The new credit union boom

| Business |

Customers disillusioned with traditional banking in the wake of the
credit crunch are turning to credit unions in search of a safer, more
ethical place to save and borrow, it has emerged.

Some big banks took too many risks, lending aggressively during the
boom years. Their actions may yet provoke a UK recession and credit
unions look set to benefit.

‘Credit unions are a very good way of keeping banking in check,’ says
Mark Lyonette, chief executive of the Association of British Credit
Unions Limited.

‘Since the Northern Rock crisis, we’ve seen a lot of people
gravitate towards the neutrals of the banking industry and there are
already a number using these schemes to great benefit.’

Credit unions work as ‘neutral’ organisations in which
customers and shareholders are one and the same, united through a
‘common bond’ such as location or employer.

‘This structural advantage means credit unions are able to serve their members exclusively,’ says Lyonette.

‘With conventional banks there is a difference of interest
between shareholders and customers; by steering clear of this, credit
unions are able to avoid pitfalls such as those the banks have
experienced with the credit crunch this year.’

Several leading UK credit unions have enjoyed surging interest
in the last few months as growing numbers of individuals struggle to
finance their day-to-day expenses.

Leeds City Credit Union, which now has over 20,000 members, is one of those that has prospered.

‘The banks are increasingly pointing people in our direction as the
credit crunch bites because we offer a more rounded assessment of
credit rating than banks do, which can really help individuals,’ says
James Hook, head of marketing at Leeds City.

A more recent development for credit unions, though, is the
interest being shown from more affluent sectors of society, many of
whom are making a lifestyle choice in the search for a ‘more honest’
form of banking.

‘Concern for ethical issues has always been there for some, but
it is now becoming more widespread,’ says Karen Fraser, a leading
consumer research strategist.

Hook agreed: ‘The current economical climate means that we are able to
promote ethical financing, as all the money that comes in [to the
union] goes back out into the community,’

A traditional drawback with credit union borrowing has been the
rates offered. Unions often struggle to compete with bank loans and
offers vary significantly between providers. Most charge a maximum of
1% interest per month on the money they lend to their members, although
by law this can be up to 2% a month, which would work out at between
10% and 24% APR. Currently, many rates are around 13%.

Also, in February 2007 the Financial Mail revealed that six credit
unions had been declared insolvent in as many months, providing
evidence of possible dangers surrounding unions. In the intervening
time, though, most credit unions have stabilised, adjusting to the the
stricter standards imposed after the FSA began governance of credit unions in 2002, and are hoping to prosper.

The potential benefit of saving into a credit union is that the dividend
paid out to members each year is not dependent on the base rate set by
the Bank of England. This means that at Leeds City Credit Union the 5%
per annum dividend given to those who hold a Premier Account – which
must contain between £1,000 and £100,000 – is less likely to be
affected by bank rate cuts.

Dividend rates instead depend on the individual performance of
the union throughout the year and are set annually, in accordance with
FSA regulations. Many unions also offer Isa
accounts, again at competitive rates. Portsmouth Savers Credit Union
currently offers a 5% Isa rate alongside its 4% standard rate, further
demonstrating credit unions’ ability to challenge most high street
banks in terms of savings.

Instant access accounts are less competitive, though, and are
usually offered at a slightly reduced rate, often around 2-3%; whilst
regular saver and loyalty accounts are also often provided, with rates
varying between 3% and 5%.

Strong support for credit unions has surfaced from many
quarters in recent months with the Archbishop of Canterbury, Dr. Rowan
Williams, praising the ‘locally-based, entirely trustworthy,
user-friendly, educationally sensitive and confidence-building methods
of managing debt’ offered by credit unions.

‘All over the world in both highly developed and less
economically developed nations, from Brazil to the US, credit unions
are actually part of the mainstream financial landscape and are helping
a broad range of people from different sectors of society,’ says
Lyonette.

‘In the US around a quarter of the population use credit unions – that’s over seventy-five million in the states alone.’

He also gives encouraging news for UK credit unions, citing proposed
legislation that will come into effect next May and will ‘put our
credit unions on a par with those around the world and help them to
really compete with the banks.’

The new regulations will give greater flexibility to the common
bond guideline for credit unions and will also allow payment of
interest on savings, instead of the dividend that is currently
permitted.

‘The legislation will mean that employers will be able to use
payroll deduction to help people save or repay their loans each month.
This will make saving so much easier for people and is something that
the banks would give their right arm for – it’s such a powerful tool,’
says Lyonette.

‘It helps people in a brilliant way because most people really
struggle to save and often only succeed when they get into the habit.’

Kitty Ussher, ecomomic secretary to the Treasury, has also
backed the changes. ‘We can give cooperatives and credit unions the
chance to compete much more fairly and freely with companies – and we
can take a huge step towards making common ownership a genuine
alternative to the company form, which has been one of my main
objectives over the past year.’