan was nominally 12 %, the rules allowed for a rebate of interest as well as a dividend, the actual interest rate, depending on the credit union, could be as low as 5% or less.
70% or 80% of the funds could be out on loan. The size of the loans were modest, and typically short term. Loan repayments and savings refilled the coffers anxiously awaited by a queue of further loan applicants. Borrowings that went to improve their lot made possible by a union, they themselves owned.
The model, comprising volunteer oversight, together with some paid staff, worked incredibly well.
During times of high inflation that drove high interest rates in banks, credit unions continued to provide loans at ‘affordable’ rates.
From local credit unions came the need to set up a representative body, on a national/all island basis. This helped in creating loan insurance products, death benefit entitlements for members, along with generous pension funds for staff.
More importantly, it set up a monitoring service to ensure the member credit unions stayed financially on track, combined with training programmes, while crucially acting as guardian of the Ethos of the movement.
Recent legislation has weakened the value and the values of the credit union movement in Ireland. It is helping quickly to diminish its community role. Not only geographically but also communities that can be formed, and informed, by a common bond. Groups, communities, made up professions or trades or involvement with a government agency, for instance.
Increasing prosperity has seen access to other sources of credit become available. The demand for credit union loans began to fall. Despite this membership has continued to grow. None the less, the increasing staff and managerial costs have been becoming a factor.
The traditional Credit Union has been trying to hold to operating principles and the social strength it gives. The representative body, and larger credit unions, have become increasingly disconnected from the founding community ethos.
This bigger is better approach is mirroring pretty exactly the process that saw the formation, before the Millennium, of many Saving and Loans, banking light, in the United States. These more ‘competitive’ entities were the canary in the coalmine that previewed the global banking collapse of 2008.
The goal must be to keep community banking parallel and not to integrate with other financial institutions. One forgotten aspect of the Irish banking crisis was the amount of credit unions who banked with Anglo Irish Bank.
But damage has been done.
Credit unions are now labelled as financial institutions. Legislation has created a new kind of credit union manager. The mantra is now on growth. Boards have been sidelined through the setting up a ‘managers’ forum’. The members have seen their role reduced to that of stakeholder.
There has been little change in the take up of loans. They grow more expensive, while members can borrow elsewhere. Desperate for income the old operating principles are being abandoned.
Now, instead of promoting thrift and sensible lending, some of these new ‘improved’ credit unions are promising money for any and every need.
Now it seems they sidle up with their lobbyists to government, as if they were the pigs leading the other animals in taking over Mr. Jones’ Farm. If they secure approval to charge the higher rate who will pay it?
Not those better off, they have other options. It will be the poorest. It will be like that final scene in Animal Farm, except now we won’t be able to tell the difference between the credit unions and the money lenders they were supposed abolish.
The Central Bank encourages this. They seek to weaken the volunteer board by promoting the role of the manager/CEO. There is a telling line in the ‘Report of the Commission on Credit Unions’ which says
“For all their distinctive features, credit unions are, first and foremost, financial institutions, which primarily accept deposits (or shares) and make loans. In this regard they are similar to commercial banks”.
This lack of recognition of the community credit union with its unique facility to draw on the shared honesty and integrity of the community to build a local efficient economic bubble, risks losing this great resource when we need it most.
There is almost a black humour in the central bank pledge to secure ‘strong credit unions in safe hands’. It is vital that the traditional community credit union be allowed to operate as a counterpoint and not as an adjunct to the banking system.
We don’t need US style Savings and Loans, with the chaos that came from them. We need, and should insist, on community banking.
Dan Boyle is a former Green Party TD and Senator and serves as a Green Party councillor on Cork City Council. His column appears here every Thursday. Follow Dan on Twitter: @sendboyle
Top pic: Rollingnews