Memorandum submitted by the Association
of British Credit Unions Limited (ABCUL)
EXECUTIVE SUMMARY
1.1 Introduction to the size and scale of
the credit union movement in Britain and in Scotland.
1.2 The scale of third sector lending, developments
in this market and the impact on Scotland. This response also
highlights the importance of small scale saving and how this can
help to alleviate poverty.
1.3 ABCUL has been working with nine member
credit unions over the last few years to introduce banking services
for credit unions in the UK. We believe that this is one of the
most significant developments on the financial inclusion landscape
in Britain. Credit unions now have the potential to bring the
necessary day to day transaction banking services to people who
are excluded from mainstream banking. This account will be anything
but basic as account holders will have access to a line of credit
through the credit union, and fees and charges will be determined
by credit union policy, not bank policy.
INTRODUCTION
2.1 The Association of British Credit Unions
Limited (ABCUL) welcomes the opportunity to make a submission
to the Scottish Affairs Committee inquiry into poverty in Scotland.
ABCUL is the principal national trade association for British
credit unions and represents 70% of the 549 credit unions throughout
England, Scotland and Wales. ABCUL member credit unions represent
85% of the £368,536,000 share capital and £348,579,000
loan portfolio of over half a million adults who uses credit unions
each week.[15]
2.2 The credit unions movement is proportionately
stronger in Scotland where there are 124 credit unions, serving
205,930 adult and junior members. Scottish credit unions have
£185,208,000 in assets, £129,824,000 out on loan and
look after £161,143,000 in member's savings[16].
2.3 ABCUL, like its member credit unions,
is an Industrial and Provident Society and 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.
2.4 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 the Scottish Executive reported in February 2006 that credit
union membership in Scotland had quadrupled in three years.[17]
2.5 Credit unions have four statutory objectives[18]:
(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.
2.6 Given the role that credit unions play
in providing low cost, inclusive financial services, the Scottish
Executive has invested £500,000 per year for two years from
April 2006 to March 2008 to support the growth and development
of credit unions in Scotland. This is in addition to the £36
million Growth Fund which HM Treasury have allocated to third
sector lenders to increase the availability of affordable credit
in low income communities. The Growth Fund is available for third
sector lenders throughout England, Scotland and Wales and is currently
being distributed, and we understand that credit unions will receive
the bulk of the £36 million.
2.7 ABCUL has recently undertaken a piece
of research with the Personal Finance Research Centre at Bristol
University[19]
to document who uses different types of credit unions. The majority
of credit unions have always understood their membership to be
the low-waged, those in receipt of benefits and those who without
the credit union would otherwise be financially excluded. The
research supports this understanding and evidenced that the majority
of people using credit unions are on below average incomes.
2.8 The research also shows that for those
responding to the survey the credit union is the preferred source
of saving and borrowing. Evidence also shows that members have
stopped using high cost credit as a direct result of joining the
credit union.
AVAILABILITY OF
AFFORDABLE MONEY
3.1 In Scotland 37% of people have no savings
and for many, credit is the only way they can budget for larger
purchases.[20]
3.2 Credit unions currently provide affordable
credit to around 500,000 adults in Britain and as of June 2005
credit unions had a loan portfolio worth £286,819,000. The
demand for credit union loans generally peaks at Christmas time,
which can be seen in the fact that credit unions had on loan £315,680,000
as of December 2004[21].
Research carried out by the Scottish Executive revealed that in
Scottish credit unions 58% of loans are for less than £1,000[22].
3.3 In 1999, at about the same time as the
PAT14 report was being published an alternative model for community
finance was proposed, Community Development Financial Institutions
(CDFI's) for personal lending.
3.4 CDFIs or Moneylines as they are often
known were put forward on the back of criticisms of the failure
of credit unions to achieve coverage and scale.[23]
ABCUL shared many of those frustrations with the prevalent approaches
to credit union development in the 80's and 90's. However it was
the Associations view that the most effective way forward was
to reform the credit union movement. We believe that the comparative
progress over recent years has shown that this strategy was a
sound one.
3.5 Therefore six years after the launch
of an alternative to credit unions the credit union sector still
represents over 99% of all third sector lending in Britain. Perhaps
more significantly the present growth in the number of people
on low incomes served by the credit union sector is outstripping
the growth rate of CDFI's for personal lending. Credit union membership
continues to grow at more than 10% per annum.
3.6 As of June 2006 the credit union statutory
maximum interest rate is 2% per month on a reducing balance which
works out at 26.8% APR. However many credit unions continue to
lend at the previous limit of 1% per month on a reducing balance,
or 12.7%APR. Moneylines typically charge between 25-30% APR and
unlike credit unions are not regulated deposit takers.
3.7 The launch of the first Moneyline in
Scotland is currently planned for Glasgow, with significant investment
from both Glasgow council and the Government's Financial Inclusion
Growth Fund.
3.8 There is broad credit union coverage
in Glasgow with one in six Glaswegians belonging to a credit union.
This works out at 13% of the population which is high in comparison
to 4% of the Scottish population as a whole. Therefore over 100,000
people are members of credit unions in Glasgow and the 34 credit
unions include nine employee credit unions and 25 community credit
unions. Glasgow credit unions hold £133 million in members
savings and have over £92 million out on loan.[24]
The Scottish Executive are extremely supportive of the work that
credit unions do to provide affordable credit and safe savings
to the people of Scotland, and credit unions are central to the
Executive's financial inclusion strategy.
3.9 However despite the efforts of all third
sector lenders there is still people who invariably turn to high
cost lenders for their credit needs. The National Consumer Council
have estimated that low income consumers pay on average £129
a month in interest—11% of their income, and people on benefits
borrow an estimated £330 million a year from home credit,
with interest payments alone amounting to an estimated £140
million.[25]
3.10 A £500 loan over 55 weeks from
the largest home credit provider Provident Financial costs a borrower
£325 in interest. A loan for the same amount over 52 weeks
from a credit union lending at 1% costs £31.07, a saving
of £293.93 on an individual loan.
3.11 However credit unions understand fully
that the availability of affordable credit is not in itself the
long term answer to financial inclusion. It is the ability to
build small sum savings which provides the safety net which helps
prevent people from falling into debt or poverty and the vehicle
through which people lift themselves out of poverty.
3.12 Dave Richardson, Technical Officer
for the World Council of Credit Unions (WOCCU) has written that,
"as verified by the credit union experience,... poor people
have a much higher demand for savings products than lending services".[26]
Credit unions throughout the world have shown that savings mobilisation
among even the poorest of communities is possible.
3.13 In the last few years the move to direct
payments of benefits has greatly increased the number people having
their benefits paid into a credit union. There have been some
interesting consequences, particularly around the level of benefit
that credit unions have retained in savings. The credit unions
that administer benefit payments on behalf of their members are
reporting between 5 and 10% retention of benefits in savings.
3.14 There many large employee credit unions
in Scotland, and they play as much of a role as community based
credit unions in helping their members out of financial difficulty.
For example the majority of the members of the Scottish Transport
Credit Union which serves employees of the passenger transport
industry in Scotland are bus drivers. Half of their membership
earn £6.50 per hour or less, and most of these members are
young men with young families to support.
3.15 The credit union see between two and
five members in either mortgage or rent arrears per week, and
are involved in around three evictions cases per month. The credit
union negotiates on behalf of the member and often provides a
loan to cover the arrears; they are proud to say that in 10 years
they haven't lost a single home.
IMPACT OF
GOVERNMENT POLICY
ON POVERTY
4.1 The Government has committed £120
million to help promote financial inclusion, £36 million
of which has been allocated for the provision of affordable credit
through third sector lenders; a portion of which will go to third
sector lenders in Scotland. This injection of capital for third
sector lenders is welcomed by the credit union movement. ABCUL
will be monitoring, alongside the DWP, the success of the fund
in achieving it's aims of increasing the supply of affordable
credit to low income communities and increasing the sustainability
of third sector lenders.
4.2 However one of the priorities for Government
around financial inclusion is to reduce the number of people that
are unbanked. 11% of Scots do not have a bank account. This figure
can rise to 18% for those on a low income.[27]
That can mean a whole range of difficulties, including the ability
to access employment, as many employers now require their employees
to have a bank account. Also those without a bank account cannot
take advantage of the discounts on basic utility bills without
the ability to pay by Direct Debit or Standing Order, and cashing
cheques can be extremely costly if you do not have a bank account.
Therefore this creates a situation where the poor pay more.
4.3 The introduction of banking services
for credit unions has the potential to make a very significant
impact on financial exclusion and poverty for those that are excluded
from mainstream banking. Over the past few years the credit union
movement has invested in the development of banking services for
credit unions and in The Cooperative Bank we have a banking partner
committed to providing the technology needed to make this available
to all credit union members. The first credit unions to launch
their own service accounts will take place in November 2006.
4.4 Currently only nine of the largest credit
unions, four of which are in Scotland have the existing resources
to implement the service. Although the costs are relatively small
in comparison to other financial inclusion projects, for those
credit unions involved, the implementation of banking services
represents the most significant investment that they have ever
had to make.
4.5 However there still remain a significant
number of credit unions, particularly community credit unions
that could manage and deliver the service and who are keen to
roll this out to their members. However it is these credit unions
that are prevented from doing so because of the initial investment
that is required. We believe that the Government should recognise
the strategic importance of this initiative and support individual
community credit unions in entering the market.
4.6 We are not envisaging a complete roll
out of banking services to every credit union in the country.
We understand that many of our members rely heavily on volunteer
support and currently do not have the capacity to undertake such
a significant development. However there are credit unions, many
of which are based in the most deprived local authority areas
in the country, and many of which are in Scotland that would be
able to deliver these services to thousands of people in their
communities. This would bring "banking" services into
the heart of those communities, and would provide people with
the basic tool which is necessary to get out of the poverty trap.
4.7 ABCUL would be happy to provide the
Scottish Affairs Committee with further information regarding
our banking services project.
4.8 The availability of free cash machines
in deprived areas is also a factor which reduces the ability of
poorer people to maximise their income. Members of Yoker Credit
Union in Glasgow and other local residents were amongst the first
to benefit from a Royal Bank of Scotland scheme to install free
to use cash machines in low income areas with no current free
ATMs. Yoker is typical of many areas where only fee charging machines
are available; around 40% of the population are on benefits, 50%
senior citizens and 10% employed, therefore cash machine charges
limit many people's ability to maximise their already low income Yoker
credit union commented that, "As there are no Banks within
the vicinity, many of our members, both young and old, feel it
is great to be able to use this machine within our premises as
they feel safe and do not have to travel to find a bank."
4.9 Therefore if more credit unions like
Yoker could provide banking services direct to people in their
community, then there is enormous capacity to help alleviate poverty
in areas of high financial exclusion.
Mark Lyonette
ABCUL
October 2006
15 FSA quarterly aggregate statistics, December 2005. Back
16
FSA audited statistics 2004. Back
17
http://www.scotland.gov.uk/News/Releases/2006/02/07094300 Back
18
Credit Union Act, 1979. Back
19
Funded by the Esmee Fairbairn Foundation, 2005 http://www.abcul.org/lib/liDownload/87/Membership%20Counts%
20-%20Who%20uses%20credit%20unions.pdf Back
20
Financial Inclusion Actions Plan, Scottish Executive, 2005. Back
21
FSA quarterly aggregate statistics, December 2004. Back
22
Hayton K, Gray L and Stirling K (2005), Scottish Credit Unions,
Meeting Member Demands and Needs. GEN Consulting Scottish Executive
Social Research, Edinburgh. Back
23
Investing in people and places, Karl Dayson, Bob Paterson and
James Powell, 1999, University of Salford. Back
24
Glasgow Credit Union Strategy Group. Back
25
Affordable Credit Fact Sheet, NCC and POLICIS, July 2005. Back
26
Unorthodox Microfinance: The Seven Doctrines of Success, MicroBanking
Bulletin, February 2000. Back
27
Scottish Executive, Financial Inclusion Action Plan, 2005. Back
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