Could this be the end of the road for credit unions?

Unless the state intervenes, many of the 410 credit unions are likely to have to merge or be wound down, writes Bill Hobbs

The days of independent self-directing credit unions may be drawing to a close as quite a significant number of the sector’s 410 credit unions are likely to have to merge or be wound down.

Unless credit union leadership convincingly argues for state backing to transform into a European style credit co-operative system, then credit unions will become increasingly irrelevant.

Facing acute financial challenges, a majority of credit unions are unable to pay a decent dividend to their hard pressed savers. About one hundred may be unable to pay any dividend for last year, with one in two paying less than a half percent. Collectively responsible for €11.9bn in household savings, worsening financial performance now threatens the future of all but the strongest credit unions. Their problems have resulted from escalating bad debts and imprudent ill-advised investment losses.

Constricted by the need to maintain capital buffers and adequately provide for bad debts, they are also experiencing a dramatic decline in new loans and heavy savings withdrawals. Some of the largest have been instructed by regulatory authorities to curtail lending activity. After years of underinvestment in modernising operations and poor standards of governance and management, many will not survive these recessionary economic times. Their boards now face making tough decisions to amalgamate with others or wind down.

The IMF/EU agreement contains specific provisions for the credit union sector, including the need for a comprehensive restructuring and stabilisation strategy which must start later this year. And with Government’s new banking resolution legislation including powers to order the takeover of a credit union by another credit institution including a bank, it has the wherewithal to enforce change. Rationalisation, reducing overall numbers either through mergers or closures, is firmly on the table.

The core issue is there is no overall blueprint to ensure the viability of what remains of the credit union credit co-operative system.

Not only will rationalisation reduce numbers to below one hundred but credit unions will also need to become modern savings and loans co-operatives. However there is no reliable mechanism through which to manage or fund such a significant restructuring programme. I recently estimated that upwards of €650m in state stablisation support could be required before creating a modern fit for purpose, financially viable federated credit co-operative network.

Federated networks evolve when credit co-operatives establish a central facility thereby creating the financial platform to access wholesale money markets, achieve scale efficiencies and deliver broad range of products and services to their customers. By agreeing to the operational and strategic control of a central corporate body, greater cohesion is achieved. Owned and governed by participating co-operatives, these cohesive networks are financially underpinned by their member’s cross guarantees and binding governance contracts.

Across Europe, federated co-operative banking networks are a major force through which 140 million people, or one citizen in five, are customers and/or members. With over 4,500 individual banks, 720,000 staff and 60,000 branches, collectively they have a combined market share of 20%. In five countries they represent 40% or more of local banking services.

Transitioning credit unions here to a European style co-operative network will be required if the sector is ever to deliver on its potential to become a consumer and small business banking alternative to commercial banking.

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.

Change will largely be determined by their director’s and manager’s willingness to move away from zealously guarding independence to create bigger, better governed and managed credit unions within a cohesive centralist system. Unfortunately, controlled through personal fiefdoms created by long serving directors and managers, credit unions have been unwilling to consider merging with others and investing in long overdue transformation.

What’s needed is a national policy and strategy to stabilise and rationalise credit unions in the best interests of their customers and not their boards and management. There needs to be a systematic process to organise and manage transformation including transitioning to a modern credit co-operative system. Critically such transformation will require state intervention.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 10th January 2011.

ILCU has since written an article in response to my piece here: