For over thirty years credit unions have been cited as a potential panacea for problems encountered by the millions of consumers who find themselves excluded from mainstream financial services. All the major political parties have consistently made supportive noises about the credit-union movement and its principles. In December 2004, Tony Blair took the symbolic step of joining South West Durham Credit Union and in March 2005 the Griffiths Commission on Personal Debt, sponsored by the Conservative Party, strongly supported the credit-union movement in its report.
However, credit unions have failed to establish themselves in Britain to anything like the extent they have done in personal finance markets as diverse as those of the USA, the West Indies and the Republic of Ireland. In Ireland half the population are credit-union members. In the USA one in four is a credit-union member and in the Caribbean penetration is over 70% on some islands. In contrast, credit unions in Britain serve only 0.5% of the population.
For many years after the appearance of Britain's first community credit union in 1964, their limited impact was believed to be a passing phase which would be resolved by legislative change. But 26 years after the Credit Union Act of 1979 they face a greater degree of criticism and disappointment than ever before, particularly because of their failure to make a significant impact on financial exclusion. This frustration is exacerbated by the continuing hold over what has been termed the 'sub-prime' sector by highly-successful doorstep moneylenders, such as Provident Financial, Cattles, and London Scottish Bank, who are believed to have a market base of up to four million customers. These doorstep lenders have had over a hundred years to build their market and develop products centred on the needs of the low-income consumer. Key to their success has been the speedy availability of loans, the delivery and collection of cash from the customer's home, informal methods of checking creditworthiness and a relatively relaxed approach to late payments (including, importantly, no extra charges). These companies are the subject of regular attacks due to the high interest rates that accompany their loans, which typically range from 100% to 400% APR. However, these high rates are often of secondary consideration to home-credit customers, for whom the weekly repayment figure is the factor that looms largest in their immediate calculations. Defending their products, the companies involved point to the high risks associated with lending to the sub-prime sector and the costs incurred in employing the agents who carry out weekly collections.
Those who believed that credit unions could provide low-cost loans to the financially excluded initially thought that the sector would evolve organically as a community-based and volunteer-led alternative to high-cost forms of consumer credit. However, in recent years a new air of scepticism has emerged, as reflected by Polly Toynbee in the Guardian [`The new credit deal for the poor is turning into an expensive disaster', 8 February 1999]:
For this negligible progress, a lot of money has been spent. Some £20 million a year has been poured in by local and central government and European social funds. And yet the total assets of all community credit unions are still only £36 million. (That suggests they might have done more good if they had just handed the £20 million out each year.) There is something about the word 'community' that ought to ring alarm bells. The credit union story is just one example of the sort of misguided good intentions that have plagued social policy for years, offering the poor high-minded good ideas that none of the rest of us would bother with.the only thing that binds the inhabitants of the worst estates together is their desire to get out. Yet social planners get amazingly sentimental about 'bonding', wanting poor people to get together in ways the rest of us rarely have time, energy or inclination to do....There's a danger that in the name of something called 'community' we keep expecting the least able, with the fewest resources and the least support, to do magically energetic things in their spare time.
Whilst Toynbee's tone was pessimistic, a number of others have returned to the drawing board in order to re-invent the concept of British credit unions. A leading figure in this respect is Paul Jones of Liverpool John Moores University, who has worked closely with the Association of British Credit Unions Limited (ABCUL) to develop a vision for credit-union development. Amongst the most important new proposals is that greater levels of objectivity and market analysis be placed at the heart of decision making, replacing what many now feel have been the ideological concerns that have driven the movement in the past. This vision of community empowerment involved credit unions adopting a 'small is beautiful' mantra. However, Jones and others have provided convincing evidence that small community credit unions frequently run into financial or other problems. As a result ABCUL has for some time been encouraging a vision of larger credit unions, as is revealed by the significant number of mergers that have taken place in recent years. It is now widely argued that a virtuous circle needs to be created, involving the creation of larger bodies with more members and higher turnover which, in turn, would enable the employment of suitably-qualified staff, better marketing and the establishment of more attractive and accessible offices in high street locations. Only through such a virtuous circle, it is argued, will community credit unions be able to stand on their own feet, as economic and social entities without financial subsidy.
However, in order to create an environment in which such a virtuous circle can be created, it is clear that credit unions need to break with their traditional practices in terms of interest rates and the saving/lending relationship. The headline-grabbing aspect of the latest proposals from ABCUL/Jones is the suggestion that credit unions will have to charge higher interest rates (25.4% rather than the current 12.68% APR) if they are to cater realistically for high-risk customers. This proposal will require legislation and the Treasury has announced that it is to enter consultation with the credit-union movement on this point. A second and equally important proposal will require a fundamental break with the credit-union traditions of requiring new members to save for a period of months to demonstrate an element of thrifty money management before a loan can be granted; of assessing further loans in relation to the amount of savings; and of discouraging members from withdrawing personal savings. A number of West Midlands' credit unions have experimented by separating lending from saving functions and the results have been encouraging. ABCUL is now suggesting that a general adoption of this strategy by credit unions, together with legislation allowing the selective application of higher interest rates, would provide a strong fillip to credit-union growth and, in particular, their ability to have an impact amongst low-income groups.
A clear indication that there is widespread support for such a development is provided by the report of the Commission on Personal Debt, set up by the Shadow Chancellor, Oliver Letwin, and chaired by Lord Griffiths, which reported in March 2005. It heard evidence from a variety of sources calling for legislation to allow credit unions to impose higher rates for some borrowers. Peter Kelly, Head of Social Banking at Barclays Bank told the Commission that '30% interest rates may sound high, but access to finance is important'. Thus the Commission shares the conviction of ABCUL and others that higher interest rates are the only practical means through which credit unions can begin to provide a service to those customers who are currently best served by the doorstep lenders. The Commission also suggests the establishment of a Community Finance Trust to be funded voluntarily from the profits of the large prime lenders, such as the high street banks, which would help fund credit union development.
These proposals are important, innovative and mark a serious attempt to create a strong community credit-union sector in Britain. But are they likely to succeed? A number of perspectives on the history of the credit-union movement can illuminate this question, particularly if we contrast the very different histories of British and Irish credit unions.
Contrasting the fortunes of the British credit-union movement with that of its Irish counterpart is instructive for a number of reasons, even if the cultural differences between Ireland and Britain are too great to allow for straightforward comparison. Both movements were late starters in international terms, emerging in the late 1950s and early 1960s, whereas the German movement had its origins in the nineteenth century and the North American credit unions emerged in the first decade of the twentieth century. The legacy of British rule in Ireland also created further parallels in regard to a number of credit institutions that were common to the urban working classes in both countries, including the mail-order catalogue firms and companies such as Provident Financial. Furthermore, Northern Ireland remains part of the UK and represents the one corner of the state where credit unions have flourished. By the early 1990s, for example, a Northern Irish Catholic was 300 times more likely than the average UK citizen to be a credit-union member.
The Roman Catholic Church was central in the development of the credit-union movement. Several European and North American credit-union pioneers were Catholics and in 1938 the movement was given the papal seal of approval by Pius XI who viewed it as a practical expression of the papal encyclicals Rerum Novarum and Quadragesimo Anno, which addressed the issue of reconstructing and perfecting the social order by improved living conditions. The Catholic Church's role in Ireland was particularly significant in establishing the common bond that became the fundamental building block of each credit union. The parish was the social unit around which this common bond was practically developed. During the 1950s, 1960s and 1970s religious observance amongst Irish Catholics was extremely high by western-European standards. Importantly, in terms of the credit unions' twin requirements, to financially assist the less well-off and to attract volunteers with particular skills or capabilities, the parish created an opportunity to create a common bond across class boundaries. In North Belfast's Holy Family Parish, the parish newsletter announced the intention to form a credit union in 1968, and the parish hall soon became the first collection point for Newington Credit Union. Middle-class professionals, particularly schoolteachers, from the parish's leafier avenues, volunteered to help those from the more deprived working-class streets. Meanwhile, a less-competitive environment was assisting the growth of credit unions in the Republic of Ireland. There were fewer financial institutions than in the UK and banks were viewed by many as inflexible and unapproachable institutions. Importantly, the Irish government was swift to recognise the potential of credit unions and facilitated the 1966 Credit Union Act, with the Parliament of Northern Ireland following suit in 1969.
Despite the fact that they were endorsed by the state, credit unions in the north of Ireland initially had a predominantly Catholic membership. This arose partly through the high profile of leading credit-union advocate John Hume, who cut his activist's teeth in forming Derry Credit Union in 1960, before moving on to the Civil Rights Movement, the SDLP and the Nobel Peace Prize. From the outset the credit unions in Northern Ireland were affiliated to the Irish League of Credit Unions, although they argued that their aim was not to create sectarian organisations, and in any case there was no British alternative in the early 1960s. Initially, the Protestant community largely ignored credit unions. Only in the 1980s did credit-union membership take off amongst Protestant communities, with the rapid establishment of around 50 bodies affiliated to the British-based National Federation of Credit Unions (NFCU). However, in 1995 this grouping formed the Ulster Federation of Credit Unions (UFCU). Many of these credit unions were based in Orange Halls, which performed a similar role to that played by Catholic church halls twenty years earlier. Around one third of the 170 credit unions in Northern Ireland are currently affiliated to the UFCU. In recent years they have represented the fastest growing sector of the credit-union movement in either the UK or Ireland, experiencing similar rates of growth to those of the Irish League of Credit Unions in the late 1960s and 1970s.
A. A. Horner's study of the geographical diffusion of the first wave of credit unions in Northern Ireland suggested that they spread initially through a `contagion' or `demonstration' effect. Thus a diffusion wave extended from Counties Derry and Monaghan into adjacent Armagh and Tyrone. Clearly the Catholic Church had a key role to play in this diffusion and it would appear that the Orange Order and the increasingly active Ulster-Scots movement have more recently provided the common bond around which a similar diffusion process has occurred in the Protestant communities of Northern Ireland.
This diffusion or demonstration model is one we might usefully explore in the British context. In 1993 Crowe et al noted that support for credit unions in Britain was strongest in areas where 'traditional communities' remained. There is a strong element of irony in this, in that the first credit unions were formed in 1964 by West Indian (Hornsey) and Irish Catholic (Wimbledon) communities. Both borrowed from their experiences of credit unions in their homelands and appear to have been motivated by difficulties faced by members of their community in obtaining credit in Britain. This factor was particularly true for the West-Indian community, members of which, it was claimed, were often asked to pay higher interest rates, or to make larger deposits than other groups. The West Indian connection was to prove particularly vibrant in the creation and sustenance of ABCUL. The Wimbledon credit union was the forerunner of the smaller and now defunct NFCU, which for over thirty years co-existed, sometimes acrimoniously, with ABCUL. Although both bodies viewed credit unions as financial organisations through which community could be built or re-energised, NFCU was the more idealistic of the two. Its belief was that small credit unions were best placed to retain a strong common bond, active participation, empowerment and self-help. ABCUL, with its financial and organisational links to the massive Northern American umbrella group the Credit Union National Association (CUNA), took an increasingly instrumental approach, viewing credit unions as financial facilities that should be extended as broadly as possible. Put bluntly they should not simply be 'the poor man's bank'.
A reading of the manifesto of NFCU, published in 1967, reveals the complex range of tasks that some felt credit unions could perform. The introduction, written by the Reverend Eamon Casey (then the Director of Shelter and later Bishop of Galway), suggested that credit unions should enhance service, thrift, security, inter-dependence and community. Casey argued that as the movement was developing in Britain 'at a time when a sense of community is all too often lacking' it could 'help restore community to our society and so enrich its individual members'. It could also relieve the stress and exploitation from those whose 'life is one of financial struggle', by providing cheap credit. Moreover, by encouraging saving it could promote thrift, a virtue that 'seems to have disappeared amongst the young'. Significantly, Casey argued that credit unions in Britain had to be 'adapted to fit in with the British temperament' and would, therefore, 'develop through small individual groups in which personal contact could be maintained between members, rather than in terms of larger units, which although financially stronger must by their nature be impersonal'. Casey, an Irishman who must have had a good knowledge of the rapid growth of very large credit unions in his homeland, had outlined the case for what is now commonly held to be one of the fundamental flaws in British credit unionism.
There are other explanations for the lacklustre growth of British credit unions. These include the failure of government to create a legislative structure within which the movement could grow until the Credit Union Act, 1979. After that point growth continued to be unspectacular in a personal-finance market that was markedly different from that of the Republic of Ireland in the 1960s. By the 1980s credit alternatives were plentiful for the more affluent, educated and self-confident British working-class consumer whose savings and voluntary labour were needed by credit unions if the pattern of growth seen in Ireland was to be replicated. The more instrumentally-minded consumer was clearly able to find higher interest rates on savings and lower rates on loans than those offered by credit unions, even if he or she had even considered the latter. In fact, research consistently demonstrated widespread ignorance of credit unions.
Moreover, community, already weak in the 1960s according to Casey, was in an even less robust state by the time the Thatcher government took power and the search for the type of common bond that had been so crucial in Ireland during the 1960s resembled the quest for the Holy Grail. Importantly other credit institutions that relied on community networks were experiencing decline. Mail-order companies, which for much of the twentieth century were heavily reliant on the sociability of hundreds of thousands of part-time agents, who received only small financial rewards to assess credit-worthiness and ensure payments were made, found that average agency size dwindled. If trust and community, call them what you will, were much harder to drum up when a little profit was to be made, what chance the selfless voluntarism implied by credit-union philosophy?
However, modest credit-union growth was assisted from the mid-1980s via the formation of agencies designed to promote and support them. Credit unions had an appeal to both left and right through their rallying calls upon citizenship, community, thrift and self-help. The first credit-union development agency was established in 1984 in Glasgow. Birmingham quickly followed suit. However, in linking credit unions to an anti-poverty message these agencies made a rod for the backs of credit unions, according to many volunteers who increasingly argued that this association created a stigma repelling both potential working-class and middle-class members.
Analysis of the successes and failures of individual British credit unions reveal that organic development and growth is a prerequisite for success. Credit unions cannot be imposed on a community from without, as numerous local councils have discovered. A common bond of some sort has to exist and this cannot be created around loose concepts such as 'the community' or 'poverty', as part of either the national government's or a local authority's anti-poverty agenda. The current trend in the debate amongst policy makers about credit unions, calling for greater professionalisation and the adoption of a business model are setting the right agenda for credit-union development. What is less certain about these proposals is how exactly the organic element so crucial to credit-union development will sit within the new model. For instance, the summary report on the recent West Midlands' pilot scheme that loosened the savings/loans relationship suggests that community credit unions will have to find volunteer directors with experience in financial services and human resources. This is a task that was much more achievable in Ireland's Catholic parishes during the 1960s than in inner-city Bradford today.
Despite the deep penetration of UK banks and other financial providers, millions of consumers remain outside the target market of the mainstream financial-services industry and constitute a large sub-prime market. The doorstep moneylenders are currently serving the needs of many in this category, dwarfing the credit-union movement in both scale and scope.
In moving to address the considerations of the market, and placing less stress on some of the more idealistic strands in their movement, ABCUL is beginning to develop schemes that suggest a more realistic approach to the needs of the low-income consumer. In particular the move towards the removal of the automatic link between a member's requirement to save before a loan is offered is a welcome sign of flexibility and is fundamental to any serious attempt by credit unions to present a realistic alternative to the doorstep moneylenders. In the past, the latter have consistently, and correctly, argued that their market and those of the credit unions are largely distinct. If credit unions are to offer a service that does, for the first time, offer an element of competition to the doorstep lenders, then it is also clear that higher interest rates will be necessary in order to cover the higher costs that will be encountered. In fact it could be argued that such higher interest rates would reflect a greater level of transparency. Credit-union borrowers currently face hidden costs through the requirement to save before a loan is granted that are not included in the low APRs on offer.
Of course, ABCUL philosophy is not simply aimed at extending credit unions in order to service low-income consumers in general. Its aim is to extend membership amongst specific social groups. This will, it is hoped, create a virtuous circle, enabling credit unions to achieve more for low-income groups than has been the case previously. If it is to succeed in this respect it will, however, have to establish the means by which credit unions can grow as organic enterprises, whilst also being supported by greater numbers of professionalised staff, augmented by business plans and more sophisticated and targeted marketing. This is a difficult balancing exercise that has thus far proved beyond the capabilities of the British credit-union movement. Past experience informs credit-union activists that the label 'poor man's bank' has repelled potential recruits from a variety of social backgrounds. The current proposals to increase interest rates to enable credit unions to target higher-risk borrowers, run the risk of associating the movement with that tag once again. However, by offering more business-like credit unions, which place less stress on issues such as the self-fulfillment of volunteers and the creation of 'community' on low-income estates, and more on the simple extension of membership and basic financial services, the movement is likely to achieve more material and practical results. The credit-union movement is not and cannot be a panacea for poverty or for the 'decline of community'. However, if it can increase its scale and scope and introduce a wider range of simple savings and loan schemes, it could offer products that provide a new element of competition to the doorstep lenders and other sub-prime organisations.
Prime Minister Blair has joined his local credit union, but what ABCUL and others really want from him is the more practical support that would be offered by legislative measures allowing credit unions to offer more flexible financial services for increasing numbers of members.
Griffiths Commission on Personal Debt, What price credit? (March, 2005) [pdf file, 451KB]
Paul Jones, Creating wealth in the West Midlands through sustainable credit unions: an action research project (ABCUL, 2005) [pdf file, 174KB]
Edward Casey, 'Introduction' in Edward Sammons, Credit Union in Britain (National Federation of Credit Unions, 1967).
Sharon Collard and Elaine Kempson, Affordable credit: the way forward (The Joseph Rowntree Foundation, 2005).
Richard Coopey, Sean O'Connell and Dilwyn Porter, Mail order retailing in Britain: a business and social history (Oxford University Press, 2005).
Iain Crowe, Geraint Howells and Kathy Pick, Support for community based credit unions (Faculty of Law, University of Sheffield, 1993).
A.A. Horner, Geographical diffusion in Ireland: the example of credit unions, 1958-1982 (Mannheim, 1984).
Paul Jones, Towards sustainable credit union development: a research project (ABCUL, 1999).
Anthony P. Quinn, Credit unions in Ireland (Oak Tree Press, 1999).
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