APPENDIX 3
Sustainable Credit Unions - Guidance notes for local authorities
Over recent years, many local authorities have taken a lead role in the development of credit
unions, particularly community credit unions, as part of the overall social and economic
development plans for their areas. Even though there are many examples of success and good
practice, recent research (1) has indicated that the overall results of local authority support
and investment has not always matched up to expectations. These guidance notes are offered
to local authorities to assist them in the support and development of sustainable and
economically viable credit unions.
Credit unions are financial co-operatives that offer quality and low-cost financial services to
their members. They can be particularly beneficial to those on low incomes or those who find
themselves excluded from mainstream financial institutions. They can also play an important
part in the social regeneration and economic development of communities, as well as being
important to community development, anti-poverty and sustainable development initiatives.
Credit unions can, therefore, be very useful tools for meeting some of the key policy
challenges facing local authorities. However, to realise their full potential, credit unions must
be both economically viable and large enough to offer a range of accessible and quality
financial services. Recent research findings (2) indicate that a significant sector of the credit
union movement is financially weak and, despite immense volunteer energy and commitment,
has not made the impact in communities that volunteers and authorities had originally hoped
for. At the same time, there are examples of credit unions, both community and work-based,
organised and developed on sound business principles, that are growing and offering financial
services to increasing numbers of people in their areas. Local authorities are uniquely placed
to support the development of credit unions, as they:
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community;
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Regulatory Framework
Credit unions are subject to three Acts of Parliament. These are the Credit Unions Act 1979,
the Friendly, Industrial and Provident Societies Act 1968 and the Industrial and Provident
Societies Act 1965. The most important of these is the Credit Unions Act 1979 that has set
the parameters for the development of the credit union movement over the last 20 years. The
legislation is applied and monitored by the Registry of Friendly Societies, now part of the
Financial Services Authority.
Under the legislation, membership of a credit union is restricted to people who share a
common bond or relationship that defines a certain unity among the members. Common
bonds recognised under the 1979 Act are - a) residing in a particular locality, - b) being
employed by a particular employer or following a particular occupation and - c) being a
member of a particular association or society.
Recent changes to the law permit a credit union to register its common bond as being those
people living or working in a particular locality.
1 “Towards Sustainable Credit Union Development.” Report of the national research carried out by Liverpool John
Moores University, the Association of British Credit Unions, the English Community Enterprise Partnership and The Cooperative Bank plc. March 1999. The document is available from ABCUL, Manchester. Tel 0161 832 36942 ibid.
It is commonly and widely understood, throughout the credit union movement, that current
legislation in Britain is excessively restrictive. Over the last two years, the Association of
British Credit Unions (ABCUL) has been leading a campaign to modernise the legislation and
the Government is now responding.
In November 1998, the Treasury published proposals to allow credit unions greater latitude in
making loans and in providing a broader array of financial services. The proposals would
lengthen the repayment periods over which credit union loans can be made and would allow
greater flexibility to credit unions in structuring various kinds of savings accounts, on which
returns could be paid to savers on a current basis. The latter reform is particularly important
for attracting member savings, since at present credit unions can declare dividends on savings
accounts only at year-end.
Supervision of credit unions is being transferred to the new Financial Services Authority, and
it is likely that credit union savings will be covered by a savings protection plan, similar to the
schemes that protect depositors at banks and building societies. These changes in the law will
allow credit unions to offer a broader array of services and provide greater security for
member savings, thereby significantly increasing the ability of credit unions to meet the needs
of those who would most benefit from their services.
Throughout the world, credit unions have proven their benefit as a source of low-cost,
accessible financial services for those people excluded by the for-profit sector. Government
now has the opportunity to create a regulatory environment that allows unions to fulfil that
potential in this country as well.
History and current position
The first English credit union was established in London in 1964. Since then they have
expanded rapidly and now number more than 600, with total assets of over £100 million and
around 200,000 members. In 1997, they had collectively £97.6 million out on loan. This is
impressive but in comparison with other countries, the British credit union movement is very
small, serving just 0.3% of the population. In Ireland, nearly half of the population is a
member of a credit union; in the USA, it is one in four. Average membership of credit unions
in Britain is also low, with over half having fewer than 200 members.
Community credit unions are particularly fragile, with 40% being financially weak, and on
average not exceeding 200 members after 10 years. Conversely, work-place credit unions
have tended to grow and become sustainable much more rapidly. Although they make up just
16% of all credit unions, they account for about half of all credit union members.
A range of factors has been identified to explain why the credit union movement in Britain
has not grown as widely as in many other countries around the world. These include:
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- credit unions have been severely restricted both
in their ability to attract savings and to make loans, as well as in the size,
viability and scope of their common bonds;
-related network of assumptions, beliefs and understandings about the
nature and purpose of credit unions that has grown up in Britain over the last ten
to fifteen years. These assumptions have resulted in community credit unions
being regarded by many local authorities and communities as typically very
small (maybe only a few hundred members), entirely operated by volunteers and
as aimed primarily at very low income base populations. This set of assumptions
has also helped foster the image of credit unions as poor people’s banks, which
equally has limited their growth and development.
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the world, a single, strong credit union owned and controlled support structure
has been a vital element of a self-sustaining credit union movement. In Britain,
disunited national trade associations and a myriad of credit union development
agencies and organisations have contributed to lack of direction and focus in the
credit union movement. Repeatedly in Britain, money has been spent, often by
local authorities, on projects that have just duplicated or contradicted similar
work happening elsewhere.
Many credit union development agencies are adopting much more co-ordinated and businesslike approaches. Equally, over the past two years, the Association of British Credit Unions
Ltd has emerged as the primary trade association, representing well over 80% of the members
and assets of the British movement, through a democratic structure owned and controlled by
credit unions themselves. ABCUL now has the resources and staff to serve as an effective
national trade body, and it has taken the leadership role in setting standards for credit union
development and in representing credit unions to Government and the public. Within the cooperative sector, it represents credit unions on the United Kingdom Co-operative Council
(UKCC), and it is recognised as the only representative of British credit unions internationally
by the World Council of Credit Unions (WOCCU).
Local authority support
Local authorities started to become really interested in supporting credit unions in the late
1980s and recent years have seen an explosion in this interest. Information held by the IdeA
(3) shows that 165 local authorities offer support to credit unions, and indeed, the vast
majority of credit unions are supported by local authorities, most commonly through
development workers and agencies, or through subsidies and – most commonly - grants. For
example, in 1996/97, 47 councils spent £318,900 from mainline budgets (i.e. excluding
European or SRB funds) on 123 credit unions (4).
Most support is given to community credit unions, as part of an economic regeneration,
community development or anti-poverty policy. However, at least 19 authorities also support
credit unions for their own employees, and one or two report that they are looking to extend
the common bonds of their employee credit unions to the wider community. Local authority
employee credit unions form one of the largest sectors within the credit union movement,
both as to rate of growth and asset size.
Indeed, the thirty credit unions serving local government employees account for about 25% of
all credit union members in Britain. They offer a professional service to many local authority
employees, many of whom are themselves on low incomes.
Despite this extensive level of support, the evidence suggests that results have not always
matched up to expectations. Involvement has sometimes been top down, with authorities
setting out to create an arbitrary number of credit unions, without any showing of actual
grassroots support. Sometimes credit unions have been promoted
3 Improvement and Development Agency (formerly the LGMB)
4 cf. Donovan and Harvey, “Enabling Community Enterprise,” LGMB 1998. This research report into local authority support for
community enterprise details some statistical evidence concerning support for credit unions. Further statistical information is to
be found in Chapter 5 of “Towards Sustainable Credit Union Development” ABCUL 1999
within a social rather than business context - often as a social welfare initiative – without the potential to grow and become selfsustaining in the longer-term. Even when support has been delivered from economic development departments there has not
been the same rigorous business dimension that is offered to other enterprise sectors. Many are yet to become sustainable and
economically viable credit unions. In many cases, despite strong commitment and ongoing support from local authorities, the
approach employed has failed to promote self-reliance and dependency on grant aid or continued external support has resulted.
Towards a more effective model of credit union development
The Liverpool John Moores University research demonstrated that successful credit unions
have been able to combine a clear business orientation with a continued commitment to social
goals. They regard themselves primarily as financial institutions and recognise the importance
of the management and financial skills needed to run a financial institution. In the past,
inappropriate development models have been used which stressed the social objectives of
credit unions to the exclusion of economic goals and long-term sustainability. Models for the
future development of the credit unions movement must ensure credit unions prioritise
financial stability and strength.
Higher growth credit unions, both community and work-based, offer a model of credit union
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- credit unions that have a sponsoring organisation behind them
tend to have a greater chance of success e.g. an employer, a local authority, a
church or community organisation, that is willing to lend its good name to the
credit union;
– credit unions should grow into economically
sustainable organisations when the directors, volunteers and workers have a
vision of developing them into financial institutions that serve the majority of the
population within a large and diverse common bond;
- success in credit union development depends a great
deal on the competence, capability, and potential of the volunteers recruited to
serve on boards and committees. Credit unions should not be started with the
primary goal of the personal development of the volunteers and should recruit a
core of skilled people who clearly have the ability to manage an effective
community business;
– higher growth credit unions tend to prioritise
both entrepreneurial leadership and a clear commitment to autonomy, selfreliance and independence;
- credit union development must be focused
on developing an effective and professional community financial business. It
should prioritise membership growth and the generation of savings. Credit
unions are not best understood as effective means of building community where
it does not already exist. They are better viewed as second-wave community
development vehicles, to be used to strengthen pre-existing communities:
- Credit unions, whether work-based or community, are
successful when they have a firm business orientation, are professional and
prioritise the quality of service to their members. Credit unions only grow when
they maximise savings by attracting members who both have confidence in the
credit union and receive a good financial service.
- the quality and accessibility of the premises from which credit
unions operate is a significant factor in their success. To develop and grow,
credit unions should operate from suitable premises that instil confidence and
promote an open, inclusive and accessible image:
- volunteers do not always have the time and energy to run a
demanding credit union business in a way that is able to promote and sustain
significant growth. Research has shown that community volunteers are
increasingly interested in engaging the support of paid staff. 50% of high
membership growth credit unions consider having paid staff to be very desirable
and a direct contributor to the quality and accessibility of their services:
– high growth credit unions recognise the
central importance of business skills, formal business plans, management, and
financial training and of understanding the workings of financial institutions.
Credit unions require more competent assistance in marketing, business
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management, information technology, technical information and in leadership
and entrepreneurial development and:
- successful credit unions monitor and
assess their performance. Best practice within credit union development
involves identifying performance criteria that indicate both financial strength and
economic viability as well as the achievement of social goals within the
community or work-place.
Developing Local Authority Support
Local authorities, as key agencies in supporting credit unions, need to take the approach that
promotes the business competence and entrepreneurial spirit of credit unions, whilst retaining
their strong commitment to mutuality and to clear social goals which have underpinned the
movement since its inception.
Guidelines for sustainable credit unions
The following suggestions are offered to local authorities supporting, or considering
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t for credit unions should be within the context of a
strategic and holistic approach to community economic development;
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make to regeneration strategies both at a local and national level (eg. New Deal
for Communities and LGA’s New Commitment to Regeneration);
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offers them a wide range of opportunities. Local authorities should take a key
role in developing effective partnerships with credit unions at a local and
regional level and with ABCUL;
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with banks in offering support, advice and sponsorship to credit unions at
different levels;
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Development Agencies and ensure that credit unions are developed according to
the national standards for sustainable credit union development as identified by
Central Government and ABCUL;
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recommendations both of the Treasury Credit Union Task Force and the Social
Exclusion Unit’s Policy Action Team 14 (Financial Services).
Credit Unions as Financial Institutions
Credit unions should be regarded primarily as financial institutions entrusted to safeguard the
money of their members. They need to be developed as community business enterprises
operating to appropriate commercial standards; and
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only meet the borrowing needs of those who most need
credit if they have the commercial credibility to attract savings from those who
have money to invest. Therefore, a good test for judging the success of credit
union is whether the majority of local authority members and staff, if they came
within the common bond, would be happy to deposit their wages or salaries at
the credit union.
Elements of Success
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plan, which targets growth and success
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of members, economic sustainability, independence and impact within the
community rather than by the number of credit unions established or operating in
a town or borough;
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effective leadership of a volunteer board and committees, which consist of
individuals who are well regarded in the community and have the skills and
vision to develop the credit union and make it grow;
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sponsorship from respected local organisations and institutions in order to
promote the credit union and give it credibility.
Local Authority Funding and In-Kind Support
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workers, local authorities should consider undertaking a feasibility study in an
area to assess need and enthusiasm for a credit union. Possibilities for achieving
membership growth, economic viability, sponsorship, premises and staff as well
as for recruiting competent volunteers to govern and manage the credit union
should be examined. Only once a feasibility study has suggested the potential
for a credit union should local authorities put their resources and support behind
the development;
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grow, with sufficient resources and funding to achieve a sufficient size to be
economically sustainable. Instead of targeting a certain number of credit unions
to organise, it is much better to provide sufficient funding for a smaller number
of credit unions that are thereby enabled to grow and actually serve a substantial
membership. Local authorities should avoid the past mistake of creating many
small, struggling credit unions which lack the resources to ever grow into
effective institutions;
-kind support for credit unions should be
regarded as the kind of investment which needs to be both substantial and long
term if it is to ultimately establish independent sustainable businesses;
d primarily be directed into credit unions
themselves in order to provide them with staff, premises and effective
operational systems. Credit unions entrusted to manage their members savings
must be equally capable of managing local authority investment;
Local authority funding, or in-kind support, should be targeted to provide
attractive premises in the communities; trained professional staff to operate the
credit union from the outset; and an effective marketing and promotion
programme capable of attracting at least 500 to 1000 members during the first
few months of operation. Local authority funding of existing credit unions needs
to adopt similar objectives;
Local authorities should ensure that credit unions meet specific evaluation criteria
(concerning membership growth, economic viability, local impact etc) and operational
requirements (concerning governance and systems) before being considered for longer-term
support.
Local Authority Employee Credit Unions
Local authorities should do more to support the setting up of credit unions among their own
employees and among other groups of employees in their areas. These credit unions could be,
in the longer term, the most effective first step in establishing sustainable credit unions for
local communities.
Concluding points
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Credit unions have been recognised by Government as vehicles for helping the
increasing numbers in our society who face exclusion and who lack access to
reasonably priced financial services. There is no doubt that credit unions could
make a huge impact in local communities. However, it has been recognised that,
if credit unions are going to achieve this, they need to adopt models of
development that are firmly based on an understanding of credit unions as cooperative financial institutions and that stress economic viability and long term
sustainability as well as social goals.
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The credit union movement in Britain owes much to the involvement and support
of local authorities throughout the country. By adopting a clear, focused
approach to the economic and sustainable development of credit unions, local
authorities can ensure that credit union benefits are made available to much
larger numbers of people.
Acknowledgements
These guidance notes were compiled by Mark Donovan - Telford and Wrekin Council and
Paul Jones - Liverpool John Moores University, with the support of Adrian Harvey, IDeA and
Gill Bolan, LGA.
Thanks also go to Ralph Swoboda, ABCUL and to the Co-operative Bank.