MOVEMENT How Ireland's credit unions can play a key role in economic recovery and sustained community development - The Irish League of Credit ...
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THE
MOVEMENT How Ireland’s credit unions can
play a key role in economic
recovery and sustained
community development
A report by The Irish League of Credit Unions
10th July 2020
CONTENTS
Foreword.............................................................................................................................................................. 4
Key Findings and Actions ............................................................................................................................. 6
Chapter 1: The Credit Union Movement In Ireland Today.................................................................. 7
Chapter 2: Credit Unions at a Crossroads:
Unlocking Potential Vs Missed Opportunity .................................................................... 13
Chapter 3: Ensuring Reasonable Regulatory Costs ............................................................................ 25
Chapter 4: What Credit Unions Want -
Credit unions during Covid-19 and into the future........................................................ 28
Chapter 5: Political Action and Policy Recommendations............................................................... 31
Chapter 6: Conclusion .................................................................................................................................... 36
About ILCU.......................................................................................................................................................... 38
FOREWORD
The ethos of a grassroots, cooperative
organisation, owned by members for members,
is central to the credit union movement. This
ethos, in a post-Covid world, is more relevant
than ever. Credit unions are ready to support
the communities they are embedded in, as they
have always done, but with renewed vigour and
sense of purpose.
Ibec estimates that the economy will not
recover to pre-Covid-19 levels until at least
2022. While this outlook is nowhere near as dire
as our 2008 prognosis, many thousands of Irish
businesses will still be forced to close or will at
least be severely impacted by nervous and
slow-moving international and domestic
markets.
There will be a human cost to this, too, much of
which will be difficult to quantify. Many
thousands of Irish people will be put out of
work, which, in turn, will have consequences for
local communities, many of which will not have
In a time of pandemic and economic downturn, sufficiently recovered from the crash of a
strong community bonds take on renewed decade ago.
importance. The events of the last four months
have brought villages, towns, and city Coupled with the increasing possibility of a no-
neighbourhoods across Ireland closer together, deal Brexit, until only recently relegated to a
if not physically then in spirit. background act, there is a real danger that
some of Ireland's rural and urban communities
In the process, many of us have become more will be economically disadvantaged for many
considerate, more neighbourly, and more years to come if they do not have essential
civically minded. If ever there were a case of a access to credit at reasonable rates in the form
thundercloud having a silver lining, this new of loans, mortgages, and other financial
positive mentality is it. An engaged and supports, which are so important for local
community-focused citizenship is something communities to prosper.
that we, as a society, and the government, as
society's representatives, should encourage and Indeed, access to credit and investment
nurture. accelerates economic recovery, and it will be
the areas outside our immediate city centres
It is a sentiment that sits well with the credit that will need the biggest boost. Credit unions,
union movement; an understanding of what because of their local knowledge and local
creates community and holds it together is its relationships, often see opportunity where
guiding principle. Credit unions are valued by other mainstream banks do not (or will not). In
households and businesses precisely because short, they ensure that these communities are
they are institutions built on a mutual financially backed and have the room to be
understanding of local people, local needs, and entrepreneurial, to innovate, and to spend
local opportunities. Credit unions are visible, within their local economies
trusted, and viewed as “human” in a financial
services market crowded with faceless high- Even before the pandemic, there were already
street brands and online apps. major shifts in credit union members’ demands.
They still want the personal and reliable savings
Ireland now faces a battle to recover, and it is vehicle that credit unions have provided them
precisely the community spirit that has guided with for over six decades, but they also want
us through the pandemic that will also support more. Their needs have changed with their
us through economic recovery.
4
circumstances; they want mortgages, small welcome the recent commitment in the
business loans, and other specialised financial Programme for Government to do so, however,
products. While they want these products from this commitment must now be acted upon and
their credit unions, which they trust and have not become another empty promise.
strong relationships with, all too often credit
unions cannot offer them, often due to the This report explores the present market
overly restricted environment in which credit situation of credit unions in the Republic of
unions must operate. This gives traditional Ireland; the opportunities for growth; the
banks an unfair competitive advantage and barriers in their way; and the political action
jeopardises the long-term sustainability of the and legislative change required to address
credit union movement. both. The report also includes a survey of ILCU
affiliated credit unions, which asked credit
The financial services sector is heavily regulated unions CEOs and managers at the coal face
for reasons that became abundantly clear in what financial products and services their
2008; there is no disputing the need for members most need now as Ireland emerges
independent, prudent, and transparent from Covid-19 lockdown, and what are the
intervention by national and international challenges that credit unions face in meeting
governments, organisations, and their agencies. the demands of their members.
Credit unions understand, and are strongly
committed to, meeting their regulatory With a new government in the Republic, there is
responsibilities and obligations and continue to opportunity for fresh thinking and enhanced
do so each day. ambition on the role that credit unions can play
in sustaining Irish communities in the
However, credit unions are increasingly challenging period ahead. A failure to grasp this
hampered in their desire to do more and opportunity will do a disservice to struggling
become more responsive to their members’ communities across Ireland, especially those
needs, despite a changing financial landscape, who were to the fore in supporting their
by the current legislative and regulatory families, friends, communities, and our country
environment. during Covid-19.
The lack of progressive policies toward credit While the ILCU is an all-island body with 91
unions and the failure of Government to affiliated credit unions in Northern Ireland this
translate their commitments to support credit report is focused solely on credit unions in the
unions to offer an expanded range of Republic of Ireland. This report sets out the
community banking services is one example of mechanisms by which government and elected
the challenges facing credit unions. representatives can now empower credit unions
to help their communities through expanded
These shortcomings and broken promises have access to credit and liquidity. We urge
the greatest impact on local communities. It policymakers to engage with us in a meaningful
deeply limits the growth of local communities, way to effect the change that is needed to
local enterprise, and local families, who might realise this worthy objective.
have no alternative sources of finance available
to them, either due to infrastructural issues
(such as an absence of local bank branches) or
relationship issues (such as a failure of those
same banks to fully grasp local opportunities).
Faced with an imminent severe economic Gerry Thompson,
downturn, now is the time for Ireland’s President of the Irish League of Credit Unions
policymakers and regulators to act. Existing
legislation must be reviewed and reformed to
ensure that credit unions can serve their local
communities in the best and most appropriate
ways while helping them strengthen their long-
term sustainability and development. We
5
CREDIT UNIONS AT A GLANCE* *Refers to Irish League of Credit Union affiliated credit unions
ROOTED IN A LONG TRACK
COMMUNITY RECORD OF
317 CREDIT UNIONS
DELIVERY
across the island of Ireland
3.6 MILLION MEMBERS Over
1 IN EVERY 2 people
living on the island
has a credit union
60 Years
supporting Irish Communities
account
FURTHER POTENTIAL
FOR CREDIT UNIONS STRONG, IF
TO SUPPORT UNDERUTILISED,
COMMUNITIES ASSET BOOK
INCLUDING:
SME lending TOTAL ASSET BOOK = €20 BILLION
Home lending (€18 billion in ROI and £2 billion in NI)
Social housing
€15 BILLION IN SAVINGS
National Retrofitting (€13.5 billion in ROI and £1.5 billion in NI)
Programme
€5 BILLION+ IN LOANS
Green lending and other (€4.46 billion in ROI and £682 million in NI)
emerging opportunities
SERVICES MOST PRIORITIES FOR
IN DEMAND DURING NEXT GOVERNMENT
COVID-19 TO SUPPORT
(BASED ON I-REACH SURVEY, JUNE 2020) CREDIT UNIONS
1. Rescheduling of loans
2. Banking services to those cocooning
3. Express lodgements 1 Changes to the
capital structures
2 Increased limits
80 % believe that rescheduling
for home loans
loan repayments is the
measure which can most
assist members in the
period ahead
3 Increased limits
for business loans
CHAPTER 1 THE CREDIT UNION MOVEMENT IN IRELAND TODAY
Across Ireland North and South, there are 317 needed part of our overall financial system in
Irish League of Credit Unions (ILCU)-affiliated Ireland.
credit unions, with 226 in the Republic and a
further 91 in Northern Ireland. All-Ireland
membership now stands at 3.68 million, split
THE CREDIT UNION
between 3.16 million in the Republic and DIFFERENCE
520,000 in Northern Ireland.
Credit unions are different to every other
Globally, credit union membership stands at financial institution in Ireland:
260 million with more than 89,000 credit
unions across 117 countries. Among these 1 FINANCIAL MODEL BASED ON
countries, Ireland has one of the highest levels PEOPLE, NOT PROFITS
of credit union membership anywhere in the Credit unions are not-for-profit democratic
world. financial cooperatives owned by all members.
One of the most obvious ways in which the They were created for one reason only – to
credit union movement remains an integral part provide financial services to communities, with
of Irish life, a key element in the state’s financial every member over 16 having a vote at their
framework, and an essential part of the local credit union AGM. In addition, any surplus
communities it serves is demonstrated in the income is used to develop new and existing
movement’s current financial reach. services, or it is distributed among members in
the form of dividends to savers or interest
In the Republic of Ireland alone this rebates to borrowers.
includes: In recent years, the Central Bank, as Regulator,
► 226 credit unions* has justifiably reminded all financial institutions
of the importance of putting their customers
► 3.16 million members
first, and this has translated into an increased
► €13.55 billion in savings focus on financial conduct and behaviour.
Credit unions find this somewhat ironic because
► €4.46 billion in loans they have always had this ethos at their core.
Our model, a cooperative one of a local
► €18.01 billion in total assets. institution run by members for members, means
that decisions are always taken by each local
In Northern Ireland:
board of directors based on prioritising
► 91 credit unions* members best interests. This decentralised
decision-making ensures greater accountability
► 520,000 members
to all members and puts them at the heart of all
► £1.36 billion in savings strategies pursued by each individual credit
union.
► £582 million in loans
2 MEMBERS, NOT CUSTOMERS OR
► £1.942 billion in total assets. SHAREHOLDERS
*Those affiliated with the ILCU Each credit union is an independent, not-for-
profit organisation that exists solely for the
That the level of membership and financial benefit of its members, not the markets. Credit
muscle of credit unions in Ireland remains so unions have members, not customers, and
strong and so prolific is not surprising to those membership is open to people who have a
who have been involved with the credit union unique ‘common bond’ with other members of
movement over its long history. the credit union.
It is a cliché to say that credit unions are This bond can be based on the geographic area
different, but they are, and this difference is the members live in (A Community Bond) or
precisely their strength. It also ensures that they the occupation / employment the members
continue to remain a relevant and a much- work in (An Industrial Bond).
CHAPTER 1 8
3. LENDING PRACTICES THAT WORK serving and protecting its members’ interests, is
FOR MEMBERS a huge differentiator from commercial banks.
There are many aspects to credit unions’ Continuing to offer this personal and responsive
approach to lending and providing credit service is one that our survey evidence has
facilities to their members that, although always consistently shown is something that the public
prudent and responsible, differ from the and members value highly.
approach typically taken by banks; they are
driven by a desire to work in the most practical Research carried out by independent agencies
way for members. also validates this view. For the last five
consecutive years the CX Company has named
Credit unions, whether lending for personal or the Credit Union the number one organisation
business reasons, have always taken a prudent in Ireland that offers the best customer
but personal approach. Credit unions pride experience².
themselves on their willingness and ability to
take the time to understand each member’s The Credit Union was also named as the most
credit request, the motivation behind it, and the reputable organisation in the country by the
feasibility of each request relative to each Ireland RepTrak 2020 Study. This is on the back
borrower’s personal and business of coming second in 2019 behind Bord Bia,
circumstances. having topped the poll the previous year. Credit
unions also came out of this survey as the most
Decisions are based on responding to member reputable financial organisations in Ireland
needs rather than impersonal, one-size-fits-all overall, more than 20 points higher than the
algorithms, which often do not capture the full average for other financial institutions.
situation of each member.
In an era when many make easy assumptions
4. THE CUSTOMER EXPERIENCE – about consumers’ preference for online,
MEMBERS’ FIRST faceless and impersonal interactions, the Credit
Union experience consistently shows that this is
Over the last decade, the retreat of the
not necessarily the case, and that there remains
traditional commercial banks from the main
a strong cohort of the Irish public that
streets of our cities and towns has become the
continues to seek and value a more personal
norm. A 2018 study found that in the ten years
customer experience. There is no singular
from 2008 to 2018, 160 bank branches had
member preference on how they wish to
closed¹.
transact, and credit unions recognise this fact
While commercial banks might have benefited and strive to facilitate all member preferences
from the savings realised from such cost-
Credit unions in the Republic currently have
cutting exercises, customers have not. Credit
€4.46 billion in loans to members, but as will
unions, in contrast, continue to offer a face-to-
be outlined further in this report, the movement
face member experience.
believes that there is much greater potential to
In addition, credit unions have adapted their extend its lending portfolio to a broader
service offering in recent years in order to meet spectrum of the Irish market, including the
the needs of their members. In practice, this has mortgage and SME sectors.
meant the increased availability of modern
5. IMPORTANCE OF VOLUNTEER-LED
online services for those who wish to transact in
CREDIT UNION BOARDS
this way while maintaining traditional in-office
services for those who prefer this method. In The directors who make up the boards of credit
addition, many credit unions also offer Saturday unions are all volunteers, typically individuals
and late opening hours to facilitate the changed drawn from local communities with financial
working and lifestyle patterns of our members. and other expertise who wish to contribute to
the work of their local credit union.
That credit unions have members, not
customers, and that each credit union is a That they are derived from the community in
regulated entity in its own right focused on which credit unions are located is also
significant to the operation of credit unions.
CHAPTER 1 ¹https://www.irishtimes.com/business/financial-services/
number-of-european-bank-branches-down-by-21-over-last-ten-years-1.3625712
9
²While the Award refers to customers in reality it in fact recognises our high level of
service to the members who comprise each credit union.
They understand and are attuned to the needs their members’ needs. Over that period, we
of members within that community, respond to have served generations of families and
those needs, and place a high value on being communities, helping them grow and prosper.
accountable and transparent to members. The trust and esteem in which these members
hold their local credit unions is reflected in the
Due to the embedded local nature of credit fact that these members continue to avail of
unions and the boards who drive their our products and services from savings for key
development, credit unions are often a focal life events, such as saving for education and
point of communities, not just by circulating college fees, to personal and small business
and recirculating local money in the local loans. This inter-generational relationship
economy but also through supporting and between credit unions and their members
promoting local initiatives and businesses, or by highlights both the grassroots and wide appeal
giving back to their communities through of the movement in Ireland.
socially beneficial activities, or procuring goods
and services from local businesses as required. With 226 credit unions in the Republic and a
further 91 in Northern Ireland, the movement
In February 2019, the Credit Union Advisory now has an unrivalled reach into communities.
Committee, established by the Minister of At a time when many traditional commercial
Finance to advise him/her on issues relevant to banks are in retreat, with branch closures and
the credit union movement, published research reduced opening hours, credit unions have
that looked at the role of directors on the continued to serve communities in both urban
boards of credit unions in greater detail³. and rural areas and are working extremely hard
Key findings from the report included: to retain their presence in each and every
community. This is despite a challenging cost
► The importance of credit unions to environment.
marginalised sections of our communities.
The report notes that “without credit 7. CREDIT UNION DIFFERENCE
unions, and the work of their volunteer IN ACTION
directors, it is undeniable that many people
would be disenfranchised or be at risk of CASE STUDY ONE:
financial exclusion”. SUPPORTING FAMILIES
► In addition to safeguarding their members’ A Cork-based family with three children
interests, directors are also upholding the built their own home with their own
ethos of the movement, an ethos that is finances derived from many years of
unique and markedly different to other savings. However, their savings ran out
financial institutions. when their new home was 75% completed.
The family had no borrowings or pre-
► Credit union board directors are largely existing mortgage and sought a loan from
representative of their communities, distinct commercial banks to complete their home.
from commercial banks and other financial Both parents were working fulltime. Banks
institutions. The age profile of directors is turned down their loan application,
also not unduly weighted towards an older despite their home, even at 75%
age group, with good gender balance completion, being valued at €200,000.
comparable to other financial organisations;
the profile includes directors who are well The Credit Union reviewed their financial
educated and a large proportion of position and approved a home
directors who have been recruited relatively improvement loan sufficient to allow them
recently. to complete their build and move into their
home. Today the family continues to meet
6. EMBEDDED IN COMMUNITY AND their repayments and remain valued and
RESPONSIVE TO THEIR NEEDS active members of their local credit union.
Credit unions have been at the centre of local
and workplace communities for over 60 years,
tailoring their products and services to match
CHAPTER 1 ³A report on research into credit union directors, the Credit Union Advisory Committee, February 2020. 10CASE STUDY TWO:
SUPPORTING LOCAL BUSINESS
CREDIT UNIONS IN A
A young man wanted to start a plant hire TIME OF COVID-19
operations business. The credit union The outbreak of Covid-19 and the subsequent
supported him in buying his first digger. restrictions on business and community life has
He has continued to borrow from the
presented challenges for the credit union
credit union to expand his business. The
movement.
credit union continues to support this
entrepreneur in achieving his business However, these challenges have been largely
objectives and reaching financial targets.
overcome, not least because of the credit
unions’ flexibility and ability to quickly adapt to
CASE STUDY THREE: the new circumstances presented by Covid-19.
SUPPORTING FARMERS
Credit unions have continued to serve their
With the value of Irish agri-food exports members throughout the pandemic while
worth over €13 billion in 2019, farmers are abiding by national restrictions. Their focus
more than just the backbone of rural throughout has been to continue to work in a
communities—they are a central part of
way that best works for members.
the wider Irish economy. The ability of
farmers to expand their services, innovate, In practice, this has meant that our offices have
and continue to produce a high-quality remained open throughout the crisis; telephone
food product is essential to this export
consultations have increased; and other
success story.
measures have been introduced to ensure
Like all businesses, access to credit and continuity for members. However, there have
liquidity is a key concern for farmers. The been substantial additional costs for credit
credit union recognised that our farming unions and personal sacrifices made by
members required a bespoke lending frontline credit union employees in facilitating
product that acknowledges their distinct these supports.
needs and their differences from other
forms of businesses. This ‘member-first’ approach is closely aligned
to the community and member-based structure
This has led to the establishment of
of the movement. A consequence of this is that
Cultivate, a unique lending solution,
credit unions have had a better understanding
tailored for farmers. Cultivate is an
initiative of a group of credit unions that of the needs of our members during this period
provides short-to medium-term loan and, equally, what will be required as the easing
opportunities built specifically around the of lockdown accelerates.
growing needs of farming members.
Again, this approach contrasts with the decision
Typical members are a mix of dairy, beef,
and sheep farmers accessing farm loans by most commercial banks to close significant
between €5,000 and €50,000. numbers of their branches across Irish towns
and communities during Covid-19. For example,
While this particular scheme is a relatively Bank of Ireland closed 101 branches during the
new and bespoke initiative, more broadly pandemic; there remains an ongoing doubt as
all credit unions provide financial supports to whether all these branches will reopen⁴.
to the farming community as part of their
service offering to this sector. This decision to close commercial banks has
negatively impacted communities in different
ways. Such as communities with either no or
poor broadband, those that are geographically
distant from the nearest open commercial bank
branch, or who have significant numbers of
elderly people who might not be as
technologically or internet savvy as younger
generations.
CHAPTER 1 ⁴https://www.thejournal.ie/bank-of-ireland-branches-shut-coronavirus-5054604-Mar2020/ 11These factors have further underlined the It is also notable that member behaviour has
importance placed by the credit union modified during Covid-19, with electronic fund
movement in ensuring continuity of service for transfers (EFT) transactions increasing during
members. recent months with our movement-owned
payments company (CUSOP) experiencing
The accessibility of credit unions and their substantial growth in various electronic
ability to continue to provide services to payments volumes over the period.
members and communities has brought huge
value to many communities during the The restrictions on movement during the
pandemic. lockdown phase has also shone a light on the
importance of maintaining banking and
This manifested itself through agile and financial services at the most accessible levels
responsive solutions championed by credit to communities across Ireland.
unions during Covid-19, such as increased
telephone consultations, expanded online A demand for local services that ultimately
services, tailored and flexible opening hours, promote the development of the communities
express lodgement facilities, and bespoke we live and work in is something that will
offerings for ‘cocooning’ members. The focus strengthen, rather than weaken, post-Covid.
throughout has been to ensure that credit Credit unions in Ireland can fulfil and expand
unions provide multiple means for members to this role in the period ahead, with the support
financially transact in ways that work best for of government and policymakers.
them.
CHAPTER 1 12CHAPTER 2 CREDIT UNIONS AT A CROSSROADS: UNLOCKING POTENTIAL VS. MISSED OPPORTUNITY
The Irish credit union movement is now at a continue to be pushed in the direction of the
pivotal point in its history. How credit unions industry norms for commercial banking.
develop over the years ahead will determine
their viability and longer-term existence. The latter are built on a globalised financial
platform of multi-national institutions where the
It is now reasonable and fair to ask the overriding consideration is increasing financial
following questions: returns for shareholders. This position jars with
the raison d’etre of credit unions, which are
1. Is there a continuing need for credit unions effectively local co-operatives driven to support
as part of the Irish financial services members and develop the local communities
landscape? from which these members come.
2. Do credit unions currently, and can they Equally, credit unions do not wish to continue in
continue to, provide an important role in existence merely for the sake of it; rather, they
this landscape? believe that the ideals that drove the creation of
3. If so, and particularly for response by our the movement over 60 years ago—providing
national decision-makers and leaders— financial inclusion and services to people
government, policymakers, and elected through a financial co-operative they own and
representatives—are they committed to a democratically control— remain as valid now as
future for credit unions in Ireland? they did then.
The credit union movement in Ireland, and more However, credit unions are acutely aware that
importantly the 3.6 million members who avail the way they do business cannot stay
of our services every day across the island, are unchanged. Like all aspects of life, they wish to
clear in their view that the answer to each of adapt to the changes that are transforming
these questions is a resounding ‘yes’. society, particularly those resulting from the
far-reaching impact of technology on daily life.
Yet this response is, by itself, not enough to Equally, the financial needs of both households
ensure the future of credit unions. What and businesses have changed hugely and
matters just as much is whether this view of the become ever more sophisticated and nuanced
importance of credit unions is shared by other over recent decades.
key stakeholders, such as those outlined above.
Credit unions themselves know they are not
A larger, arguably more pointed question is immune to these changes and recognise the
whether there is a willingness among need to adjust to remain relevant and best meet
government, elected representatives, and the the requirements of their members. But
Regulator to allow some credit unions to improvements require ongoing investment by
decline and ultimately fail. credit unions and scarce resources must be
prudently deployed.
If not, are key national decision-makers equally
committed to securing the future of the There are essentially two scenarios facing the
movement and to working with credit unions movement in the years ahead, one positive and
who want to create a sustainable future for the other negative. The first, the positive, is
credit unions? And what steps do they need to unlocking the full potential of credit unions by
take to underpin this objective? empowering them to increase their footprint in
the Irish financial services market through
An important and often overlooked part of the increased services and products. The second,
credit union movement is the wider social value the negative, is continued restrictions on their
which it provides. Credit unions are not ability to meet the sophisticated and evolving
commercial banks, nor do they wish to be. needs of their members and wider
communities, thereby leading to a gradual and
As noted in the previous chapter, the basis on
sustained decline.
which they are founded and operate is different
and unique relative to commercial banks. Yet, If the latter is the case, not only will the future
from a regulatory perspective, credit unions of credit unions be at risk, but there will be a
huge missed opportunity for communities,
CHAPTER 2 14businesses, and Ireland’s economy to capitalise particularly regulatory-related costs, have
on the distinct offering and beneficial continued to increase.
difference that credit unions are uniquely
positioned to provide. The current financial model of credit unions
continues to be based primarily around its
If as a society we support the first positive view members savings, with deposits now standing
of the need to fully unlock the potential of at almost €14 billion in the Republic. This has
credit unions, several challenges must first be led to credit unions often being characterised
overcome. These are explored below. and viewed as savings unions. While savings are
strong and have continued to grow, in contrast
CHALLENGES FACING credit union lending is much weaker and
remains largely confined to unsecured short- to
CREDIT UNIONS medium-term credit.
1. ADDRESSING THE ISSUE OF UNDER- Yet the success of this financial model is now
LENDING BY CREDIT UNIONS what threatens to undermine the very viability
of credit unions – savings growth. It is one that
At the most basic level, credit unions currently many wish to reimagine, not least as it
engage in an extremely low level of lending. threatens the movement’s long-term future.
This situation developed due to a number of
factors including changing lending habits. Lack of loan book diversification
However, it is equally fair to say that the
Even within the restricted lending that credit
regulatory environment itself, for many years,
unions undertake currently, there is also an
also restricted the ability of credit unions to
extreme lack of diversification in the Credit
adapt to meet lending demands.
Union’s loan books.
For example, until early 2020 credit unions
Almost 95% of the current loan book is based
were largely confined to lending only for short
on short-term personal loans, with an average
to medium term periods, with the majority
loan value of just over €7,000 per member.
(70%) under five years and this effectively not
only locked them out of the mortgage market, This places credit unions in the Republic of
but it also reduced their attractiveness as Ireland at odds with credit unions in
lender of choice for other loan products. comparable countries, such as the Canada or
US, where diversification is the norm and
Some changes approved by the Regulator, and
viewed as essential, and has been a feature of
which took effect in January of this year, allow
their loan books for many years.
for longer term lending, such as facilitating a
measure of expanded mortgage and business As noted above, in January new Central Bank
lending, but, with the outbreak of Covid-19 in regulations were introduced. These followed
the interim, it means that it is too early to fully many years of proposals by the credit union
assess the impact of these measures. movement to allow credit unions to offer a
broader and increased level of longer-term
More broadly, these low levels of lending form
lending, including home/mortgage and
part of a longer-term trend of a declining loans-
business lending.
to-assets ratio, with the gap continuing to
widen over the last 20 years. Falling levels of However, as pointed out by the ILCU to the
lending across the movement contrast sharply Central Bank and others prior to the
with the increasing overall asset base, currently introduction of these new regulations, these
at €18 billion (ROI). changes to lending practices are relatively
limited in scope and will have little impact on
The loans-to-assets ratios across credit unions
the issue of under-lending in credit unions. This
in the Republic of Ireland now stands at 26% (a
is particularly the case for larger and
fall of 35%) from a high point of over 61% in
progressive credit unions that want to offer a
2001. The knock-on effect of this decreasing
more diverse portfolio of financial services to
ratio has resulted in credit unions’ gross income
their members, including expanded mortgage
declining over the period, while business costs,
and SME lending. In the period ahead, the latter
CHAPTER 2 15are likely to quickly reach their maximum Significant impact on members
lending limits and be constrained in growing
The current levels of capital reserves (see below
their loan books any further.
for more detail) that must be held by credit
As will be outlined below the ‘perfect storm’ of unions have direct and negative impacts on
increasing savings coupled with falling lending ordinary credit union members. The biggest
is driving down loans-to assets ratios which are manifestation of this are the caps on the
in turn forcing credit unions to introduce amount of money that ordinary members can
reduced savings caps thereby making credit save with credit unions. This situation has been
unions less attractive and also creating a exacerbated during the Covid-19 pandemic as
situation whereby some credit unions are now the level of lending has fallen and consumers
unable to serve their members needs by being have increased their savings due to financial
no longer able to take their savings, once their and economic uncertainty.
savings are above the caps.
However, the impact of savings caps on credit
As credit unions incrementally move to grow union members is that members with deposits
their lending offering, a more proactive in excess of these savings caps are now
response from Government policymakers in effectively being turned away by credit unions
cooperation with the credit union movement who cannot exceed these saving limits, lest they
itself is needed to ensure that the assets of the breach the Regulators onerous capital
credit unions can be used in a more effective requirement.
way for the benefit of members and
For example, one of the largest credit unions in
communities. Currently these remain
the country, the Health Services Staffs Credit
underutilised and are serving the interests of
Union (HSSCU) informed members in May that
neither members nor the Irish economy.
they have been forced to introduce a savings
cap of €40,000. This means that once a
Credit union loan diversification – the
member reaches this saving limit, they cannot
international experience
deposit any more savings into their credit union
While Irish credit unions are only now beginning account.
to diversify their loan books, this is something
that credit unions in United States have been In the case of another large credit union in
doing for many decades. South Dublin, it too recently announced a
similar cap on deposits of €40,000 per
Credit unions in the United States offer a full member, with further reductions also likely.
range of banking services, including car loans,
mortgages, current accounts, and debit and While the figure of €40,000 may seem high at
credit cards, in addition to generating first, in circumstances where the membership of
alternative fee income through insurance, this credit union includes 47% retirees, the
investments, and other financial products. monies they save with their credit union may
constitute their lifelong retirement savings.
Despite this diversification, they have retained
their structure and guiding principle as Research undertaken by The Irish Times in 2019
member-owned co-operatives working for the found a further 36 credit unions across Ireland
benefit of their members and communities. A had introduced similar savings caps on
similar evolution has occurred in the Australian members⁵. In the current environment of Covid-
credit union movement. 19-linked higher savings, reduced appetite for
consumer loans, and increased regulatory costs,
The point to note is that loan book this trend is increasing.
diversification has not diluted the community-
based philosophy or guiding principles of the In the period ahead it is likely that for many
movement in the United States, so it is possible more credit unions their savings cap could fall
to expand lending offerings while maintaining as low as €15,000 to €25,000.
community roots and a not-for-profit ethos.
In effect, this would mean credit unions could
not hold its’ members savings for relatively
modest amounts such as purchase price of new
CHAPTER 2 ⁵Credit unions impose savings caps on deposit accounts, Irish Times, 13 June 2019. 16Nissan Micra, savings for a couple’s wedding or the Republic, highlighting the relatively small
a deposit to purchase a home. Members are dent it has made to date in credit union loan
again the losers and are faced with a situation books or wider mortgage market.
whereby their credit union can no longer meet
their financial needs. Some of the reasons for this are set below.
The existing 10% capital reserve requirements
Limited home lending
means that any credit union currently close to
Credit unions in the Republic currently engage or even a couple of percentage points above
in a very limited amount of home and mortgage this reserving level, such as at 12-14%, is at risk
lending. This is the case for a number of of falling below it if they increase the number of
reasons, such as historical regulatory limitations mortgages they lend – even if a relatively
on the duration/term of loans credit unions modest number of new mortgages.
could offer, thereby preventing credit unions
from engaging in mortgage lending; restrictions Linked to the latter is the fact that the costs
on the overall share of credit union lending associated with mortgage lending - including
which could be mortgage related; and, the enhanced staffing resources and expertise and
administrative and cost burdens associated legal costs - do not ensure a sufficient margin
with providing mortgage products. for credit unions to grow their mortgage book.
This is now beginning to slowly change. As Of those credit unions who have considered
noted throughout this report, there is a growing investing in bringing mortgage products to
appetite amongst many, particularly larger, market, the fact that once they achieve even a
credit unions, to offer mortgages to members. modest growth in mortgages, they are then at
However, for those who do wish to either risk of falling below capital reserving levels, is a
commence mortgage lending or to expand the substantial deterrent. This is even more so the
volume of mortgages they lend to members, case, as credit union deposits have increased
there remains significant regulatory barriers to further in recent months putting reserving
doing so. levels under even greater strain.
In November 2019, following a stakeholder Once credit unions are at or close to the current
consultation, the Central Bank announced 10% reserving level, they are then forced to
regulatory reforms cited to facilitate a measure introduce further savings caps on members to
of expanded mortgage lending. come back within the reserving requirements.
This knee-jerk response is not conducive to
For most credit unions these ‘reforms’ will not long-term financial planning and product
significantly change the position in respect of development, undermines the credibility of
mortgage lending to members or remove the credit unions amongst members and acts as a
regulatory barriers they face if they wish to strong disincentive to participate in either any
grow their loan book in this area. or additional mortgage lending.
These new Central Bank regulations took effect A further consideration is the fact that the new
in early 2020, however they are limited in Central Bank rules are very prescriptive and
scope, allowing the full credit union network conservative in the overall levels of mortgage
across the Republic to issue a limited number of and commercial lending which they permit. The
mortgages per annum. regulations set ceilings of 7.5% of total assets
for a single credit union to advance home and
Not only does it continue to restrict credit
business loans, rising to 10% and 15% for credit
union mortgage lending in the immediate term,
unions that hold assets of at least €50m and
but it also ensures that any longer-term, more
€100m. These ceilings do not enable credit
ambitious pathway for credit unions to win a
unions to fully develop diversified loan
greater share of the mortgage market over the
portfolios at the required scale.
years ahead remains unfeasible.
Credit unions, while they can attest to a strong
After almost 6 months since the change in
demand amongst members for a mortgage
regulations, mortgages currently represent just
lending product, are also keen to ensure that
over 3% of the total credit union loan book in
CHAPTER 2 17they do not create an inflated demand amongst to incrementally grow their mortgage books
their members for home lending which they without a continuous risk of falling below the
ultimately cannot meet due to the regulatory current 10% capital. The latter continues to stifle
restrictions outlined above. both the ability and confidence amongst credit
unions to engage in expanded mortgage
While it has long been argued by government lending.
and financial commentators that increased
competition in the mortgage market in Ireland SME lending
would be hugely beneficial for Irish consumers,
As with mortgage lending, the ability of credit
the current regulations do little to position
unions to lend to businesses, particularly SMEs
credit unions to compete in this market.
and micro-businesses, situated within their local
With a membership base of over 3 million communities is also currently very restricted,
across the Republic of Ireland, many of whom notwithstanding the strong asset base of many
are potential home buyers, credit unions are credit unions.
ideally positioned to serve this member base
SMEs and micro-businesses are the backbone
but remain unable to meet members’ financial
of the Irish economy, representing 99% of
needs in this area.
active enterprise in Ireland and accounting for
Imagine, for example, a member who has built more than one million employees (65% of the
up their savings and has a strong credit history total workforce).
with their local credit union. The credit union
A report undertaken last year by the Seanad on
understands their financial circumstances and
SME businesses in Ireland⁶ found that many
their ability to meet their financial obligations
small businesses, particularly those in the
better than most. However, regulation means
regions that struggle to access credit, do not
that that member, even though they may want
even apply to commercial banks because they
to access a home loan from their credit union,
expect their applications will be rejected. Lack
cannot. Instead, they will have to go elsewhere
of access to relationship managers in
and/or to a financial institution less attuned to
commercial banks, in addition to high interest
their needs and track record.
rates for SMEs (the second highest in the
The ILCU recognises these barriers to mortgage eurozone), were also cited by small businesses
lending and has already developed and as a barrier to securing credit.
launched a full-service mortgage solution,
The knock-on effect is that often viable small
which individual credit unions can avail of. As a
businesses, which have the potential for further
result, mortgage applications are now being
growth and job creation opportunities, are
processed via this service in a small but
constrained in their ability to expand their
growing number of credit unions, with support
businesses.
from a centralised Mortgage Hub operated by
the ILCU. While this was the position before Covid-19,
SME difficulties in securing access to credit is
However, overall, the most effective mechanism
now even more important as our economy
to allow credit unions more actively engage in
emerges from the pandemic and is seeking to
mortgage lending and at greater volumes
get businesses back trading. Credit unions with
would be a reduction in current capital
significant assets can have a central part to play
reserving requirements from 10% to 8%.
in financially supporting small, local businesses
This solution would provide credit unions with during this period. However, their ability to do
greater leeway to grow their mortgage book in so remains constrained by the existing
a number of ways. regulatory limitations, such as the existing
capital reserve requirement of 10%.
It would give credit unions the headroom to
financially provision for an expanded volume of The restrictions which inhibit mortgage lending
mortgages; enable credit unions to invest in equally apply to increased commercial/business
building their inhouse mortgage lending lending.
expertise as required; and, allow credit unions
CHAPTER 2 ⁶Seanad Public Consultation on Small and Medium Sized Businesses Report 2019 18These include that: less attractive to businesses when choosing a
lender.
► The current requirement that credit unions
must hold a minimum of 10% capital Credit union ambitions to expand their
reserves means that many credit unions are lending portfolios
faced with an ongoing challenge of
Credit unions acknowledge that they also have
bolstering their reserves to maintain this
some responsibility for the significant fall in
reserving level. This means that credit
loans-to-assets ratios, which has occurred over
unions often do not have the capacity to
a prolonged period. In the past, credit unions
also invest in developing mortgage
did not always proactively develop the lending
products;
side of their businesses as they might have
► The current regulatory ceilings of 7.5% of done. This occurred for myriad of reasons, such
total assets for a single credit union for as a lack of lending expertise in some offices,
mortgage and business lending combined, the administrative burden associated with
or 10% to 15% for credit unions with assets particular lending products, or other structural
of at least €50 m and €100 m, are barriers that impeded the development of
inadequate to allow for meaningful particular types of lending products and
commercial lending; and services.
► The additional costs, in areas such as However, many credit unions are now working
staffing and underwriting expertise and to put in place solutions to address these
administration costs, which would have to issues, with an increasing number of individual
be incurred by credit unions to scale up credit unions now offering more sophisticated
their business lending, would not generate products in areas such as home lending or small
sufficient margin to justify relatively small business loans. There remains much work to be
increases in commercial lending. done.
Again, as per mortgage lending, a reduction in However, the perspective of credit unions on
current capital reserves requirements to 8% the issue of lending is clear. They want to be
would create headroom and generate increased able to offer their members a fuller service,
opportunities for credit unions to increase their which not only meets their day-to-day current
lending to small businesses. banking needs and their saving requirements,
but also provides a more diverse range of credit
Another factor limiting expanded business facilities beyond short, unsecured loans to
lending by credit unions is the regulatory longer-term, secured lending for homes and
restrictions on credit unions offering asset businesses.
finance. Asset finance products such as leasing
finance, PCPs or hire purchase finance were not This is the development path that many credit
included as part of the new Central Bank unions are now on, but the regulatory and
regulations on lending from earlier this year. policy environment must also synchronise with
and support this ambition rather than hinder it.
Asset finance has grown significantly in recent
years as a means for businesses to access short Department of Finance support for
term or working capital loans, with commercial community banking
banks and other financial institutions offering
A 2018 Department of Finance report⁷
this credit facility.
examining the merits of establishing a local
Asset based finance is also particularly public banking system in Ireland based on the
attractive to businesses due to the fact that it German Sparkassen model recommended
invites a lower rate of interest as a result of against the State doing so.
being secured on the back of the asset it is lent
Germany’s Sparkassen are regional and
against. The restriction on credit unions
community savings banks where a state or
participating in this market sector places credit
other public actor has an ownership stake in a
unions at a disadvantage relative to other
bank or financial institution. They are a
financial institutions in Ireland and makes them
substantial force in the overall German financial
CHAPTER 2 ⁷Local Public Banking in Ireland: An analysis of a model for developing a system of local public banking
in Ireland, 2018, Department of Finance and Department of Community and Rural Development.
19system. In opting against pursuing the model in A role for credit unions in financing social
Ireland, the costs of administering such a housing – a timeline of inaction
system was a significant consideration in the
► November 2014 - The government
Department’s decision.
published the Social Housing Strategy
However, so too was the existence of the well- 2020, which aims to deliver 35,000 social
developed credit union network across Ireland, housing units over the six years to 2020. In
which either already provides much of the addition to the public monies that would
proposed services of Germany’s Sparkassen, fund this strategy, it was also predicated on
particularly in retail credit, and/or has ambitions “private sector finance which will be raised
to expand their services further in other areas from a variety of sources which could
such as increased SME lending akin to the include the EIB, ISIF, pension funds, credit
German model. unions, and other financial institutions, both
domestic and international”.
The report did recommend that existing credit
unions be empowered to diversify their loans ► October 2015 - In response to that specific
books and expand their capacity to lend to request, the Irish League of Credit Unions
local businesses. Rather than building a new responded with its detailed proposal ‘Social
financial structure from the ground up and the Housing Funding’, which set out a roadmap
associated costs for the state in doing so, it was for the role that credit unions could play in
recognised that the credit union movement and the delivery of such funding.
its network can fulfil such a function.
► June 2016 - The Oireachtas Special
Despite this endorsement by the Department of Committee on Housing and Homelessness
Finance for a greater role for credit unions in examining the housing crisis, as a priority
business lending, it has not yet translated into recommendation stated: “The Government
significant legislative change to facilitate it. should seek to mobilise as quickly as
possible, all possible sources of funding,
However, it is of note that in recent days the including funding from the Housing Finance
Programme for Government has committed to Agency, Strategic Investment Fund, the Irish
enable “the credit union movement to grow as League of Credit Unions, and Irish Pension
a key provider of community banking in the Funds, to increase the supply of social and
country”. ILCU welcomes this commitment but affordable housing.”
now wants to see the new Government
translate it into proactive policy change to ► July 2016 - The Department of Housing,
realise this objective. Community and Local Government policy
document Rebuilding Ireland stated: “The
Social housing Government is also committed to a range of
There is an unprecedented shortage of housing, other structural, funding and policy
particularly social housing. The ability of the supports to increase delivery by AHBs
credit union movement to financially support [Approved Housing Bodies]. Among these
and extend credit to increase the stock of social measures will be the establishment of an
housing across Ireland is something that has Innovation Fund to support the
been long advocated by a wide range of development by AHBs of innovative
stakeholders, including government financial models… Support will be provided
departments and elected representatives. from this Fund to an Irish Council for Social
Housing (ICSH)/ sector-led new special
However, despite such endorsements, as set out purpose vehicle, involving investors,
below, this role for credit unions in financing including the Credit Union movement”.
much needed social housing remains
unimplemented. ► October 2017 - The Joint Committee on
Finance, Public Expenditure and Reform
and the Taoiseach published their report on
the review of the credit union sector. The
report stated that the credit union
movement should be empowered to
CHAPTER 2 20contribute to alleviating the housing crisis in What is required now from the new
the state and the current regulations are not Government is delivery on its’ commitment to
adequate to this imperative. allow for credit union funds to be invested in
social housing.
► February 2018 - Following sector
engagement with the Central Bank in National Retrofitting Programme
relation to proposals for credit unions to
The Programme for Government committed the
provide funding to AHBs for the provision
next government to develop and roll out a
of social housing, the Central Bank
national programme of retrofitting up to
announced, having taken account of the
500,000 homes by 2030. We welcome this
feedback from respondents, that it is
initiative. As a financial institution rooted in the
appropriate for credit unions to be
community, we believe that credit unions are
permitted to provide funding for social
uniquely placed to support lending to members
housing through investments in AHBs,
to enable them to participate in this national
subject to certain requirements and limits.
programme.
► June 2020 - To date there has been no
The government has also committed to working
delivery on the recommendation to
with both credit unions and An Post to develop
leverage credit union funds to support the
a mechanism to do this to support access to
development of increased social housing.
finance for retrofitting. We would urge the
Indeed, in recent parliamentary question
Department of Finance, the Strategic Banking
responses by relevant ministers, there has
Corporation of Ireland (SBCI) and other
been increasingly insistent pushback on any
relevant stakeholders to move quickly to begin
responsibility for delivery at all. Successive
a process of consultation and engagement with
commitments for delivery in Q3 2018 and Q1
credit unions representatives to work together
2019 have not been met. Currently there is
to unlock credit union funding streams.
no timeline or outcome in view.
2. ENSURING PROPORTIONATE AND
This policy issue is not simply one for credit
RESPONSIBLE CAPITAL RESERVES
unions. It is inextricably linked to the national
imperative of bringing AHBs back off the The capital requirements/reserves required to
government balance sheet before the available be held by credit unions under regulatory law in
headroom for funding meets the downward the Republic of Ireland are acting as barrier to
pressure of fiscal limits. Credit unions are not a credit unions’ sustainability and development.
single fix to that multi-faceted problem, but our
finance is a sustainable pillar of a separate The regulatory requirements stipulate that a
source of funding for the future. credit union must reserve 10% of its overall
capital from its total funds. This requirement
As noted throughout this paper, the full differs from commercial banks in several ways:
potential and capacity of credit unions to
contribute to the development of their ► Reserving requirements by commercial
communities continues to be ignored by banks are based on a risk-weighted
policymakers due to the latter’s failure to enact approach, unlike credit unions.
the policy and legislative changes needed to
► The risk-weighted approach can lead to a
tap into the existing strong asset base of credit
lower level of reserving required of
unions.
commercial banks when compared to how
Credit unions, with the correct mechanism to credit unions are currently assessed.
unlock the alternative sources of credit they
The ‘one-size-fits-all’ 10% reserving requirement
provide (specifically through the establishment
that credit unions are obliged to meet is not fit
of a state-regulated investment vehicle), could
for purpose, as it fails to take account of the
make a real difference in ensuring that more
variance in risk that each individual credit union
families can access affordable housing within
holds at any given time. It can lead to perverse
their communities.
results; a credit union with a higher risk profile
is not required to hold a higher level of reserves
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