Credit unions must make changes to remain viable

Bill Hobbs suggests that credit unions in Ireland need to consolidate like they do in other countries. But the “two becomes one” approach will only work if a new business model is adopted.

Credit unions are doing badly, but they can change this, writes Bill Hobbs.

There are far too many poorly governed and managed credit unions, which are either too small or too financially vulnerable to remain independent. If credit unions are to survive, they will need to operate on “county” and not “parish” lines by creating about 60 larger, new model credit unions from their existing 409 operations. As such a change will probably require substantial state aid, credit union leadership will need to prove that this consolidated network along with a new central shared service corporate structure can become, in time, an alternative banking system for ordinary people and small businesses owners.

Faced with the very same regulation, operational complexity and consumer sophistication, credit unions elsewhere have been successfully consolidating for decades. Consolidation has allowed them to deliver on their mission to provide ordinary people access to a full range of affordable financial services on fair terms. First established here in the 1950’s, by 1998 there were 421 registered credit unions. Today numbers here have reduced by barely 3% to 409. In comparison numbers in the United States have declined by 34%. Similarly, Canadian and Australian credit union consolidation has gone hand in hand with substantial ongoing investment in providing high quality financial services.

Had Irish credit unions evolved as their international peers have, they would have, generated the funding required to modernise operations, provided more extensive products and services and accumulated the capital buffers to withstand the losses they now face. Regrettably, along with losses in their core unsecured consumer loan business, they have also lost millions in high risk investment instruments they should never have invested in and in business loans that should never have been made.

While credit unions collectively have close to €14bn in assets, less than €7bn is out in loans. The balance is either on deposit with Irish banks, invested in bank and government bonds or risk instruments. Though funded by €11.5bn in household savings less than a third of their 2.65m members are active customers. At this level of market penetration, credit unions should have deepened existing relationships by making available better quality products and services long before now.

But they continue to offer the same basic products first introduced fifty years ago. With less than 1% of total income generated from fees, for many their undiversified, high-cost labour intensive business model is failing. With the majority of credit unions too financially vulnerable or too small to survive, the sector must achieve three important goals.

The first is to consolidate down to a realistic number. There are many ways in which to reconfigure a financial services retail network. As a credit union’s income earning assets are determined by the average amount borrowed which in turn is funded by the average amount saved by their customers, the most meaningful mechanism is to focus on the numbers of customers served. If a credit union was to say service 50,000 customers, which is about the size that allows for operational efficiencies to be achieved, then it’s possible to model a new network. 


Using Central Bank data, I modelled a network of 57 credit unions ranging in size from €180m to just over €300m in assets. Interestingly it would re-configure credit unions along county lines rather than the current, far too narrow, parish common bond.

But such a re-configuration of itself would not be enough. Two other things are required. To work, larger credit unions would have to adapt to a new business model. Designed along international best practice lines, they would need to operate at higher standards of governance and managerial competence. Such “new” larger credit unions would first focus on excelling at their core business of “savings and loans” while augmenting this core business with associated fee earning products. At this scale, they would also be capable of making small business loans. In time they would develop the competencies to provide a full range of consumer financial services.

However the larger “new” credit unions would still not be big enough. Credit co-operatives evolve as full service providers by leveraging off the financial power of their combined balance sheet and pooling resources. To succeed, they would have to collectively modernise IT systems, standardise processes and products and pool spare cash and capital. To do this they would need to establish a shared services organisation similar to those found in mainland Europe, North America and Australia, where central organisations owned and operated by credit co-operatives are critical to achieving the economies of scope and scale required to excel at offering affordable financial services.

While but one model for a new credit union system, given the scale of losses, credit unions are highly unlikely to be able to fund consolidation and transformation from their own resources. The Government may be required to provide funding but only if credit unions demonstrate a willingness and capacity to change. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 18th July 2011.