Credit unions - What should they do with spare capital?

RainyDay

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Is there an argument that says CUs which have large amounts of excess capital for investments have failed in their core objective. Shouldn't this capital be getting used within the common bond? Should CUs be lowering loan rates to make borrowing within the common bond more attractive?
 
Re: An investment strategy for credit unions?

The Credit Unions are caught in a terrible bind. Despite paying uncompetitive rates on shares and deposits, they are swamped with money.

In total, they have managed to lend out just less than 50% of the money on deposit.

They have dramatically lost share of the loans market, because the banks have become cheaper in recent years.

They would like to lend more, but they face restrictions on the size and duration of loans that they can make. If a borrower wants to borrow a large amount of money over a longer term, they should remortgage their home as mortgage finance is cheaper than the best credit union rates.

Is this a bad thing? What is the purpose of Credit Unions? It is to lend to people who can't get money from the banks. Small loans to people whom the banks are not interested in.

I don't see any role for the Credit Unions in the mortgage market. It is a viciously competitive market where the best mortgage rates are lower than the best deposit rates available. It would be very difficult for the CUs to compete in this market.

Brendan
 
Well said Brendan. Back in the 60s and 70s Credit Unions were able to compete very well with the old style Hire Purchase Companies who were fleecing the poor unfortunates who could not get money from their local Bank. They are indeed in a terrible bind now as to what they do with the large amounts on deposit. Unfortunately Credit Unions now see themselves as Commercial Business Units and are aggressively competing with Banks and other businesses in the marketplace. I hope that they will survive in that cutthroat environment but they will certainly have their work cut out to do so. Presently they are lucky to have so much on Deposit that it is masking the level of bad loan debt on their books. I would like to see the Credit Union movement fully supported by Government because it is much more than a business.
 
Yes, they have a problem.

But, yes, they should cut their lending rates.

Sligo still charge 12.68% APR with some sort of interest rebate. OK, they may charge lower rates on special loans, and lower rates on loans less than savings.

But, they need to cut their headline rate to approx. 8%.
 
Protocol

Does Sligo still insist on people maintaining a share account equal to a percentage of their loan?

Brendan
 
According to this Sligo CU charge an effective rate of 9.68% after rate rebates (but not including the effective cost of having to keep money in shares/on deposit while borrowing).
 
There are 425 credit unions registered in the Republic of Ireland currently. They vary very considerably in asset size, investment portfolio and services offered. Some offer excellent services, and are open six days a week, and have excellent websites and member interaction.

What is not being highlighted are the successful credit unions - community credit unions offering loans between 6.5 and 7.5% APR, and paying dividends of between 2.00% and 3.00%. We see no mention of credit unions undertaking significant social investment in areas such as financial literacy, combating illegal moneylending, and supporting local sports teams, schools, etc. That is too unsexy for financial journalists to write about.

Nor does anybody - credit unions included - seek to explain the very excellent "Free-to-Members" Life Savings, Loan Protection, Permanent Disability and Death Benefit Insurances that most credit unions provide for their members.

The oft-repeated mantra of "high bad debts" is an easy chorus for all who care to hum - but has anybody investigated the logic of the situation?

For a start, most credit unions operate significantly in a niche of the market that is largely unbanked. The banking sector only discovered the working class in the last decade, and indeed has been steadily withdrawing branches from rural areas in recent years. Credit Unions, in fairness, have stuck in there, providing "banking" services to the sometimes less fashionable sectors of society - the sectors the Celtic Tiger forgot.

That this sector would have a higher level of arrears, on occasions, is understandable. Financial Need does not travel in parallel with financial ability - in fact, quite the opposite at times. Be realistic, there are such things as "acceptable" levels of arrears. They just have to be managed better. Or are credit unions simply to abandon lending to this sector in society because of a series of notional percentages that a few pen-pushers who never worked behind a credit union counter came up with?

And despite what others seem to suggest, having high levels of savings is a good thing - these can be invested safely, and are less prone to risk.

That there are 425 credit unions in the country is a tribute to local communities - however, we have to be realistic too. Change will come, and the big challenge for credit unions is to manage this change. So far, there is no clear vision presenting for credit unions - if the core idea of credit union is to survive, it must be clearly defined - providing value-for-money financial services to members in a dignified and not-for-profit basis. This has to be done within an increasingly regulated environment. Credit Unions will have to face the reality of amalgamations to meet the new member needs that present. Credit Unions became relevant in the past by delivering relevant services to their members in their communities - the local hall, and then the Main Street became their delivery channel. Credit Unions must now re-state their relevance through opening up new delivery channels and through meeting members needs again.

Sure, there are dysfunctional credit unions, and there are celebrated instances of credit unions that have got things wrong. Significant changes will have to come. It comes less easy for Credit Unions - these are the creation of ordinary people who did something for themselves before "self-enablement" became a politically correct term. It will be hard for many to let go of the reins - some will see a loss of power; some will see a loss of influence; some will fear the end of the dream; some find the change painful.
For many activists, volunteer and professional, credit union is much more than about "financial Services" - it is about community, service, fair-play, dignity......

Change will have to come, including amalgamations, new IT, strategic alliances. However, if handled carefully, and with courage, it will lead to a Renaissance within one of the greatest social and financial movements in the country. It may draw inspiration from the successful change management effected by the other great social pillar of the country, the GAA.

And you'd never know, maybe an enlightened government just might devise a means of channeling surplus credit union savings funds into building local schools, social housing projects and community centres, instead of the Credit Unions investing surplus cash in multi-national, trans-national banks?
 
The question may well be what do credit unions do now? I am struck by the fact that a key document was published in November 2006 which addressed the very issues discussed here.

“A Call to Action – re-inventing credit unions for the 21st Century”. It’s still available on-line on the CUDA site http://www.cuda.ie/.

It’s quite a read as it challenges all the notions of what a credit union is, restates what it is and then makes recommendations on what should happen now.

At the time of publication it was acknowledged as making a substantial contribution to defining a way forward.

Since of course little if anything has changed....which isn't surprising.

Kaplan

[broken link removed]
 
The CUDA Document "A Call to Action" does indeed contain meaningful and valuable contributions to the all-but-silent debate on the future of the credit unions in Ireland. At least it focused on credit unions, as opposed to credit union representative organisations.

Kaplan wonders why there has been so little debate on the issues raised - the reasons are simple - Credit Unions have immersed themselves in their localities, and ignored the wider national perspective. The wider credit union movement lacks significant national vision, leadership, and business acumen. It has a national leadership alright, but this leadership seems more fixated upon the past, upon elaborate rules and the trappings of office, upon phony wars with the Regulator and with other organisations, and upon empires built upon shifting sands (a good example of the latter is the most recent investment debacle).

Debate might stimulate change. Change is seen as a threat to the chains and trappings of seeming importance. "Dissidence" is demonised. It is stultified and subjugated.

The CUDA document was completely ignored by the larger representative association, and, I might add, by the Department of Finance, by the Minister, by the Credit Union Advisory Committee and by the Institute of Co-operative Studies in UCC - key stakeholders all.
 
Tadghin

You are quite right in zoning in on the real problem and that is the complete lack of leadership (as distinct from people in leadership positions). But I think your observation should also be extended to credit unions themselves.

Those who are familiar with how credit unions elsewhere kept pace with change know that it was small groups of credit unions and their leaders, predominantly credit union senior management, who led the way and not their trade associations.

Irish credit unions have failed to collaborate in creating the commercial structures which proved so successful in the US, Australia, Canada and more recently New Zealand and Poland. Even the UK credit unions are now offering a current account through a link up with the Co-Operative Bank.
As far as I am aware the CUDA report was recognised as making a significant contribution to the debate by the Regulator, Minister, CUAC, ILCU credit unions, academics and internationally by credit union leaders in the US, Australia and UK. (The ILCU itself stayed mute for obvious "political" reasons). I recall CUDA called for a task force to be established by Government to tackle reforms.

Interestingly, from a leadership perspective the report was quickly followed by CUDA’s initiation and sponsorship of the O’Toole Private Members Bill for a statutory savings compensation scheme early last year and its influential involvement in the Report on Longer Term Lending Limits. Shortly after its CEO suddenly resigned and since CUDA has lost 33% of its membership. (It started with 22 credit unions and now has only 10).

Last year the ILCU produced its Strategy for the Movement which is its grand ambitious plan for reform and modernisation. Recently the ILCU’s CEO resigned and it’s currently looking for a new one.

The answer to the spare capital (reserves) question is: hang onto to the little there is left of it, generate more and invest it wisely in improving business sustainability and not new buildings.

Unless the question is what should be done with excess savers funds ? Find a way to safely lend more and reverse the downward trend in the critical loan to total asset ratio.

The cheeky alternative might be removing the non-dirt status of a certain share account type and wait for the loan to asset ratio improve as money finds another home. Of course this would mean a drop in income and likely to act as an impetus for change.

Kaplan
 
WHAT SHOULD CREDIT UNIONS DO WITH SPARE CAPITAL.
1. The Minister for Finance should establish a Statutory Deposit and Share Guarantee Scheme for Credit Unions. The Credit Unions should lodge 0.6%, 0.7% and 0.8% respectively of their assets over a three year period to this scheme. This scheme should be regulated by the Financial Regulator, and administered by a Board appointed by the Minister. After 50 years of loyalty, members are entitled to the same protection that Bank and Building Society Customers enjoy under the Bank Deposit Guarantee Scheme.

2. The Minister for Finance should establish a Community Capital Fund, managed by the National Treasury Management. Credit Unions should be able to channel their excess funds into such a state guaranteed scheme. The Community Capital Fund should ring fence these funds for use in capital, community projects within the credit union area - projects such as primary schools, industrial breeder units and community halls could be so-funded.
 
Is there an argument that says CUs which have large amounts of excess capital for investments have failed in their core objective.

The core objective of a credit union is to provide financial services to people within a common bond who are not being serviced by the main stream financial service providers. Whether a credit union has lent out half/ the same / or twice the value of their shares says nothing as to whether they have met that objective. It is more the operation of money lenders and lenders of last resort that tell you whether a credit union is meeting it's core objective.

If people did what was logical / profit maximising, lots of people would be moving their savings from the 2-3% potential dividend that they are getting in the majority of credit unions to the banks where they can get 4-5% interest. More 'logical' people would help credit unions to balance loans and savings. As long as credit unions are seen as a place to hide money, they will always have an attraction where people with choose them as a place to save even though they can make more elsewhere.

My other gripe with this argument is that the core objective of credit unions should extend to all the financial services needs not just savings and loans. This does not mean mimicking banks services, it means identifying gaps such as pension provisions and creating innovative products either alone or in conjunction with the private sector, the government, MABS etc.
 
Ontour

The core objective is to provide affordable financial services to people within a common bond including those who cannot access services eslwhere.

A key problem is one where credit union customers no longer borrow from their credit union. There are many reasons for this and the solution to the problem is excusively within the bounds of credit unions to redress.

The success of moneylenders is hardly evidence of a failure of credit union objective but a problem that Government through its social policy must address. A good source of information here is the report Financial Exclusion In Ireland published by the Combat Poverty Agency 2006.

The provision by Government of a credit union statutory state backed savings compensation scheme (deposit insurance) is an absolute requirement of any modern financial service system. Indeed it is best practice and the advice of the IMF who maintain that state backing is required in all but the strongest of financial systems. Few would consider the credit union system qualifies as one of the strongest. Such a scheme has already been designed and published in a private members Bill by Senator JOe O'Toole. It includes guaranteed compensation and provides for supports for viable but troubled credit unions. It's structure would required pre and post funding by credit unions who would be required to maintain a deposit upwards of 2% on their insurable savings. In effect the scheme would act as a call on the balance sheets of every credit union.

The suggestion of a central community type fund was one of the key recommedations of Call to Action (CUDA) in its proposal for a social finance fund which envisaged capitalising the vehicle with credit union DIRT receipts, with ongoing funding through credit unions purchase of social finance government backed bonds. It recognised that providing social finance funding was a highly specialised form of lending requiring specialist operations (some currently exist).

Kaplan
 
The Government has avoided the introduction of a Deposit Guarantee Scheme for Credit Unions since the introduction of the Credit Union Act in 1997. They simply are afraid of offending the grandees of the ILCU Savings Protection Scheme, which offers no guarantee to the members.
The only problem with the O'Toole Bill is that the 2% funding was not to be achieved on a phased basis - if spread over a three year period, it would be more affordable.
Joe O'Toole should introduce an amended version, and force the government to stop passing the buck on this critical piece of consumer protection.
 
Tadghin

Under the scheme credit Unions would be obliged to lodge Deposits of 2% (this figure could be slightly lower - internationally it's c1.25-1.5%).

As it is a deposit there no reason why credit unions couldn't fund up immediately.

The deposit would remain on their balance sheet. Thus it would not be a premium type payment ie expensed to their P&L's.

In effect the scheme would have a call on the combined balance sheet resreves of all credit unions - similar to a cross guarantee.

Such deposits may carry a notional cost in foregone income but then again the scheme could pay an interest rate to the depositing credit union. Similar to the Central Bank Minimum Reserve Requirement credit unions will shortly have to comply with.

Currently a credit unions contribution to the League's SPS fund is a recurring expense item.

In fact one of the major benefits of the O Toole Bill is that there would be no need for the League's fund of €100m, which it would retain and use for whatever purposes its members decide on. (The League could use the fund to augment the state scheme for example continue to provide stabilisation assistance or fund it members mondernisation needs etc.)

This significant benefit seems to have been missed by many people as it resolves an issue that has plagued the movement for years. I wonder why ?

Kaplan
 
Dear Kaplan,
I was working off the assumption that the amount in question would be treated as an expense. If treated as suggested, then there is no reason why members should be denied this protection.

The reason why it hasn't happened is fivefold:-
1. The ILCU wants to retain control over the current fund.
2. The ILCU sees itself as the rightful regulator, and refuses to cede necessary oversight of the fund to the Financial Regulator and to place it at arms length under an independent, expert management.
3. The Government, and Fianna Fail in particular, is fearful of the ILCU and
4. Credit Union Boards do not understand the details of the current stabilisation scheme, the so-called "Savings Protection Scheme".
5. Credit Union Boards do not understand the implications of a Credit Union failure.

Bill Hobb's article in to-day's Sunday Business Post would make interesting reading for directors on the fifth point.
 
Bill Hobb's article in to-day's Sunday Business Post would make interesting reading for directors on the fifth point. Today 01:26 AM

Any chance of a link to this as it's unlikely I can buy he SBP at this time on a Sunday?

Slim
 
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