The global financial system is in a state of chaos. The people have lost confidence in the established order and are taking to the streets. Savers and pensioners are no longer sure of the durability of their money’s currency of denomination. Trust in commercial banks is at an all time low.
Time, surely, for a local, friendly provider, driven not by short-term profit-making but by a concern for its customers’ long-term interests. One that is committed to its customers’ welfare, subscribes to such an ethos and ploughs back its profits to its customers and the business rather than remote, faceless institutional shareholders.
In short, time for the credit union movement to step forward as a credible alternative to the status quo.
After all, around the developed world governments and regulators are agreed that the world’s banks must curtail the reckless gambling that has caused so much turmoil; that banks exist to protect and promote banking and financial services in the real economy rather than feed the parallel investment banking casino.
Meanwhile, in the developing world, the burgeoning microfinance movement is – in spite of isolated levels of government interference – providing the credit to liberate thousands of small entrepreneurs and ignite economic growth. It is using simple but extremely effective and affordable mobile phone technology to deliver previously unheard of services to the lowest rungs of the economic ladder.
So much to play for. Trouble is, credit unions and other such cooperative banks have not been immune from the fallout of the lending boom. Instead, here in Ireland, the movement stands at probably its weakest point since its origin in 1958.
Yet, by June of this year there was 408 credit unions in the country with savings of €12,222 million and a membership of 2.9 million. In fact, Ireland has one of the highest rates of credit union membership in the world with a penetration rate of 67 percent (percentage of credit union members as compared with number of economically active citizens).
Yet, in spite of this, the Irish credit union movement is described as “transitional” rather than “mature”. This is because, in the words of the Interim Report of the Commission of Credit Unions published this month, “limited product development, a failure to evolve the regulatory and prudential frameworks, the failure to leverage appropriate ICT infrastructure for the delivery of services and limited service support systems.”
It seems that the very things that differentiate a credit union from its banking cousins – not-for-profit, local or place of work focus, basic product range – have become limiting factors when it comes to developing the services and infrastructure necessary to take the movement to the next level. The ethos of the movement conspires to limit ambition at a time when standing still is simply not an option for any business, particularly financial services.
And now the situation has become even more urgent.
The financial position of credit unions is deteriorating. The Commission found that “adverse economic conditions are now translating into significantly higher levels of loan write-offs”. There has been a 110 per cent increase in write-offs between 2008 and 2009 and a further 22 per cent increase between 2009 and 2010. Some 98 credit unions currently have arrears over 25 per cent of their gross loan books.
The picture the Commission paints is one of substantial underperformance. First there is under-lending – the average loan to asset ratio in 2011 was 42.45 per cent, an historic low. At the same time the share of investment holdings in Irish credit unions is high. The Commission notes that this adversely impacts upon income generation as the return from investments tends to be lower than interest receivable on loans – a problem “compounded by significant losses on some investment portfolios.”
Consequently, consistently low returns on assets has affected reserves – some 27 credit unions were “seriously undercapitalised” with 56 having total realised reserves under the 10 per cent of assets figure required by regulation.
The Commission takes reassurance, however, that good practice and regulatory pressures have led to commensurately higher levels of bad debt provisioning.
And the fact is that credit unions are having problems just as they are coming under increasing levels of scrutiny from the Regulator.
When the Irish Financial Services Regulatory Authority was established in 2003 as the sole regulatory authority for all financial service providers, this meant the credit union sector moved from being a largely self- regulated sector to being on the same plane as the banks.
In 2010, the Central Bank of Ireland took over. While the Commission believes it is important that the credit union movement has a legislative framework that is appropriate for credit unions, as the reaction of the Irish government to the financial crisis has developed, credit unions have “come within the scope of significant new and proposed pieces of legislation”. This includes the Financial Services (Deposit Guarantee Scheme) Act 2009, Central Bank Reform Act 2010, Central Bank and Credit Institutions (Resolution) (No.2) Bill 2011.
With all this new regulation, the danger is the credit union “difference” could be “diluted and lost”. The question becomes – against this homogenising influence – how to evolve and grow the credit union movement in line with its ethos and guiding principles.
But the slump in performance and increasingly onerous regulatory requirements poses the major question: is current management in credit unions up to the task?
Probably not, if one believes the Registrar of Credit Unions, James O’Brien, who spoke on the subject earlier this year.
“It might be convenient to put the stresses now evident in many credit unions down to the difficult macro-economic environment we are now experiencing and there is much truth in that,” said O’Brien. “However, this is only partly the reason. For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by the supervisory committees has been non-existent.”
While O’Brien acknowledged a “current loose legislative framework” he also spoke of “the general poor compliance culture built up in many credit unions over the years.”
O’Brien is implementing a three-pronged strategy to sort out the credit union sector
1. Resolve weak and non-viable credit unions quickly and efficiently to protect members’ savings and maintain the financial stability of the sector
2. Establish an adequate legislative and regulatory framework to protect the financial stability of individual credit unions and allow the sector to develop
3. Bring about longer term restructuring of the sector to ensure its long-term sustainability
Clearly, with items 1 and 2 the Registrar is working in a race against time to ensure that a few implosions do not trigger wider panic among depositors. But it is item 3 that will have the most profound effect on those committed to the movement.
In this regard, O’Brien is clear: there needs to be substantial consolidation of the sector and much more cooperation. “Re-structuring will be required to build economies of scale and provide for the necessary support and control frameworks and IT systems to drive such development.”
If this can be achieved, the rewards can be substantial and the credit union sector can develop into a credible alternative to the banks, particularly by applying new and affordable payments technologies around the mobile phone. In particular, prepaid cards and prepaid mobile applications offer a chance for credit unions to build customer cachet and credibly position themselves.
There has never been a time when the public is more sympathetic to bank alternatives but unless the credit union sector can pull off a stunning transformation the opportunity will be lost.