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.
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