Credit unions source funds at close to zero, and rely on volunteer labour for much of their staffing. They are also supposed to know their client in a way that the big banks don't bother with any more.
So funding is close to free, labour is cheap and default risk should be reduced by their knowledge of their customers, and they are not expected to make a profit.
So why can't they break even when lending at 12%? I think it's down to really, really inefficient work practices and processes.
I've only been in a credit union once in my life and it felt like I'd stepped back into 1983.
Credit unions source funds at close to zero, and rely on volunteer labour for much of their staffing. They are also supposed to know their client in a way that the big banks don't bother with any more.
So funding is close to free, labour is cheap and default risk should be reduced by their knowledge of their customers, and they are not expected to make a profit.
Totally inaccurate for today's credit unions, might have had some relevance back donkey's years ago.
The alternative:24% interest rate is really attacking the poorest of the poor.
Provident, to take an example, can charge 187.2% APR to loan someone 500 quid for a year,
@NoRegretsCoyote
With respect, I think you need to do a bit of
research into the CU sector. Pick a large credit union, and check if their annual report is available online, and read that as a starting point to get a better understanding.
Excellent. But we're talking about credit unions.@RedOnion I am familiar with how banking works and concepts like adverse selection
@RedOnion I am familiar with how banking works and concepts like adverse selection.
Credit unions were, inter alia, set up to provide smaller-value loans to people who banks were not interested in, probably more due to the cost to the banks of underwriting than default per se. Cost to credit unions was kept down as default risk on lending was mitigated by making borrowers hold on to shares, personal knowledge of borrowers' own circumstances, and also from the social pressure on borrowers of knowing that they were borrowing from your own community.
I think it is very odd that this business model worked well 20 years ago when interest rates were higher (with lower room for margins), but won't work now.
Should credit unions be actively seeking borrowers who are more likely to default? This seems to go against the traditional lending practices that they adhered to. I don't think that lending to higher risk borrowers by credit unions is Lehman 2.0, I just think it raises fundamental questions about the purpose of the sector.
Anyway I took your advice and looked at the annual report of a big credit union in a large town outside Dublin. They seem to only be generating surpluses due to large writebacks in recent years. On the expenditure side the regulatory costs and insurance are indeed very high for the size of balance sheet. I was also surprised by some of the ancillary spending though: €450k on IT, €165k on advertising, and €134k on sponsorship, AGM and convention expenses. These seem like a lot given net interest income of around €6m.
@24601 ; @Monbretia
Perhaps I was being overly provocative with my post. I am not an expert on the CU sector. The one time I have ever been inside a credit union was recently enough, in late 2017, and they had not one but two volunteer tellers on duty. All I needed to do was lodge a cheque to a relative's account and the whole process took two hours and needed a second visit, and this was after I had called in advance. I've never been anywhere less keen to take my money
I appreciate that sourcing funds does not cost zero, but it is still pretty low and plentiful, judging by the fact that their deposit base exceeds their loan book by a factor of four. Obviously they are expected to generate a surplus, but they don't have analysts expecting a certain RoE that a commercial bank does.
I have no objection to lifting of the price cap per se. I just find it bizarre that they are looking to increase margins at a time when interest rates are much lower than they were when the cap was set twenty years ago. Maybe they've fallen into a bit of a space where AML and prudential requirements are squeezing players at the smaller end of the credit market. But if this is the case surely they should be trying to look at their own cost base, rather than just pushing up the cost of lending.
Interest rates being low is also a huge problem for them since they have such excess funds. When you lodged that cheque to your relative's account for every €100 the credit union probably lent about twenty of it, had to insure it for life savings protection, had to reserve €10 of it and likely went across the road to AIB/BOI/PTSB etc. and deposited a large chunk of the rest of it a 0% with a small portion of it being invested in longer term products that are probably yielding, if they're very lucky, 1%. They literally don't have any want or need for your money and many are telling their members this but you know what happens, money keeps piling in. This is a serious medium-term viability pressure for some credit unions.
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