Overhauls needed to rescue the credit union sector

Credit Unions helped to transform Ireland in the past. With the right moves, they can help do it again, writes Bill Hobbs

Credit unions are in serious trouble, their problems are getting worse and they are struggling to respond. One in very two cannot survive much longer as independent entities. One in four is in quite serious trouble. Less than fifty are financially strong enough to operate safely in today’s stressed economic times.  

It is reckoned that the Central Bank’s regulatory strategy will see the network of independent credit unions consolidating from 409 down to about 100.

While the sector has its own dedicated and appreciative regulator, on its own progressive regulatory intervention can only ever facilitate transformation through requiring higher levels of governance and management competencies and implementing robust prudential standards and rules. Business transformation will have to be led and achieved by credit unions themselves. Yet most do not fully understand the magnitude and impact of transformation required.

Unless credit unions are transformed into the type of modern credit co-operative banking system found in other advanced countries, consolidation could amplify their serious, long term problems. That supportive regulatory intervention and consolidation on their own will not solve for these problems is down to two core issues credit unions most resolve. Their business model and co-operative governance and management systems are no longer fit for purpose and will have to be radically transformed.

They will need to migrate to a modern, flexible and responsive business model and invest in enabling information technology and multi-channel branching platforms. But even when enlarged, consolidated credit unions still won’t have the financial resources, managerial competencies or achieve the scale or scope dynamics required to transform themselves. They will also have to co-operate within a cohesive network.

They will need to leverage off their collective balance sheets by ceding strategic and operational autonomy to a higher level, central organisation. Such entities, called apex organisations or central finance facilities are found at the heart of modern co-operative banking systems. They are essential to enabling credit co-operatives improve governance standards, professionalise management and offer better quality financial services to their customers.

Any transformation programme will need to include three elements - consolidation, a new business model and a cohesive network. This would allow credit unions to create a financially robust co-operative banking system, offering a wide range of quality affordable products and services on fair terms, across a multi-channel delivery network of physical outlets, ATM’s, internet and mobile technology.

In Ireland unfortunately credit co-operatives are considered the Poor Man’s banking alternative to the dominant commercial banking shareholder model. This is not the case elsewhere, where as People’s Banks, they fulfil a vital and systemic role in national banking systems.

Regretfully, a progressive proposal promoting a strategic alliance between a building society and a consolidated credit union network, to create a European style federated co-operative banking system fell on deaf ears. It’s a pity, as the proposal would have, if adopted by Government, fast tracked credit union consolidation and transformation into a robust national co-operative banking system.

If credit unions are to play a systemically important role in facilitating economic recovery, they will have to re-discover their enthusiasm for pursuing a common purpose by redefining and unambiguously stating what that purpose is. Articulating a new credit union narrative will take inspirational leadership that encourages the enthusiastic pursuit of a common purpose.  

But the real problem is transformational leadership has failed to emerge. This leadership vacuum is recognised by those concerned for the future of the sector as the single greatest impediment to transformation. Solving for the future of credit unions will take people with the competence, experience and vision to define a national strategy and execute it at local level.

The magnitude of transformation required would tax larger, better resourced institutions. For this reason any national transformation strategy will require Government sponsorship through a dedicated empowered change agent that appreciates “the credit union difference”.

By excelling at delivering affordable financial services on favourable terms, credit unions enhance the financial wellbeing of the people and wider communities they serve. They made an enormous contribution to transforming Ireland in the past and can do so again. But if credit unions are to contribute to rebuilding a shattered economy, they must radically transform the way they do business while remaining true to their guiding philosophy, values and ethos.

To become relevant again they will have to do two things. Define and articulate their purpose for an advanced society and radically transform the way they deliver on this purpose. But change and transformation is almost never initiated or led by incumbent leaders who all too often suffer from confirmation bias, a proven biological disposition where despite overwhelming evidence they are in trouble, they hunker down, defensively protecting the status quo. 

Many believe what’s required is a cadre of transformational leaders and facilitators who can define what a credit union’s purpose is and who can inspire the enthusiastic commitment to achieving it in others.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 6th June 2011