Patricia Hewitt, Economic Secretary to the Treasury, said: "We have one of the most competitive and sophisticated financial services sectors in the world - but some people are still missing out. And for those people financial services mean cheque-cashing shops and illegal loan sharks.
"Credit unions have been doing invaluable work by providing savings facilities, low-cost credit and financial education to the less well off. The Government is determined to encourage the sector."
Credit unions are small, mutually-owned savings groups which make loans as low as pounds 50 to their members, typically at interest of 1 per cent a month.
Members must share a "common bond", such as working for the same employer or living in the same area. Examples range from News International to Duckinworth, a local credit union in Manchester.
Whereas a quarter of US workers belong to a credit union, there are only 216,000 UK members. Assets are pounds 118m.
The Government's reforms, in the form of proposals in a consultation document, aim to help credit unions by relaxing arcane legal restrictions. The reforms are aimed at the 2.5 million people who have no building society or bank account.
A cap on membership of 5,000 people will be lifted, while rules defining the "common bond" will be eased. Credit unions will be allowed to borrow from sources other than banks and offer basic services such as bill payment.
Unions will also be allowed to offer interest-bearing share accounts. The Treasury proposes to lift a cap on savings by under 18s from pounds 750 to pounds 5,000. The Financial Services Authority will regulate the unions.
However, there was disappointment yesterday from the credit unions themselves, which wanted the reforms to go further. The Association of British Credit Unions (ABCU), a trade body, said it was dismayed the Treasury had rejected several key requests.
Chris Smith, spokesman for the body, said: "The restrictions we have in place are probably the worst in the world. On the one hand they say they will relax the rules. But on the other hand they seem to be taking things away."
Mr Smith said new conditions, including a 10 per cent minimum on capital reserves, could hinder rather than help. The Treasury has also refused to lift the ceiling on savings above pounds 5,000 per member.
"We feel that there is a definite will in the Government to do something about this, but there doesn't seem to be the same will in the Treasury. We just want it to be freed up a bit," Mr Smith said.
Members of credit unions rarely default because of the common bond. Bad loans typically amount to less than 1 per cent of a loan book, against 4 per cent for high street banks. Surpluses go into reserves or are distributed to members through a dividend.Reuse content