Memorandum submitted by JW Cross, District
of Canterbury Credit Union
District of Canterbury Credit Union Ltd is a
community-based credit union having as its Common Bond all those
who live or work within the local authority District of Canterbury.
The Credit Union was authorised by the Financial
Services Authority on 19 January 2005 and commenced operations
on 3 February 2005. Since that time it has made loans to members
of £31,000.
EXECUTIVE SUMMARY
A. Community-based Credit Unions that operate
to criteria fixed by Government offer the best way of addressing
Financial Exclusion.
B. Community based Credit Unions require
the active participation of all members of the community, not
just the financially excluded who cannot provide the savings necessary
for their own financial inclusion.
C. Government should specify criteria that
Community based Credit Unions must comply with to attract support
from government. Compliance should be monitored by the Financial
Services Authority.
D. Approved Community based Credit Unions
should enjoy Charitable Status for the purposes of taxation.
E. There should be an obligation on Local
Government and the National Health Service to promote financial
inclusion through the relevant local approved Credit Union.
F. Credit Unions are not expensive to set
up and operate provided that they have attracted some support
across the community as a whole. The Financially Excluded do not
have either the skills or finance to form, operate and provide
the necessary savings to capitalise Credit Unions.
G. Community based Credit Unions will not
succeed in addressing the issues of Financial Exclusion without
the active support of all levels of Government.
H. The model adopted by District of Canterbury
Credit Union Ltd of raising initial members' savings through the
concept of Founder Membership achieved by individuals investing
some of £1,000 is capable of being replicated and enables
Credit Unions to make meaningful loans shortly after authorisation.
I. In the 11 months since it was launched
District of Canterbury Credit Union Ltd has attracted £94,000
of savings, made £31,000 of loans of which £5,000 have
already been repaid.
1. Access to banking services
1.1 All members and potential members of
District of Canterbury Credit Union Ltd (DCCU) had a bank or building
society account at the time they applied for membership.
1.2 The bank accounts are used to receive
wages and benefits.
1.3 In a substantial minority of cases all
sums deposited in the bank account are immediately withdrawn in
cash. The individual then operates on a "cash basis".
1.4 Some accounts do not have the facility
for making payments by Standing Order. The ability to make payments
by Standing Order is a mixed blessing as the accounts lack the
facility to go even marginally overdrawn. The effect is that Standing
Orders are returned and incur substantial charges relative to
the individual's income if they are not fully covered by credit
balances.
1.5 Individuals with basic bank accounts
do benefit from the ability to receive their income directly into
their account and then to withdraw it using ATMs, which offer
a free service in most town centres and supermarket outlets.
1.6 We do see some evidence of small cash
withdrawals being made from ATMs where a charge is made. Because
of the size of the transaction charges can often exceed 10% of
the total value. The individuals concerned are aware of the level
of charge they are paying but are prepared to meet the cost because
of the convenience.
1.7 We do not believe that the banking system
can be used to overcome the problems of financial exclusion. It
would not be cost-effective for bamks to do so and, if they were
to give credit, they would not be able to manage and recover the
sums advanced.
2. Access to affordable credit
2.1 We believe that community-based Credit
Unions offer the best opportunity of providing affordable credit
to all members of the community.
2.2 To achieve access to affordable credit
for all, there would have to be a sea change in the community
in terms of their attitude towards Credit Unions. Currently most
members of the community do not understand what a Credit Union
is and those that do, believe that membership is for the financially
excluded. We understand that 40% of the population of Ireland
are members of a Credit Union and in the United States approximately
25% of the population enjoy the benefits of membership. The corresponding
figure in England is a fraction of 1%.
2.3 The financially excluded cannot provide
the savings/capital that is required to finance loans that the
Credit Union can make.
2.4 A Credit Union has no capital of its
own. It has to attract members savings to build up a fund available
to finance member loans. There is no financial incentive that
a new Credit Union can offer individuals who are not financially
excluded, the only return that can be offered is the hope of a
dividend at some time in the future.
2.5 Community based Credit Unions are not
expensive to set up.
2.5.1 DCCU benefited from training provided
free of charge by Business Link Kent Ltd.
2.5.2 Pre-trading and initial operating
expenses were covered by Grant.
2.5.3 DCCU does not have any premises of
its own. Collection points are opened in Canterbury Public Library
on a Saturday morning with accommodation being provided free of
charge by Kent Library Service; in Herne Bay on a Tuesday morning
with accommodation being provided free of charge by Canterbury
City Council and on a Thursday in Whitstable in a Community Centre
for which rent is paid. Administration is done by volunteers from
their homes.
2.5.4 A local firm of Chartered Accountants
provides the Registered Office and accommodation for board meetings.
2.5.5 The Credit Union's financial records
are kept on a computer at the University of Kent, whose IT Clinic
has a contract to back up and maintain the computer. It is accessed
by a "dial-up" telephone facility.
2.5.6 DCCU will continue to need some financial
support until the economies of scale can be achieved.
2.6 DCCU, in common with all new Credit
Unions, is particularly vulnerable in having no capital to cover
any provision for bad and doubtful debts. It also has fixed costs
that will amount to several thousand pounds per annum.
2.7 DCCU has addressed the problem of having
no capital available initially to finance loans to members by
introducing the concept of "Founder Members". So far
90 individuals have provided DCCU with an investment of £1,000
each. The target capital to be raised in this way is £200,000
so a further 110 Founder Members are being sought.
2.8 Founder Members appreciate that they
are being offered a "bad bargain" in terms of the return
that they can expect on their investment. It is made clear to
them that they are helping their local community by forgoing the
interest that they would otherwise receive on that part of their
savings. They understand that their capital is not being put at
risk because of the Financial Services Compensation Scheme.
2.9 The change in attitudes necessary to
ensure that all members of society view Credit Unions as being
appropriate places for their savings and borrowings can only be
achieved by Government, both local and national. Otherwise those
that have the financial ability to promote Credit Unions do not
have any incentive to do so , and those with incentive do not
have the financial resources. The Credit Union movement does not
have the means of achieving this itself.
2.10 Attitudes to Credit Unions could be
changed most rapidly with the active support of Employer and Employee
organisations (CBI, TUC etc).
3. Financial education and access to financial
advice
3.1 DCCU has been able to help a number
of its members with individual education and advice that has been
tailored to meet their personal circumstances. This has been done
by a trained volunteer on a one to one basis. This is viewed as
the ideal solution.
3.2 The general level of financial competence
is low, people do not understand the cost of credit or understand
the meaning of the term APR. Credit is judged on the basis of
its weekly cost in terms of the repayment of capital and interest
and not on whether it represents good value.
3.3 We believe that that many of the financially
excluded who are best able to manage their financial affairs are
those that are on a low level of state benefits. Benefits are
withdrawn in cash and then spent as far as possible over the period
until the next benefit receipt is due. Good cash management is
essential to avoid periods of hardship.
3.4 Individuals who have or have had a higher
a higher level of income seem less able to budget, presumably
because they have not had to exercise such a high degree of care
in the past.
3.5 A substantial number of individuals
have incurred levels of debt that they cannot possibly hope to
service and repay. They are beyond the ability of the Credit Union
to help. DCCU limits loans to £4,000 and will only lend where
it appears that the member will be able to service and repay any
loan made. Where appropriate we have referred them to the Citizens
Advice Bureau.
3.6 Credit Unions are in a position to provide
basic financial advice on budgeting, managing cash flow and understanding
the terms of credit agreements. We believe that they should be
encouraged to fulfil this role.
4. Incentives and barriers to saving for
people on below average incomes
4.1 There are no financial incentives for
the financially excluded to save.
4.2 Approximately 50% of the individuals
approaching DCCU for a loan have indicated a desire to build up
some savings so that they will have some money available to cope
with unexpected expenditure in the future.
4.3 Individuals who have no savings but
wish to start saving have shown no interest in obtaining the best
rate of return on their money, their objective is merely to have
some savings.
4.4 Individuals who do start saving with
a Community based Credit Union either do so because they wish
to make a contribution to the community or establish a pattern
of savings to enhance their credit worthiness within the Credit
Union.
4.5 We are not aware of any member of the
Credit Union who is contributing to a Stakeholder Pension.
5. The role of the Government, the Financial
Services Authority and other bodies and organisations in promoting
financial inclusion
5.1 Both Kent County Council and Canterbury
City Council were instrumental and supportive of the formation
of District of Canterbury Credit Union Ltd. Practical help since
formation has been limited.
5.2 We have had little contact with the
Financial Services Authority other than as part of the authorisation
process. Meeting the FSA requirements to obtain authorisation
were demanding. We were advised whether our rules and other documentation
complied with the FSA requirements. We were not given any guidance,
nor did we seek guidance, on operational matters once authorisation
was given.
5.3 The FSA Credit Union handbook is comprehensive,
useful and understandable. We have encountered greater difficulty
with the Quarterly Returns.
5.4 Business Link Kent Ltd has been and
remains extremely supportive. They funded all of the training
costs and have been an excellent source of advice.
5.5 Central Government can assist in addressing
financial exclusion through Community based Credit Unions in two
ways:
5.5.1 It can require Local Government to
promote membership throughout their employees base and the whole
of the community that they represent. Local government is in touch
with its residents at various times throughout the year. and
5.5.2 It can materially improve the ability
of Community based Credit Unions to make a surplus and to be able
to reward their savers through changes to the taxation system.
Currently all Credit Unions are taxed as if they are operating
businesses that are trading mutually. This means that they are
subject to Corporation Tax on any income that is not derived from
Members. The change to Corporation Tax rates announced by the
Chancellor in the Pre-Budget Statement mean that from April 2006
onwards bank interest and other investment income received will
be taxed at 19% (Currently 0%).
5.5.3 The greatest benefits that Community
based Credit Unions could receive is to be taxed as if they were
Charities. To achieve this status they would have to comply with
strict criteria which should be monitored by the FSA. This would
enable eligible Credit Unions to raise income free of tax from
third parties and individuals to make donations under the Gift
Aid regime.
5.6 Local Government should be required
to promote Community based Credit Unions that operate within their
area and who comply with the requirements specified by Central
Government and monitored by the FSA. Promotion must both be within
their employee base and, both directly and through their employees,
to the community that they serve. In our opinion this could be
achieved at a very modest cost and to great effect.
5.7 The Health Service acknowledges that
financial exclusion contributes towards ill-health. The Health
Service could promote membership of Community based Credit Unions
in the same way as Local Government.
6. The benefits of financial inclusion and
the extent to which financial inclusion measures can contribute
to combating poverty and reducing barriers to employment
6.1 Cash loans are freely available and
widely used in the district. The current interest rate quoted
on a £500 loan repayable over 55 weeks is 177% APR. If a
Credit Union member were to borrow the sum over the same period
and make the same repayments, at the end of 55 weeks they would
have paid off the loan and accumulated savings of approximately
£300.
6.2 Many stores offer instant credit at
rates of approximately 30% APR. If a Credit Union member replaced
a Store Card debt of £2,000 repayable over 30 months with
a similar loan from the Credit Union and continued to make the
same repayments, at the end of that period they would have accumulated
savings of approximately £540.
6.3 The maximum loan available from DCCU
is £4,000 with repayment over 36 months.
6.4 The example set out in 6.1 and 6.2 above
set out to the financial benefit of financial inclusion for those
who wish to borrow.
6.5 We believe that when DCCU achieves the
membership of 2,000 it will be capable of making a contribution
to the economy of the District of approximately £100,000
per annum, being a combination of lower interest rates paid by
savers and a better return for investors on their savings. Figures
of this magnitude would contribute to a reduction in poverty.
6.6 Credit Unions are run by their Members.
DCCU anticipates that it will be both run and managed by Volunteers
who will receive both training:
6.6.1 The use of computers and software
required to maintain the administrative and financial accounts
required by the Credit Union.
6.7 Training outlined in 6.6 will improve
the employment prospects of volunteers currently lacking the skills.
6.7 The availability of affordable credit
will enable individuals who need suitable workwear, tools, transport
or season tickets as a means of accessing employment opportunity
to obtain these so on reasonable terms.
I would be pleased to supply any further information
or answer any questions which the Treasury Committee may have
on this submission or on the operation of District of Canterbury
Credit Union Ltd.
January 2006
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