Welsh civic engagement 2: An alternative to the doorstep lenders

John Richards on the growth of the Welsh credit union movement

John Richards has been manager of Gateway Credit Union based in Pontypool since 2004 and is a member of the Wales Credit Union Liaison Committee.

Although credit unions in Wales have for many years been contributing to the economy they have not yet reached a size that can really change the financial landscape on our High Streets. However, with support from the Welsh Government their membership has grown from approximately 11,000 in 2000 to 42,000 in 2007, which is a significant achievement by any standards.

There are 27 credit unions in Wales ranging in size from 200 to 4,500 members. They have a total combined adult and junior membership of around 52,000. Their savings are approximately £20 million and their total assets arearound £23 million.

Only seven of our credit unions are financially self sufficient. The remaining 20 rely on the Welsh Government for revenue support. It is important, therefore, that the Government has secured £3.4 million for a second phase of a credit union funding programme that runs from 2010-2013.  Many credit unions have also received support from other sources, most notably local councils, housing associations, the Deparrtment of Work and Pensions via the Growth Fund project and also the Big Lottery.

This is the second of a series of essays on ClickonWales this week exploring initiatives within the Welsh economy, environment, media, and politics. They are taken from Growing Wales’ Civil Society, published by the IWA earlier this year.

Tomorrow: Helen Nelson on mobilising civil society.

Despite this credit unions have never received any operational capital funding, except for a limited period from the Department of Work and Pensions. Consequently. All the money they lend is other members savings.

It is likely that the Welsh Government’s funding will come to an end after the current contracts finish in 2013. Credit Unions should therefore have a business plan in place that will enable them to reach sustainability by then, or at least have identified some other source of revenue support. A sustainable credit union will have at least six characteristics:

  1. It will offer a range of competitive products and services; a mix of adult savings accounts, such as regular accounts, notice accounts and Christmas accounts; and accounts for junior savers, including regular accounts and Child Trust funds. All these savings accounts will pay an attractive dividend or interest rate.
  2. It will have a lending policy that will attract customers from all income levels. It will offer loans that can compete with the doorstep lenders in terms of amount, say from £50, but are also good value when compared to the banks for higher amounts, say to £15,000.
  3. It will have a banking platform to allow members to pay wages, benefits, and to set up direct debits into and from their credit union accounts.
  4. It will be run by a mix of paid staff and volunteers, be well regulated, with adequate reserves and have a stable and strategically minded Board. It will also have suitably resourced Treasury and Internal Audit departments to ensure tight fiscal control. The business plan will ensure it stays focused and be able to make adequate surpluses. It will project itself as professional, local and mutual and have at least a part time, five day office presence in most large towns in its area of operation (known as its common bond). In addition it will have small volunteer-run collection points in most of its smaller communities.
  5. It will be playing a role in regeneration, lending to small business, providing money advice, financing or supporting community regeneration projects and training and developing volunteers into employment.
  6. It will be in meaningful partnerships with local councils and housing associations.

The size of a self sustaining credit union is more difficult to predict. A lot will depend the size of the area it covers, its common bond, and whether this is largely rural or urban. In my view it will need a minimum membership of around 4,000 and a common bond containing a population of at least 200,000.

The whole of Wales is now covered by credit unions, but large areas are still without a recognizable credit union presence. Member numbers are increasing, achieving an average 19 per cent growth between 2006 and 2009. As well as increasing their presence in their own areas some are also expanding their bonds into areas already occupied by other credit unions.

The Welsh Government has set a target of 5 per cent of the population being active members of a credit union by 2020. That’s roughly 150,000 people, which is three times greater than the current membership total. This will only be achieved if Credit unions increase their rate of expansion.

Changes to the legislation will help. In early 2011 the UK Coalition government will hopefully vote through a Legislative Reform Order to the Credit union Act 1979. This first major revision of the Act will change the way Credit unions can do business, by:

  • Allowing the creation of interest bearing savings accounts instead of rewarding savers by retrospective dividends.
  • Slackening the restrictions on what constitutes a common bond allowing Credit unions to grow more easily
  • Enabling non incorporated bodies the opportunity to open accounts, such as community groups and savers clubs.

These changes should allow far greater opportunities to create competitive saving products, especially for group members. In turn that should help raise the capital needed to enable credit unions to grow at a much faster rate than is currently being achieved.

Increasing member access is also vital. The doorstep lenders that proliferate do so mainly because they are so easy to access. Their customers need never leave the house, but simply wait for the knock on the door and pay in cash. Credit unions need to be as flexible as possible in getting money to and from low income, unbanked members.

Introducing a banking platform will also be crucial in making credit unions attractive to a wider range of potential members. The option of members paying their salaries or benefits into their credit union account will be a huge step forward.

Sharing back offices functions to increase efficiency will become more commonplace. My own credit union already shares a debt recovery officer and an accountant with three other local credit unions, something we currently cannot afford to do individually.

Mergers are another way of increasing efficiency and several have occurred through the years. The latest is happening in north Wales where five credit unions are likely to merge in the coming year. The process has proved protracted and not without problems. However, each credit union has taken the needs of the whole of north Wales into account in reaching their decision. The enlarged credit union will have retained the financial, material, and human assets of all the merging unions and, at the same time, be able to present a uniform image across the whole of the region.

The eventual credit union structure in Wales is difficult to predict, but I would be surprised if there were more than 15 in five years time. By then my hope is that credit unions will be bigger, stronger and more visible. As a result the community will better understand that they are financial mutuals that offer a low cost alternative to the doorstep lenders and a competitive, ethical alternative to the banks.

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