Inside Track Insight Credit unions
In the money
Paris Gourtsoyannis Feature Writer
Credit unions are set to reap the benefits of increased political interest, but are they a realistic alternative for those trapped between mainstream finance and payday lenders?
With so much attention being paid to the crisis in the world’s banking system, it would be excusable if reforms to the smallest of the UK’s financial industries went unnoticed. However, the changes to the laws that govern credit unions could herald rapid growth in a form of lending that particularly affects Scots, who make up one in five of the UK’s borrowers. On 8 January, changes came into force that could lead to credit unions across the UK reaching out to a range of new customers from whom they were previously restricted. Until now, credit unions could pay out their profits to members only in the form of dividends decided retrospectively at an AGM. Tis prevented them from advertising interest rates. Tey were also able to welcome only those members who fitted a “common bond”, such as living in a single postcode area or working for the same employer. By allowing credit unions to pay interest in the same way as other banks and building societies and to accept members from non-overlapping common bonds, the government hopes the sector will draw customers away from the big banks (as demanded in the coalition agreement, which called for greater diversity in financial services) and from high-cost payday lenders. Te UK Government’s impact assessment of the
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www.holyrood.com 30 January 2012
changes doesn’t offer an estimate of the potential growth in credit union members, but suggests the sector as a whole could enjoy an upper limit of 20 per cent growth in profits. By the UK Government’s own admission, much of the legislation applying to credit unions dated to the 19th century. For Frank McKillop, Scottish policy and relations manager for the Association of British Credit Unions (ABCUL), the change marks the end of a battle that has gone on for years to put UK credit unions on a par with counterparts in other countries. “We’ve been looking for a very long time to get reforms to the legislation,” he says. “Te World Council of Credit Unions described the British legislation from 1979 as the most restrictive in the world, because the freedom that credit unions in Canada, the USA, Australia, Poland – countries like that – have had is just streets ahead of what British credit unions were allowed to do.” Lack of credit for governments and companies means a restricted ability to generate growth. For families in the UK’s most deprived communities, it means prolonged, deeper poverty. In its December 2011 report, A Vicious Cycle, children’s charity Barnardo’s laid out the impact on families of indebtedness and exclusion from mainstream credit. Across the UK, one in five families with an income of less than £13,500 is spending over 30 per cent of its earnings on debt repayments. Failure to secure credit at a sustainable level of interest simply compounds the problems these families face, by forcing them to turn to payday lenders or rent- to-buy schemes for household items – both of which charge interest several times the value of the original loan. Te report calls for a financial safety net for those who have taken high-cost loans, a strategy to reduce high-cost credit
“Across the UK, one in five families with an income of less than £13,500 is spending over 30 per cent of its earnings on debt repayments”
use. It also calls for efforts to provide access to finance for all to eliminate what Barnardo’s calls the “poverty premium”: the increased cost of living resulting from a lack of credit. As the global economic crisis has pushed UK politicians to look at a greater role for credit
unions, organisations themselves have seen their role in the community increase simply by virtue of increased demand. Te types of people that Carol McHarg sees coming through the door of 1st Alliance (Ayrshire) Credit Union are no longer just those on low incomes or on benefits. “Te newer ones are people who are in employment, that high street lenders are not willing to lend to anymore,” she says. With more and more people outside the umbrella of mainstream finance, McHarg and her
colleagues increasingly find themselves called upon to pick up the pieces after high-interest lenders have moved in to meet the demand for credit.
Te push to make sustainable credit available to those left out of mainstream finance has so far
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