A co-operative gives credit where credit is due

Credit unions may be an alternative to commercial banks, writes Bill Hobbs

Is the Government serious about creating a “peoples bank”- a co-operative banking alternative for ordinary people and small businesses? Intuitively it makes sense. As banking co-operatives are owned by their customers, they focus not on maximising shareholder value but on maximising customer value. Interestingly the component parts of a co-operative banking system already exist. An alliance between mutual building societies and credit unions through a federated network would create a national co-operative banking system – one governed and owned by millions of ordinary citizens.


Irish credit unions and mutual building societies share common, historical roots in European credit co-operative movements that first appeared in the 19th Century when, during a time of industrial development and social disruption, small groups of people banded together to pool their savings and grant loans to one another.

Initially credit co-operative’s primary economic and social purpose was to provide credit to people who were financially excluded – unbanked because commercial banks were not interested in serving them. They spread throughout Europe, crossed the Atlantic to Canada, and in turn were adapted in the U.S. in the form of credit unions. It was the U.S. credit union credit co-operative model that was eventually established in Ireland in the 1950’s. Today, credit unions and credit co-operatives have evolved into co-operative banks providing affordable financial services to hundreds of millions of ordinary people worldwide. In all cases, they provide a full range of consumer and small business financial products.

Banking co-operatives evolve in three phases having differing business models and central collective systems. In their establishment phase, co-ops use a “finance company” model; members buy shares with their savings, which are treated as risk capital remunerated by dividends paid from profits made from making loans. New co-operatives proliferate as communities and employees set up their own ones. They form trade associations, such as Leagues, to represent to Government and arrange for central group purchases. The overriding emphasis is on preserving the independent autonomy of the individual co-op. Termed an “atomised” system there is little if any strategic co-operation between individual co-operatives. Products and services remain basic. Collectively while appearing to be financially strong, they are in fact were no stronger than the weakest of their members. Such is the Irish credit union system today, where for nearly two decades, credit unions have been stuck in evolving to second phase “savings and loan” co-operatives.

As “Savings and Loan” co-operatives, credit unions compete at market rates, treat shares as deposits paying regular interest, expand their range of loans and savings products and augment them with fee earning products. Individual co-operatives cede autonomy in return for greater safety and better products and services. In shifting from the atomised system to a federated network, they establish central finance facilities that provide treasury, liquidity, capital, IT, money transmission business loans, mortgages and other products and services they would otherwise be unable to provide on their own. Such federated networks see their member co-operatives cross guaranteeing each other to underpin their financial stability and strength. Central finance companies, many operating as wholesale banks, are at the heart of credit union systems in the US, Canada, Australia and Poland and European co-operative banks such as RaboBank. During this phase co-operatives begin to rationalise as smaller non-viable operations merge with larger ones.

Finally, savings and loans co-operatives transition to full service co-operative banks offering a broad range of products and services to their personal and business customers.

The key characteristic of all successful credit union/co-operative banking systems is the existence of strong centralised support mechanisms. Development of federated networks were essential to achieving the scale economies and professional governance and management systems required for credit co-ops to exploit the savings and loans model and develop the competence to compete as full service financial institutions.

The “finance company” model still in use here by credit unions contains a number of inherent flaws exposed under recent stressful conditions. Many are struggling to generate sufficient profits to reward their members, build the capital buffers necessary to ensure financial stability and invest in business sustainability. Under lent with non-diversified products and little capacity to manage margin and costs, achieve scale efficiencies or generate fee income, the future is bleak. Unless that is credit unions make a step change, shift to the savings and loans model and establish the supporting centralist structures required to do so.

It is a matter of historic record that while credit unions have long recognised the need to develop a cohesive centralist system, they have been unable for a variety of reasons to transition and mature as credit co-operatives in line with their international peers. Transitioning to a savings and loans model within a federated network is an urgent requirement if the sector is to deliver on its latent potential to offer a viable consumer and small business banking alternative to commercial banking. Credit unions will not be able to accomplish this change on their own.

If Government considers the co-operative banking sector of national importance, then policy must address one key question: is the future to be defined by an outdated autonomous atomised credit union system or defined by a federated network in which credit unions and building societies are constituent owners? Deciding on the latter is the first step to begin to build a viable co-operative banking system that works.

There is an opportunity to craft a people’s co-operative banking system through a federated network alliance between credit unions and mutual building societies. Such a network would; have over 2m members, a national foot print of over 450 outlets, combined assets over €35bn, offer a multi-channel consumer and in time small business, full banking service. There are many who might find such a concept implausible. But the country needs a safe and working banking system – one that commercial banking cannot deliver on for some time – credit unions and building societies have the basis to craft a co-operative banking system and Government has the ability to make it happen.


A version of this article appeared in the Irish Examiner, Business Section, Monday 15th March 2010