Select Committee on Treasury Written Evidence

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.


  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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 16 November 2006