After a number of reports, credit unions are facing an overhaul, writes Bill Hobbs
It was announced last week that Government has tasked a credit union commission with defining the future of the sector and recommending enabling legislative and regulatory systems.
Given entrenched vested interests that have consistently frustrated reforms, it won’t be an easy task. The commission will succeed if it manages to craft a purposeful strategy having the support of all stakeholders for a comprehensive transformation programme.
Of the national network of 409 credit unions, at least one in five will have to merge with others in the next year or so. It’s a long overdue rationalisation that may reduce the number of credit unions to about one hundred. While the number of credit unions will reduce, should they modernise their business model and achieve economies of scale and scope through a centralised shared service organisation, as their international peers have shown elsewhere, it is highly likely the numbers of outlets and delivery channels will increase.
Such a change would be the largest and most comprehensive rationalisation programme of any financial institution in the history of the state. If properly thought through, planned and executed, a transformation programme could result in a vibrant modernised credit union sector similar to those found in Europe, North America and Australia. It could see credit unions becoming a principle provider of high quality affordable financial services to ordinary people.
Long before 2008 credit unions were at risk of an external shock negatively impacting on financial stability. Their business model contains a number of flaws. Emphasising dividends paid from profits, the inclination of voluntary boards and their managers was to adopt risk adverse practices focused on maximising dividends and to compete with one another to pay the highest rate. This behaviour led to them eschewing investment in diversifying products and services and adopting market based pricing mechanisms. It also came at a cost of building the reserves required to ensure economic viability and sustainability and investing in improving operational competencies.
Financial fragility was exposed in 2006 when a run on a large credit union threatened to become contagious. At this time a report highlighted extremely high levels of delinquent loans which were not being provided as bad debts in annual accounts. Many credit unions were manipulating bad provisions to bolster dividend pay-out rates. Later that year credit union investments in high risk instruments they should never have invested in, became public.
What wasn’t so public was that moves by the credit union regulator to reign in risk taking were being frustrated by influential directors and managers. A worrying number were quite deliberately and knowingly breaking laws designed to protect against risk taking. As they considered laws limiting risk taking were out of date, they argued they could ignore them. Hamstrung by one of the weakest of credit union legislative regimes in the advanced world, the regulator was almost powerless to act. What limited interventions it could make were made, but its increasingly robust warnings and advice were ignored.
The banking and economic crisis are not the root cause of credit unions troubles despite what some would have others believe. In a recent speech, the Central Bank summarised why the system has become so fragile “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 chief executive of trade body CUDA, I published in late 2006 an important report on the future of the sector and called on the then government to set up a commission to see to it that long overdue reforms where implemented.
The report, “A Call to Action, re-inventing credit unions for the 21st Century”, listed eight key recommendations which if implemented would have modernised the business model, improved governance and management competencies, rationalised the sector, improved products and services, improved regulation and legislation and provided savers with a deposit guarantee.
It is telling that five years later only one recommendation has been implemented. When faced with a contagious run on credit unions in September 2008, Government extended its deposit guarantee to cover credit union savers’ funds.
It’s good that Government finally got round to setting up a commission to consider the future of credit unions. As its membership reflects vested interests, balanced by the inclusion of academic and some other expertise, will it be capable of acting as a positive force for change or will it become captive of the past and produce convenient fudge? It has to be of some concern that business expertise in credit co-operative transformation and development does not appear to have been included for.
A version of this article appeared in the Irish Examiner, Business Section, Monday 20th June 2011
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