Credit Unions in Ireland: a viable alternative to the financial crisis banks

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Merijn T. Knibbe
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Big, listed banks, darlings of the neoliberal establishment, brought Ireland to its knees. Small Irish community banks (credit unions, a volunteer led movement with over 3 million members), while severely affected by the financial crisis, did not only not contribute to the financial crisis but also weathered it, retaining the trust of their members. Mind: ‘members’, not ‘clients’. Via the website of the Irish Central Bank some excerpts of a speech by Registrar Anne Marie McKiernan to Irish League of Credit Unions AGM (and mind that members kept trust BECAUSE they got less dividends during the crisis):

Uachtaran na hEireann, ladies and  gentlemen…

The Irish credit union movement was founded by three dynamic, pioneering and entrepreneurial people, teacher Nora Herlihy, baker Sean Forde and civil servant Séamus P. MacEoin, as a way to help tackle the economic and social problems prevalent in Dublin in the 1950s.  They were concerned about the impact of high unemployment and low and short term State benefits on the health and  welfare  of many families in Dublin at that time.  They felt that scarce availability and poor management of money contributed to the problems faced by many families.

Their vision was that credit unions would provide people with a way to better manage their money and give them access to inexpensive credit when they needed  it.   Each credit union would be owned by its members, who would use their pooled savings to lend to each other at a fair and reasonable rate of interest.  Their concept of financial self-help grew enormously in popularity, from 3 credit unions with 200 members in 1959, to 434 credit unions with 1.7 million members 20 years ago, with membership rising since to 3.1 million people.  Today, 333 active credit unions hold €15.2bn in assets, €12.7 bn in savings and €4bn in loans. Collectively, they account for 1/8  of  Irish  household savings and 1/4 of non-mortgage personal loans in Ireland.

There is no doubt that credit unions have a special place in the financial sector and in communities across Ireland.  For over a half-century now, you and your colleagues have been serving your members with drive and determination, as you strive to continue to uphold the principles and aims of those early pioneers of the movement in Ireland.  The credit union movement has been, and continues to be, a catalyst for greater financial inclusion; it encourages a savings culture and provides access to financial services and products for those who may face barriers elsewhere…

Along the way, credit unions have weathered  significant storms, none more so than the financial crisis and economic downturn which threatened  the stability of  the credit union sector and the Irish financial system more broadly.   But, while credit unions appeared to emerge from that crisis in better shape than feared, the sector was nonetheless severely impacted, including from pressures on members’ repayment capacity due to job losses and pay cuts, writedown of property investments (including overexuberant development of some credit unions’ own premises), and poor lending decisions which led  to  significant write-offs.

But a worse crisis was undoubtedly avoided, and while there were many and complex reasons for this, it is worth reflecting on some of the contributing factors :

• confidence and loyalty of your members in your credit unions, which meant that the risk of broader savings withdrawals and associated illiquidity was avoided, apart from a few cases. This member confidence and resilience of members’ funds – throughout the crisis period and since – were undoubtedly boosted by the extension of the deposit guarantee scheme to credit unions in 2008, which then – as now – protects members’ funds up to €100,000.  And liquidity risk was further mitigated by introduction and bedding in of liquidity requirements from 2010.  Also, sensible decisions by many credit unions to improve their financial resilience by increased provisions and decreased dividends were rewarded by credit union members staying loyal, even while the return on their shares declined;
• the evolution of arrears and defaults in credit unions, where losses were substantial but still less than feared, as households and small firms focused on repaying short term credit union debt, to keep finance flowing at a time when access to other financing – particularly from banks – was severely hampered.  Nevertheless, arrears and bad loans still reached unacceptably high levels and, while on a reducing path, arrears are still worrying high at 12.8%;
• the package of regulatory measures, designed to reduce balance sheet, governance and management risks and  vulnerabilities in credit unions.  These included the financial requirements (liquidity and regulatory reserves, long term lending limits and lending restrictions) and, later, new governance and management requirements, to ensure that credit unions would be better run and better able to protect members’ funds and the future stability of their business;
• restructuring and resolution.  The Central Bank’s resolution actions removed a number of failing credit unions, with no loss of savings to any member, and helped stem possible confidence and financial stability risks.  While voluntary mergers were slow to gain hold, the extent to which restructuring has been embraced in recent years – thanks to the combined efforts of the Restructuring Board, credit union managers and boards and the Central Bank – has been vital in giving the best chance of future viability for many credit unions and provided a basis for expanding services for members.

These are, of course, only some of the many aspects which saw the credit union sector emerge burdened, but unbowed, from the worst period of the Irish financial and economic crisis.  Reflecting on the avoidance of a much worse outcome can seem like a negative view of the world.  But, in fact, it offers the opportunity to draw lessons that can be used to better deal with the different challenges ahead.  What are those major lessons?

• Confidence and loyalty of your members is remarkable and a major asset to your sector.  This comes with the responsibility on credit unions to ensure that they are well run – financially and operationally – to safeguard those members’ funds.  …..  Recent changes in our regulatory framework are also specifically aimed to reduce the prospect of, and the possible risks from a materialisation of, changes in confidence or illiquidity in the sector – these include the short-term liquidity requirement in our latest regulations, and the cap on savings of €100,000.
• Crises and their aftermath have a way of diverting attention from other, apparently less pressing but no less serious issues.  …   But the demands of the crisis did divert attention from the underlying structural problems of the sector.  These structural issues include the need to address your ageing active membership base; your ability to grow lending prudently and also to transform the business model to provide the products and services that new, younger members expect via the channels they require.

…

Many  suggestions have  now  been  put forward  for  tackling  the  very  serious crisis in social housing,  including by the credit union sector.  Proposals consider how the sector could use its surplus funds in a more proactive but still community, social and risk-focused way, and those are credible aims.

At  the  Central  Bank  it  is  our  statutory  duty  to  ensure the protection by each credit union of the funds of its members  and  to  foster  a  safer,  stronger  credit  union  sector.  It is on these criteria that  we  base  our assessment of  any  proposals put  to  us, and we  are  always open  to developments  that  would  satisfy  these  criteria.   In  our  recent  regulations, we  explicitly added reference to  our  ability to  prescribe further  classes  of  investments which  may include  investments  in “projects of  a  public nature”.  This would  of  course include,  but not  be limited  to, social housing  projects.  Regarding specific proposals, an important criterion is always to consider how any funds provided – which are the savings of members – would be protected, in a transparent way. …

The development of the sector, from its origins to its height when it provided financial services to a large portion of the Irish population and supported social and community objectives, all within a volunteer-led movement, provides an excellent example of what can be achieved with vision, commitment and leadership.  Adapting the vision of those early pioneers of the movement, for the world we live in today and for the current realities of the sector, is the challenge faced by credit unions’ managers, boards, volunteers, members and representative bodies.  I think those pioneers would embrace that challenge wholeheartedly, and I am confident that the sector, with the impetus already underway from embracing many challenges, from striving to meet regulatory requirements and from efforts to stabilise the sector, has the commitment and capability to do the same.