The rise of credit unions

More people are joining credit unions as the recession bites. As high street banks encounter greater difficulties, credit unions are looking like a possible state bank, says Paul Stephenson

It is a cold Friday evening in January and the Sydenham Credit Union is hectic. At a time when most people are out socialising, the 50-odd customers gathered in this corner of south-east London are talking personal finance. Such scenes are mirrored in similar credit unions across the country as the credit crunch and economic slowdown starts to hit people in their pockets.

A growth in the number struggling with debt is confirmed by Citizens Advice, whose unpublished figures indicate that significantly more people are seeking advice about debt and job insecurity.

“We are seeing a pattern of people struggling to meet a lot of consumer credit debt, part of which is to do with the general marketing of credit and partly to do with people in some cases being overloaded with debt,” says a spokesperson for the charity.

“We are concerned that those who are burdened with a lot of consumer credit debt are also struggling to pay essential bills such as the mortgage, fuel costs and council tax bills.”

In the past two recessions, credit unions played a role in providing loans to those on low incomes. Their number has grown greatly since the 1990s and they now have the funds to lend more. The latest available figures showed there were nearly 750,000 adult and junior members in Britain, with nearly £500m in savings and more than £400m in loans.

Paul Mason, BBC Newsnight economics editor, says there is more protection for society’s poorest now than during previous recessions, but he predicts a rapid expansion in demand for the services of credit unions from the working poor, who “were lent money they couldn’t afford”.

Growth in members

Local credit unions confirm a growth in numbers joining and saving with them – often people with more money than has historically been the case – because they have lost trust in the high street banks. They say more people are seeking loans, which are repaid with an interest rate of no more than 2% a month on a reducing balance.

Those seeking loans elsewhere can face ruinous interest rates. This month, shadow housing minister Grant Shapps called for the wider use of credit unions after finding examples of some lenders charging interest rates of more than 1,000% a year.

Bristol Credit Union chief executive James Berry reports that savings deposits have been larger and more numerous. “We have seen a 50% increase in the number of members joining, from about 100 to 150 a month,” he says. “The biggest growth areas are debt consolidation, or to pay mortgage or rent arrears.”

29 Jan - Lead featureLewisham Plus Credit Union, which is one of the unions that offers a current account, is seeing membership growing by a quarter year-on-year. Community development officer Liam Carlisle (pictured right), who also chairs the London and South East chapter of the Association of British Credit Unions Limited (Abcul), describes a similar picture of savings and loans. “We have had people come in with £10,000, asking if they can join, and enquiries from professional people,” he says. “We are also seeing more people on even lower incomes applying for loans, who we can refer to money advice agencies if they are unsuccessful.”

Carlisle also points out that credit unions also provide services such as face-to-face debt advice.

In the neighbouring borough of Southwark, Lakshman Chandrasekera, chief executive at Southwark Credit Union, paints a similar picture: “We have been getting a lot of new members, mostly people on benefits, but also people who want to borrow money and are having problems with banks. They include NHS workers.”

Chandrasekera says the union lent out £1.6m in the final quarter of 2008, compared with £1.1m in the same quarter in 2007. “We have seen some debt consolidation and people are beginning to see their credit card bills are high,” he says.

Credit unions to pay interest on savings

Things are likely to pick up even more by October, when legislation is will allow credit unions to pay interest on savings, rather than just a dividend. They will also no longer need a common bond of membership, drawing people from the same geographical area or workplace. These and other financial changes will allow them to attract more funding.

Abbie Shelton, policy and communications manager at Abcul, which provides advice to credit unions, says they are continuing to expand their work with agencies such as Citizens Advice.

“Many credit unions have close relationships with Citizens Advice Bureaux and other agencies and will refer people to these partners,” she says. “We have also had a project running, funded by Barclays Bank, based on developing new relationships with other organisations, so staff are aware of what work is going on and what the other organisations do.”

Social Fund role

However, their role could be even further enhanced if the government decides to go ahead with plans for them to distribute the Social Fund and other elements of state funding to, in particular, working-class communities.

“I don’t think this is something that will happen in the near future, but things may be in place so that it can happen further down the line,” Shelton says. She adds that such a move could have advantages for clients – whereas now they only get a Social Fund loan, if they went to a credit union they might be able to access other financial products at the same time.

“The main thrust within government is with the legislation, to build the scale of credit unions so they can reach out to more people,” she says.

Most significantly, all these measures could put credit unions in a strong position to take the role of a state-backed or third sector lender.

Mason says it has become clear that the government believes there has to be “some form of state lender”. The choice is between the Post Office and national savings or some other sector for savings and borrowing, such as credit unions.

He says creating a wider role for credit unions would fit perfectly with their usual location in working-class communities, and their role in working with, and often being co-located with, other agencies such as CAB.

These factors could make credit unions the vehicle for getting money into communities that need it most, and it is now to be seen whether the government wants them to take on the job that the high street banks are no longer fulfilling.

What is a credit union?

● Credit unions are financial co-operatives, owned and controlled by their members, and run as not-for-profit organisations.

● Any surplus made is invested in the union or paid to members as a dividend, although no interest is paid on savings.

● They first appeared in the UK in the 1960s and membership is determined by a common bond – members often live or work in the same area.

● Historically, members have been those on lower incomes, who save small amounts regularly.

● The savings are retained within the union and are used for loans. Because money is not raised or invested elsewhere, the unions have been largely unaffected by the credit squeeze or stock market crash.

● Although not an absolute requirement, loans are normally made only to those saving with the union, with interest charged at a maximum of 2% on a reducing balance.

● In October, expected legislation should allow unions to pay interest on savings, rather than just a dividend.

● There are almost 750,000 CU members in Britain, with nearly £500m in savings and more than £400m in loans.

● Last year the government unveiled plans for credit unions to distribute the Social Fund.

‘Working poor are most at risk in this recession’

BBC Newsnight economics editor Paul Mason says the current downturn will be different from the recessions in the 1980s and the early 1990s, when industry was devastated.

Those recessions “finished off manufacturing, mining and northern cities and towns”, he says. “They threw a relatively protected part of the population that had high social capital into an environment where they had low social capital.”

This time the working poor, those just above the minimum wage are most vulnerable, he says. “I think the danger is that quite a large segment of that population could find itself unemployed.”

Paul Mason, economics editor, BBC Newsnight

Further information

Published in Community Care 29 January 2009 under the headline ‘Creditable Alternative to Banks’

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