Are credit unions a credible solution to loans misery?


The Government hopes that by improving, credit unions can provide basic financial services to millions of vulnerable people. officials are proposing to bankroll a small number of credit unions to help them do away with the irresponsible high-cost credit providers or loan sharks that can force folk into a debt spiral.

A major report published on Thursday by the Department of Work and Pensions suggested that up to seven million people who pay a high price for borrowing could be helped by the growth of credit unions. The feasibility study had been commissioned by Iain Duncan Smith last year to investigate the practicalities and usefulness of giving a legal and financial boost to credit unions.

It sets out measures to increase the number of people using credit unions including a£51m government cash injection to fund a major programme of change to expand and modernise. It suggested that it could be possible to deliver the growth needed within seven to 10 years.

The credit union movement in Britain is relatively small compared with countries such as the United States and Canada, with just 3 per cent of people using the unions here. But with more than 400 credit unions across the UK, they are in a great position to step in to help the unbanked and financially excluded. In the past some have been criticised for not being run in a professional enough manner. Many are small and only offer finance to members of a union or local community.

But the proposals would help ensure they could be run on a firmer footing and compete to offer equivalent lending and savings services to High Street banks.

Credit unions were actually given beefed-up powers by the government in January, allowing them to compete more effectively with banks. Now some 25 of them offer current accounts, for instance.

But the report proposes focusing on credit unions that can offer a credible alternative to the high street banks. That should be fewer than the 80 that presently offer financial services, it says.

It calls for credit unions to become financially sustainable by changing the way they do business and introducing automated systems to reduce costs.

Mark Lyonette, the chief executive of the Association of British Credit Unions, gave a cautious welcome to the report's proposals. "We are pleased that the report identifies the need for credit unions to become more convenient to use, more efficient and attractive in order to serve millions more consumers." he also agreed that increasing collaboration between credit unions is the best way to do this.

One proposal not contained in the report but that has been widely discussed is for credit union services to be made available through post offices.

Mike O'Connor, the chief executive of Consumer Focus, said: "We believe linking credit unions to our post office network could be a perfect match and help ensure the continuation of the vital community resource which our post offices provide."

His view is supported by Neera Sharma, the assistant director of policy and research at children's charity Barnardo's. "To ensure that the poorest families get the best deal, the government should continue to consider the provision of better, universal access to credit union services through post office branches," she said.

The problem of finding a way of providing decent financial services to millions of financially vulnerable people is at the core of the proposals.

"Access to affordable credit is a major issue for many consumers, especially where they need small sums to make an emergency purchase or to tide them over for a short time period," pointed out Mr O'Connor.

"High street banks should do more to provide affordable credit for consumers, but are dragging their heels."

Lord Freud, Minister for Welfare Reform, said: "Currently around seven million people fall into the trap of high-cost credit, with some being charged more than 6000 per cent in interest on short-term loans.

"For too long predatory lenders have been plaguing the homes of vulnerable people, who often have no other way to get cash when they need it most."

One key problem that credit unions have is that they have to operate with a cap on credit.

Commercial lenders, including payday loan companies, have no such restrictions, which frees them to make huge profits at the cost of consumers.

While many have called for a cap on credit charges for payday lenders, there is also a call in the report for raising the interest rate cap that credit unions are forced to operate under.

It recommends that a rise in the interest rate ceiling from two to three per cent a month on the reducing balance should be considered.

It would only apply to the smaller loans which credit unions offer to lower-income consumers, but which currently cost more to provide than they generate in income. Increasing the rate ceiling would make the loans more viable.

"If credit unions are to be able to compete sustainably on smaller, short-term loans, then clearly the interest rate cap does need to be looked at afresh," said Damian Hinds MP, chair of the All Party Parliamentary Group on Credit Unions.

Arts and Entertainment
The write stuff: masters of story-telling James Joyce, left, and Thomas Hardy
books...begging to differ, John Walsh can't even begin to number the ways
Jose Mourinho on Sky Sports
footballEXCLUSIVE COLUMN Paul Scholes: It was not a leg-breaking tackle, as the Chelsea manager had claimed
Romelu Lukaku scored twice to add to the hat-trick he registered in the first leg in Switzerland
Image from a flyer at the CPAC event where Nigel Farage will be speaking
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Anna Woodward: German Speaking Accountant

    £45,000: Anna Woodward: My client is aleading global manufacturer and service ...

    Danielle Degan: Accounts Payable Executive

    £13 - £15 Hourly Rate: Danielle Degan: Are you looking for a Purchase Ledger r...

    Jemma Gent: International Management Accountant

    £150 - £200 Day Rate: Jemma Gent: Are you as an experienced accountant with ex...

    George Parlour: Assistant Accountant

    £13 - £15 Hourly Rate: George Parlour: Do you want to give something back? Th...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower