Credit unions _PRAGUE_ 2010

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Credit unions _PRAGUE_ 2010 Powered By Docstoc
					The World of Credit Unions

           Paul A Jones
Research Unit for Financial Inclusion
 What is a Credit Union?
• Credit unions are democratic,
  member-owned financial cooperatives
• Credit unions exist to serve their
  members and communities.
• Credit unions are safe, convenient
  places to access affordable financial
Credit unions world wide

• 186,000,000 Members
• 54,000 Credit Unions
• 97 Countries
  –   Canada – 1,068 credit unions – 48% penetration
  –   USA – 8,536 credit unions – 43% penetration
  –   Australia – 144 credit unions – 26% penetration
  –   Dominica – 14 credit unions – 147% penetration
• Credit unions in Ecuador
Credit unions in Europe
                                                            Penetrati   Penetrati
 Country         No       No       Members      Members       on           on          Savings          Assets

                 2006     2005          2006        2005        2006        2005             2006             2006
 Great Britain   540      550        543,359     501,879       1.33%       1.25%      838,081,811      977,109,401
 Ireland         525      620       3,050,000   3,000,000    109.98%     110.61%    17,546,637,114   19,921,369,957
 Poland           70       76       1,550,660   1,394,433      5.66%       5.14%     1,906,673,081    2,053,326,919
 Romania          11       11         52,477      48,869       0.34%       0.31%       20,512,951       26,236,191
 Russia          238      213        366,954     277,776       0.37%       0.27%      204,820,288      246,096,806
 Ukraine         760      746       1,790,414   1,297,000      5.55%       4.00%      528,954,468      615,785,393

 Estonia          10                   2,693                   0.30%                    2,634,095       10,447,537
 Latvia           30       30         22,601      22,005       1.44%       1.39%       11,688,640       13,984,969
 Lithuania        59       56         68,841      55,458       2.78%       2.24%      156,440,694      173,001,786
 Macedonia            1        1       6,105       5,245       0.43%       0.37%        2,728,973        4,605,573
 Moldova         485      504        106,400      96,299       3.39%       3.09%        7,742,729       24,834,536
 TOTAL           2729     2863      7,560,504   6,704,674      3.31%       2.92%    21,226,914,844   24,066,799,068
Credit unions in Europe 2008

• Click for interactive map
European origins of credit unions
Originated in Germany in the 1840’s and evolved in three general

• European Co-operative Banks
        France, Germany, Netherlands
• Small Savings Co-ops
        Italy, Greece
• North American Model
        Britain, Ireland, Eastern Europe
        Spread throughout the world by the World Council of
        Credit Unions - WOCCU
Co-operative Bank model
Rabobank System
•   174 local banks -- 800,000 members
•   Rabobank Nederland is the central organisation
•   Serves general public – 9 million individuals and
      corporate clients
•   Common logo, standard services
•   40% of domestic savings; 29% of the mortgage
•   90% of agricultural credit
•   Serves small, medium and large sized
Economic Goals

• “Not for profit, not for charity, but for
• Profits go to the member
• Giving people a better deal on financial
• Providing financial services to people
  excluded by the for-profit sector
• Creating jobs in the community
Social Goals

• “People helping people”
• Giving people control over their financial
• Mutual self-help and reliance
• Building community
• Education in the wise use of money
• Instilling democratic and co-operative
Park Road Credit Union

• Operates in Toxteth, Liverpool 8
• Many people excluded from financial
• Many do not have a bank account
• A group of 25 volunteers, mostly
  women, mobilised community support
• Created their own financial institution
Credit unions in Britain

• Hampshire Credit Union
• Southwark Credit Union
• Hull and East Yorkshire Credit Union
Community Development Credit
  Unions in the US
• National Federation of CDCUs
Financial Exclusion

• The inability of people to access the
  financial system
• Part of the much wider concept of
  social exclusion
• Disproportionately effects people on
  low incomes
Social Exclusion

• “is a shorthand term for what can
  happen when people or areas suffer
  from a combination of linked
  problems such as unemployment,
  poor skills, low incomes, poor
  housing, high crime environments,
  bad health, poverty and family
  breakdown” Kempson et al FSA 2000, p 7
What’s financial exclusion?
  – No bank account
  – No savings
  – No assets
  – No access to money advice (or financial
    capability education)
  – No insurance
  – No access to affordable credit
    • PAT 14’s 1999 report, Access to Financial Services
      and HM Treasury 2004
Extent of financial exclusion in UK
•   Over 1.75 million adults in the UK do not have access to a
    transactional bank account, (Fin Incl Task Force Report 2009).
•   At least 800,000 children live in households without bank
    accounts (HMT 2006)
•   7.8 million people unable to access mainstream credit (NCC 2006)
•   3 million regular users of the alternative credit market (HMT 2004)
•   165,000 households using illegal money lenders in the UK (Policis
•   43% of all households have no savings at all, with a further 15%
    only having savings of less than half of one month’s income.
    (2006 FSA baseline survey)
•   3 million households in social housing lack contents insurance,
    while they are twice as likely to be burgled as people living in
    privately owned properties (Widening the safety net; Demos, 2005)
•   Debt is the number one issue advised on in Citizens Advice
Financial Exclusion

• Originally seen as a geographical issue (Leyshon
  and Thrift 1995)
   – Reduction of financial retail outlets in poorer
   – Bank and building society closures
   – Problems of physical access and car ownership
• 'the inability to access necessary financial
  services in an appropriate form. Exclusion can
  come about as a result of problems with access,
  conditions, prices, marketing or self-exclusion in
  response to negative experiences or perceptions'
  (Sinclair, 2001).
FSA 2000 – Kempson

• access exclusion: restricted access via the
  processes of risk assessment;
• condition exclusion: where the conditions attached
  to financial products make them unsuitable for the
  needs of some people;
• price exclusion: where some people can only access
  financial products at prices they cannot afford;
• marketing exclusion: where some people are
  effectively excluded by targeted marketing and sales;
• self-exclusion: people decide that there is no point in
  applying for a financial product because they believe
  that they would be refused. These beliefs can arise
  from many experiences and perceptions.
The financially excluded

 • the long-term unemployed;
 • old-age pensioners;
 • those excluded from earnings because of
   sickness or disability;
 • female single parents;
 • certain ethnic minority groups, especially
   Pakistani and Bangladeshi households;
 • those reliant on state welfare benefits or
   living in rented accommodation.
    – Sinclair 2001
The impact of exclusion
• higher charges for basic financial transactions and credit –
  lack of access to a bank account means that certain financial
  transactions such as money transfer and cheque cashing may
  be more expensive;
   – Pre-payment meters can mean an extra £215 pa on energy bills
• no access to certain products or services – a range of
  services, such as contract mobile telephones, require a bank
  account for regular Direct Debits;
• lack of security in holding and storing money – operating
  solely on a cash budget leaves people more vulnerable to loss
  or theft;
• barriers to employment – a bank account for receipt of wages
  is a basic requirement for most employers; and
• entrenching exclusion – having no formal banking or credit
  history at all can be as much of a disadvantage as an impaired
  credit history in accessing certain financial services.
The impact of exclusion
• To the community and society
   – Linked to child poverty
   – Costs of the benefit system
   – Greater links to social exclusion
      • HM Treasury 2004
• Lack of access to finance is often the critical
  mechanism behind both persistent income
  inequality and slow economic growth.
• Hence financial sector reforms that promote
  broader access to financial services should be at
  the heart of the development agenda. World Bank
Life on a Low Income

• "I've got to put my money away for bills before I
  can relax and even think about food."
• "When you're pushing the trolley around and you
  see people pushing one that's almost full and
  yours isn't, I think 'I wish I could just put what I
  wanted in and not have to worry', but I can't."
• "You feel degraded. You think other people know
  that you are in debt. You think you have done
  something wrong."
• "Little things that never mattered before are
  suddenly major issues and you fight over them. I
  fight with him [her husband], I shout at the kids,
  he does as well and the kids cry."
      • KEMPSON
The impact of recession
• Credit refusals rising for all
• Higher risk borrowers experiencing
• Home credit borrowers – finding it difficult
  to access credit in the last year – double
  the refusals
• Greater moves to access third sector and
  higher cost credit by people on more
  moderate incomes
Financial exclusion in Europe

• A more cohesive society for a
  stronger Europe
• Financial Services Provision and
  Prevention of Financial Exclusion
• Country reports
• European consumer debt network
• Reseau Financement Alternative
What can be done?

• Does Government have a role?
• Do banks and other financial
  providers have a role?
• Does third sector finance have a
The role of credit unions in Britain

• So let me take this opportunity to recognise the
  value of third sector lenders – like credit unions –
  who have a huge role to play expanding the
  provision of affordable credit, and opening up
  opportunities for people.
• Let’s be clear on this – they can’t solve
  everything, but they can do much to help out.
  They’re excellent at targeting people who’re
  financially excluded from financial services.
• Economic Secretary to the Treasury 2005
Changing Credit Unions

• The Path to Quality Credit Unions
  – Traditional model credit unions
  – Business-oriented credit unions
  – New Model Credit Unions
  – Regulated Credit Unions
  – Quality Credit Unions
Traditional model credit unions
• Social focus rather than business orientated
• Small community operations
    – Entirely volunteer run and vulnerable to burn out
•   Personal and community development
•   Not built for expansion and growth
•   Influence on industrial sector
•   Impact – real but marginal
    – By 1998, average membership community credit union
      was around 200 members
    – 40% of community credit unions in England and Wales
      were financially weak
    1999 – Business-oriented credit unions

• Towards sustainable credit union development
• Move to become more business focused
• Business plans, leadership and promotion
• Employing staff, high street premises,
• Serving a more diverse membership
• Support of Government and local authorities
• Signs of growth within individual credit unions
2001 New Model Credit Unions
•   Learning from the International Movement
•   Business and market orientation
•   Radical financial and organisational restructuring
•   Financial discipline – introduction of PEARLS
•   Commercialisation and mainstreaming
    – to be successful, credit unions must attract a varied
      membership base
• Fundamental to developing capacity to serve low
  income communities
• Rationalisation of the movement
    – Significant growth within individual credit unions
Facing into the paradox
• New model, poverty alleviation and
  financial exclusion
• If credit unions are to achieve the social
  goal of combating poverty and financial
  exclusion, they have to first attain
  economic viability and commercial
2002: Regulated credit unions
• The impact of FSA regulation
• Introduction of Approved Persons Regime
• Established operational standards and financial
• Development of a culture of compliance
• Impact on service delivery
   – Financial Services Compensation Scheme
• 59% of directors think Approved Persons Regime
  is a good thing. More likely to say this in larger
   – 76% directors in 5,000 plus member CU
   – 50% directors in 200 or less member CU
 2005: Quality Credit Unions
• New Model in the British context
   – learning from the West Midlands
• Modern and professional, accessible and visible
• Commitment to good governance
   • BBCU – credit unions not meeting WOCCU standards
• Customer focused
   • researches, understands and meets member wants
   • understands dynamics of the low income market
      • Accessible savings, affordable credit, transaction services,
        insurance, money advice, money management support
      • Access to Credit on a Low Income (Co-operative Bank 2001)
2005: Quality Credit Unions

  • Emphasising savings mobilisation
     • Child Trust Fund and ISAs
  • Flexible and responsible approaches to
     • BBCU – includes greater use of credit scoring
  • Development of transaction services
     • ABCUL and The Co-operative Bank new project
  • Benefit direct accounts
  • Insurance services
  • Money advice and financial education
Effective promotion and delivery

• Through partnerships and networks
  – Working strategically with other organisations
  – Reaching out to the community through others
  – Councils and local authority departments, Sure
    Start, Primary care trusts, housing
    associations, employment agencies, schools,
    refugee councils, CAB offices, community and
    charitable organisations, victim support
    groups, churches and faith groups
• Promoting mutual benefits
Financial Inclusion - HM Treasury

• Promoting Financial Inclusion 2004
  – Free face to face money Advice
  – Access to Banking
  – Access to affordable Credit
• Financial Inclusion: the way forward 2007
  – Save savings
  – Insurance
  – Helping people with financial distress – including
    how banks can help
Financial Inclusion the way forward
Ensuring that everyone has access to appropriate
  financial services, enabling them to –
• Manage their money on a day-to-day basis,
  effectively, securely and confidently
• Plan for the future and cope with financial
  pressure, by managing their finances to protect
  against short-term variations in income and
  expenditure and to take advantage of longer-term
• Deal effectively with financial distress, should
  unexpected events lead to serious financial
Financial Inclusion – action plan

• HM Treasury Action Plan
Financial Inclusion Growth Fund

• A Government initiative to increase the
  availability of affordable personal loans made by
  third sector lenders
• Circa 100 contracts with credit unions
• 2006 – 2011
• By January 2010
   – 218,864 loans,
   – £94,682,805,
   – £433 average
Capital Credit Union Ltd

• Capital Credit Union Ltd
• Capital’s CE0 talks about combating
  extortionate lending
Scaling up Third Sector Lenders

• Financial Inclusion Taskforce sub group
  – Mapping what already exists in the sector
  – Mapping what support the banks are already
  – Asking the sector and others what is needed
  – Defining what scaling up would mean
  – Defining the inputs of capital and other inputs
    which would be needed
Scaling up credit unions

• Enabling legislation and
  proportionate regulation
• Sound governance and strong
• Sustainable business models,
  products and services
• Appropriate investment
Legislation and regulation

Enabling legislation

•   More flexible common bond
•   Organisational membership
•   Once a member always a member
•   Under 16 membership
•   Interest not just dividends
•   Clarity on objects of credit unions

Proportionate regulation
• higher level of capital adequacy than basic solvency (0%)?
• FSA to act on credit unions who are out of compliance
Governance and Management

Sound governance
• New Corporate Governance Code
• Recruitment drive for new board members
• Corporate volunteering initiatives.
Strong management
• Operational training available face to face
  and online
• Leadership development opportunities
• Secondment programmes.
• Formal mentoring systems
Business models,
      products and services

Sustainable business models
• PEARLS monitoring system
• Market sensitivity on pricing and control of expenses
• Evidence based decision making e.g. market research
• Knowledge of who is using credit unions now, what their needs
• Attract employers
• Credit union back office for treasury, liquidity and processing etc
• Credit Union Direct to provide universal coverage
Products and services
• Development of appropriate ‘safe savings’ products e.g.
   Christmas accounts
• Alternative payday lending model
• Not for profit home credit ? - see current JRF research on this
• Savings Gateway, Social Fund and Post Office
• Partnerships on mortgage lending with BS sector

• Governments support.
• Work with banks
• Private charitable trusts
• Housing associations, local organisations
  to become members of credit unions and
  deposit with them as well as lend them
  subordinated capital.
• Attract employers
Progress since 1999
• Shared goal of halving the numbers of the
  unbanked (into of basic bank accounts)
• Increase in credit union membership and CDFIs
• 3rd sector instant loans (Growth Fund)
• Expansion of debt advice
• Money Made Clear – focus on financial capability
• Saving Gateway
• Child Trust Fund through credit unions
• Illegal money lending teams

Credit unions and Banks

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