Building Better Credit Unions

1
Building Better Credit Unions

• Charles Ferguson
• Donal McKillop
• Peter Goth

2
Some Statistics - 2004

• Credit unions are in 91 countries membership
  totals 136 million and assets 708 billion.
• In the US 46 of the adult population belong to a
  credit union. Australia (24), Canada (21).
• In Ireland 70 of the adult population are credit
  union members (30 in Northern Ireland).
• In GB approximately 1 of the adult population
  are credit union members

3
The Credit Union Ideal

• Credit Unionism the social, philosophical and
  ethical imperatives.
• The role and objectives of credit unions as
  financial intermediaries.
• The achievement of sustainable credit union
  development.

4
Research Objectives

• Assess the role played by credit unions in the
  provision of affordable credit.
• Identify the factors contributing to the relative
  success of individual credit unions.
• Assess key trends within the sector mergers and
  new start-ups.
• Identify measures to help boost the coverage,
  capacity and sustainability of the sector.

5
Performance Assessment
6
Performance Assessment

• Data suggests that in excess of 50 of credit
  unions in GB will face difficulty in surviving
  long term.
• A reduced number of credit unions may be
  beneficial because
• those that remain will be better, bigger and
  safer
• trade bodies can concentrate on the development
  needs of fewer credit unions and so enhance
  performance
• the trend towards professional management will be
  reinforced

7
Recently Established Fast Growth Credit Unions

• Financially supported by local authorities
• High quality premises and high grade staff
• Focused on service provision to the financially
  excluded
• High membership growth but some key ratios
  problematic
• Success long term requires attracting a mixed
  income membership

8
A Ranking of Merger Drivers

• 1. To create a financially viable credit union
• 2. To safeguard members savings
• 3. Due to difficulties caused by the FSAs
  stricter regulatory regime
• 4. To widen and diversify the common bond
• 5. (joint) To offer a wider range of services
  volunteer burnout avail of scale economies

9
Mergers the Reality

• The primary driver for mergers has been weak
  credit unions
• Most mergers to date have been reactive
• A mopping up exercise involving small problem
  community credit unions
• Few examples of strategy based mergers
• Short term difficulties although problems ease in
  the longer term

10
Strong Performing Credit Unions

• The new model versus ethical/traditional debate
  is more about theoretical mindsets than hard
  realities
• Irrespective of the label strong credit unions
  are those that satisfy the following-
• 1. Serve a varied membership base
• 2. Are of sufficient size to reap scale and scope
  economies

11
Strong Performing Credit Unions

• 3. Demonstrate financial discipline
• 4. Are self-sufficient
• 5. Have appropriate governance structures
• 6. Have skilled and motivated directors
• 7. Have skilled and motivated manager

12
Policy Recommendations

• Credit union development that concentrates solely
  upon serving the needs of the financially
  excluded, is a weak model of credit union
  development.
• Credit union development based upon a cross
  section of the population offers a more viable
  long term model of development
• Greater emphasis should be given to this latter
  model by credit unions, trade associations and
  the Government. C,G,T

13
Policy Recommendations

• The current trend towards widening of common
  bonds should be encouraged as this may facilitate
  a diversification of membership mix. C,G,T
• This should be accompanied by greater use of
  credit scoring to prevent an increase in bad debt
  write-offs. C,T

14
Policy Recommendations

• It is not in the interests of the Movement to
  expect strong credit unions to merge with weaker
  credit unions if this weakens the position of the
  former. C,G,T
• Effective Boards can only emerge through
  investing in the training and development of
  volunteers. C,G,T

15
Policy Recommendations

• Relying upon grants to fund the core business of
  credit unions leads to a dependency culture
• Grants may be appropriate at a particular point
  in the credit unions development but should be
  limited and targeted and not used as a substitute
  for self reliance. C,G

16
Policy Recommendations

• The potential for shared service provision,
  particularly in the area of IT should be
  investigated. G,T
• Performance benchmarking should be implemented
  for all credit unions G,T
• Good research requires detailed data at the level
  of the individual credit union. This should be
  made available by the FSA C,G,T