Select Committee on Treasury Written Evidence

Memorandum submitted by the Association of British Credit Unions Limited (ABCUL)


  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.


  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.


  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.


  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.


  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.


  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.


  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.


  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.


  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.


  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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