Memorandum submitted by the Association
of British Credit Unions Limited (ABCUL)
EXECUTIVE SUMMARY
1.1 As the principal trade association for credit
unions in England, Scotland and Wales, ABCUL's submission to the
inquiry concentrates on how the use of unclaimed assets might
promote financial inclusion through increasing the capacity and
capability of credit unions.
1.2 We believe that the Commission on Unclaimed
Assets proposal for a Social Investment Bank or a similar organisation
would promote financial inclusion by:
— Providing opportunities for start
up funding for credit unions in areas of high financial exclusion.
— Providing opportunities for existing
quality credit unions to expand into areas of high financial exclusion.
— Providing a source of subordinated
capital for existing credit unions, enabling them to:
— Increase the availability of
affordable loans; and
— Increase their capital adequacy
to the level (8%) at which they can become Version 2 credit unions.
— Provide funding for credit unions
to offer the Credit Union Current Account to its members.
— Providing a source of funds for training
and capacity building for credit unions, including raising standards
of governance.
— Provide a source of funding for a
back office facility for credit unions.
— Providing funding for a default credit
union for people unable to access a local credit union. This would
work in partnership with a range of organisations to provide face
to face service.
1.3 We believe that the Social Investment Bank
model proposed for the Commission on Unclaimed Assets has great
potential, but we would also welcome alternative models which
may have the same potential to impact upon financial exclusion.
INTRODUCTION
2.1 The Association of British Credit Unions
Limited (ABCUL) welcomes the opportunity to make a submission
to the Treasury Select Committee inquiry unclaimed assets with
in the financial system. ABCUL is the principal national trade
association for British credit unions and represents 70% of the
534 credit unions throughout England, Scotland and Wales.[15]
ABCUL member credit unions have 85% of the £420 million +
share capital and £350 million + loan portfolio of the half
a million adults who uses credit unions each week. Credit union
lending makes up over 99% of loans to individuals from third sector
lenders.
2.2 ABCUL, like its member credit unions, is
an Industrial and Provident Society. It is a co-operative owned
and controlled by its members. ABCUL belongs to the World Council
of Credit Unions the world wide apex body whose members represent
43,147 credit unions in 91 countries serving 136 million people.
2.3 Over the last eight years the Association
has played a leading role in reforming and modernising the credit
union movement in Britain. As a result the credit union movement
is now adopting models of development and offering a range of
products which has dramatically improved the scale of many credit
unions. Credit union membership has almost doubled since 2002
and British credit unions now serve over 540,000 adult members
and 80,000 junior members.
2.4 Credit unions have four statutory objectives:[16]
(a) the promotion of thrift among the members
of the society by the accumulation of their savings;
(b) the creation of sources of credit for the
benefit of the members of the society at a fair and reasonable
rate of interest;
(c) the use and control of the members' savings
for their mutual benefit; and
(d) the training and education of the members
in the wise use of money and in the management of their financial
affairs.
2.5 The current review of legislation affecting
credit unions and other co-operatives has the potential to greatly
improve the capacity and coverage of capacity of British credit
unions. The ability to offer organisational membership and for
credit unions to define their own common bonds has the potential
to transform the credit union movement in the next few years.
START-UP
FUNDING FOR
CREDIT UNIONS
3.1 There are currently 534 credit unions in
England, Scotland and Wales, a figure which through mergers and
a small amount of closures has reduced from a peak of almost 700
in 2001. Despite this large number, there are still many people
who do not have access to quality credit union services. Investment
in credit union development agencies rather than in the credit
unions themselves in the 1980s and 90s made sure that credit unions
remained small and were unable to grow to a sustainable size.
3.2 At the end of September 2006, 185 out of
377 ABCUL member credit unions had less than 500 members and 265
had less than 1000 members. Most of these credit unions lack the
staff and premises to sustainably provide a full range of services
to members; they often serve small areas and have a limited impact
on financial inclusion in the areas they serve. Many people are
currently excluded from using credit union services because they
do not live or work within an existing credit union's common bond.
3.3 Examples from around the country show that
where sufficient start up funding is available to enable a credit
union to start trading from attractive shop front premises with
professional staff and a range of appropriate services, the credit
union can reach sustainability within a few years. For example,
Tower Hamlets Community Credit Union and Portsmouth Savers Credit
Union were both registered at the end of 2000. By September 2006
they were both providing a range of services to over 3,300 people.
3.4 In local authority areas where small numbers
of people qualify for credit union membership, there is often
a great deal of support for establishing a professionally run
credit union. Lack of funding is a major problem however in many
areas and a social investment bank or a similar model could provide
grants and/or loans to facilitate the development of a credit
union and provide capital and revenue funding for the first few
years of its existence. A credit union with credibility provided
by premises, staff and appropriate products will reach sustainability
in a few years and have a major impact upon financial inclusion
in the area it serves.
FUNDING FOR
EXPANSION FOR
EXISTING CREDIT
UNIONS
4.1 Where strong, sustainable credit unions
exist in close proximity to areas without quality credit union
coverage, the obvious solution is for the existing credit union
to expand its area of operation to allow more people to benefit
from its services.
4.2 Also, credit unions serving large areas
which have reached sustainability often wish to open up new premises
which would enable them to reach more people. New premises may
take 2-3 years to reach sustainability and the credit union will
often lack the resources to fund this itself.
4.3 A loan fund to enable successful credit
unions to have a presence in new areas within their existing common
bond or expand their common bonds to enable new populations to
benefit from their services would be an excellent way of expanding
financial inclusion. A social investment bank or similar model
may provide these opportunities and enable many more people to
benefit from quality credit union services.
SUBORDINATED CAPITAL
FOR CREDIT
UNIONS
5.1 Credit unions have the ability to accept
subordinated loans. A subordinated loan is one which is subordinated
to the interests of the members ie, in the event of liquidation,
repayment of the debt would be made only after the members"
shares are repaid.
5.2 Subordinated loans can be a very useful
and prudent way of boosting capital, particularly in a credit
union which is in a developmental stage. It can strengthen the
new credit union while it grows or can provide the necessary capital
to progress to version 2 for more established credit unions.
5.3 There are only 12 credit unions which have
Version 2 status with the FSA, and only one credit union has converted
from Version 1 since FSA regulation began. Version 2 credit unions
can make larger loans and have the ability to attract savings
for on-lending with variable dividend rates and the payment of
dividends more than once a year. There are a large number of credit
unions which would like to move to Version 2 status, but to do
this they must maintain a capital -assets ratio of at least 8%.
For a fast growing credit union this is a difficult task; as assets
increase so must the amount of capital which the credit union
must maintain. A subordinated loan can provide the necessary boost
to capital and enable the credit union to boost its growth with
the more attractive savings and loans products it can offer as
a Version 2 credit union.
5.4 Despite the very welcome £36 million
growth fund to increase the availability of affordable credit,
successful credit unions often struggle to meet the demand for
affordable credit from members. A subordinated loan is one way
that credit unions can meet this demand. For a new credit union
this can assist the credit union to reach sustainability for quickly.
5.5 To date, there have been very few examples
of credit unions receiving subordinated loans. A social investment
bank or similar model could provide subordinated loans to credit
unions.
CREDIT UNION
CURRENT ACCOUNT
6.1 ABCUL and a number of its member credit
unions have funded the development of a transaction banking product
which has recently been introduced into nine credit unions. The
product has been designed to overcome many of the disadvantages
of basic bank accounts and is a major step forward for the credit
union movement in Britain, both as a tool for increasing financial
inclusion and for ensuring the expansion of the credit union movement
and its future sustainability. In countries around the world,
the introduction of a transaction account has been instrumental
in major expansions of credit union movements.
6.2 Many credit unions have the desire to offer
the Credit Union Current Account to their members but lack the
funds for the start up costs. Grant funding to help credit unions
with these costs would represent a major step forward for financial
inclusion.
TRAINING, CAPACITY
BUILDING AND
GOVERNANCE
7.1 The recent announcement of funding from
the Financial Inclusion Fund to assist credit unions in receipt
of Department of Work and Pensions Growth fund money with capacity
building was very welcome. This is the first national investment
from the UK Government ever.
7.2 A recent Financial Services Authority report
on corporate governance stated that many of the problems credit
unions face are caused by poor governance. Raising standards in
credit unions is key to improving the performance and therefore
growth and sustainability of many smaller credit unions.
7.3 A social investment bank or similar model
of funder could provide funding to, for example, develop a governance
toolkit for credit unions, incorporating key performance indicators
and benchmarking tools.
7.4 The PEARLS financial monitoring system,
introduced to a number of ABCUL credit unions through funding
from Barclays, has been instrumental in driving change within
the credit union movement. As well as improving performance and
financial strength, credit unions using the system have been encouraged
to break the link between savings and credit, thereby making affordable
credit more accessible to lower income members. This is another
possible area that a new source of funding to tackle financial
exclusion could be put to excellent use.
BACK-OFFICE
FACILITY FOR
CREDIT UNIONS
8.1 A back office facility for credit unions
will enable even smaller credit unions to offer a wider range
of services to members. If legislation were to allow credit unions
to offer membership to organisations, a credit union for credit
unions could be created which would be the obvious model for such
a service. This back office facility would enable smaller credit
unions to offer services such as the Credit Union Current Account
to their members. The economies of scale such a facility would
bring would mean better value services to members and a more sustainable
future for the credit union movement.
8.2 Pooling liquidity in such a facility would
enable credit unions with a high demand for loans to meet their
members' needs by using the excess liquidity of cash rich credit
unions.
8.3 A social investment bank or similar use
of unclaimed assets could provide funding for the set up costs
of a back-office facility. We believe that this would only need
short term funding and could reach sustainability in a short period
of time.
8.4 It is perhaps important to say that we don't
see the Social Investment Bank in itself as this back office.
A credit union owned back office, a credit union composed of credit
unions, would provide a regulated deposit taker as the back office
and would be our preferred option.
A DEFAULT CREDIT
UNION
9.1 Anticipated changes in legislation will
expand the coverage and capacity of credit unions and mean that
many more people can benefit from credit union services. However,
it is inevitable that even after these changes have taken place,
there will be gaps in coverage. A default credit union which can
provide services to people wishing to, for example, use a Credit
Union Current Account to receive their benefits, or who wish to
save safely or borrow affordably would provide a solution to these
gaps in provision.
9.2 A credit union which could take in members
who are unable to join a local organisation would ensure that
no-one in Britain would have to face the prospect of remaining
in financial exclusion. By using the back-office facility described
above, this credit union could offer the Credit Union Current
Account to anyone who wished to use it.
9.3 This "default" credit union would
work in partnership with local outlets including perhaps post
offices, housing associations, local authorities etc to provide
a face to face presence. Providing universal coverage across Britain
would transform the credit union sector's ability to deliver on
a number of important social policy goals. Credit unions participation
in the government reform of the Social Fund, the future successor
to the Post Office Card Account and indeed the potential Savings
Gateway would all be enhanced by the ability to provide universal
coverage. It is anticipated that the combination of the "default"
credit union and the supply of existing quality credit unions
would offer complementary provision.
9.4 A social investment bank or similar vehicle
could provide the short term funding needed to make national credit
union coverage a reality in this way. As a result this would pave
the way for a significant "scaling up" of the credit
union sector and its ability to impact upon financial exclusion.
CONCLUSION
10.1 Anticipated changes in legislation will
allow credit unions to reach out to far more people and build
a sustainable and effective ethical financial services movement
which will have an even greater effect on financial exclusion.
To achieve this growth, initial investment will be necessary.
10.2 A social investment bank or similar organisation
would have the potential to provide a much needed source of grant
and loan finance for the credit union movement. Used in the right
way, this money could have a major impact upon financial exclusion,
increasing the availability of affordable credit and providing
safe savings opportunities for lower income consumers. Enabling
more credit unions to offer the Credit Union Current Account will
bring many more people into the transaction banking system, increase
convenience and enable people to save money by paying bills by
direct debit.
10.3 The investment placed in the movement through
the financial inclusion fund is already allowing credit unions
to meet more of the demand for affordable credit in their communities.
With increased availability of short term grant funding and loans
to credit unions, there is much more that the movement can sustainably
achieve. Improving financial inclusion is a fitting use for unclaimed
assets and credit unions have the ability to achieve much more
in this arena.
February 2007
15 FSA figures from unaudited quarterly returns November
2006. Back
16
Credit Union Act, 1979. Back
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