Turning credit unions around

Once a success story, credit unions are stuck in the past and in dire need of rescuing, writes Bill Hobbs

Unless credit union reform is on Government’s agenda for urgent change, the future for credit co-operative banking in Ireland is very bleak.

With the way credit unions continue to be operated here, being unable to pay a decent dividend is a sign of financial instability. One in every five is unable to pay any dividend for last year. And with only one in four paying a rate over 1.00%, three quarters of the state’s 412 credit unions are experiencing varying degrees of financial stress.

It appears that the Irish League of Credit Unions has almost exhausted its small stability support fund of €115m. So far it has committed €58m to supporting twenty nine credit unions. With another seven in the pipeline requiring upwards of another €40m, all too predictably, its small fund will soon run out of money.

Clearly credit unions are going to need state support. This could see the Government providing hundreds of millions in tax payers’ funds to stabilise the sector. As part of the IMF deal, the Central Bank is currently reviewing credit unions to establish the scale of support needed. The bank must also implement a strategy to stabilise the sector. Under the deal, new laws will give the bank a statutory resolution fund and tools to close credit unions or where they are viable, merge them with others including banks. But these crisis management responses have little to do with the future role of credit unions.

Something quite important is missing - a clear, unambiguous Government commitment to transforming credit unions into a modern, well run, credit co-operative banking network.

Once an international success story, Irish credit unions have been stuck in the past for the past two decades. Perfectly designed for an Ireland that doesn’t exist anymore, their methods and ways of doing business remain rooted in the 1950’s. Unlike their peers elsewhere, they have not developed as successful full-service banking co-operatives have in say Europe, Canada and Australia.

Instead of focussing on becoming full-service co-operatives, credit unions here pursued an ill-advised strategy of maximising surpluses (profits) to pay far too high dividends to their savers. This meant they did not invest in the modernisation required to provide better quality affordable products and services. Critically they did not set aside enough money to see them through bad times.

Financial stress cracks first appeared as early as 2005 when worrying levels of bad debts were reported on in the media. Their bad loans were far too high for booming economic conditions. And unable to make enough good loans, credit unions put over half of excess savers funds into risky investments that should never have been made.

Since 2008 two things have happened. Hundreds of millions have been wiped off investment values. And boom time imprudent lending along with an economic recession have triggered rising bad debt losses that could exceed over €1bn.

The fundamental problem is that Irish credit unions have not been led, governed and managed as they should have been.

As credit co-operatives, credit unions can be thought of reservoirs of community capital to be protected and enhanced by one generation of directors and managers to hand on to the next generation. By successfully providing affordable products and services to this generation, their managers maintain and build community capital to hand on to the next generation. Because their owners are also their customers, credit co-operatives are not driven by short term demands of the market, shareholders or bond holders. Their managers become expert at running co-operative banks. This notion of inter-generational community capital twinned with managerial expertise is why credit co-operatives elsewhere were able to weather their banking and economic crisis. Their ways of doing things can be adopted here in Ireland.

Here, there are far too many badly run credit unions, providing poor quality expensive products to far too few people. If they are to play an important part in a working banking system, they will have to radically reform and change the way they do things. But for various reasons, they will be unable to make this change on their own. This is why many are convinced they have to be helped from themselves.

If the new Government considers credit unions of systemic importance to the any new banking system it must put credit union reform and modernisation firmly on its agenda for urgent and important change. Its starting point should be to establish a credit union reform authority with the power to design and deliver on the necessary changes.

A versions of this article appeared in the Irish Examiner, Analysis section, Friday 4th March, 2011.