The Mutuals and Co-operative Sector Business Council is today submitting a paper to HM Treasury, outlining six recommendations for expanding the economic contribution of credit unions.
The paper follows the Government’s commitment to doubling the size of the mutuals sector and a subsequent Council review into how credit unions can best support this goal.
The Mutuals and Co-operative Sector Business Council paper includes input from credit union leaders, trade bodies, officials and regulators, and recommends six changes to expand the economic contribution of credit unions:
1. Remove the ceiling on the growth of credit unions by raising the potential member limit on locality common bonds to 10 million.
2. Allow credit unions to achieve better economies of scale by encouraging centres of excellence in Credit Union Service Organisations (CUSOs).
3. Improve customer outcomes and remove growth inhibitors by updating credit union legislation and regulations.
4. Strengthening governance and improving skills with more trade association advice and guidance.
5. Getting the balance of deposits and loans right to support borrowers as well as savers through sustainable pricing strategies, product diversification and use of technology.
6. Increase overall awareness and political support for credit unions e.g. through outlining their role in the Government’s financial inclusion strategy and referrals to the sector from banks and building societies.
Kevin Parry, Chair of the Mutuals and Co-operative Sector Business council and Chairman of Nationwide Building Society said:
“The Mutuals and Co-operative Sector Business Council was established to champion the growth and impact of mutuals across the UK. The first area we have turned our attention to is the potential of credit unions. This paper provides a clear and practical roadmap for scaling the credit union sector, that if acted upon will have a positive impact on the economy and financial inclusion.”
Credit unions, which are co-operative societies that provide savings and loans to their member-owners, provide affordable credit and savings to those with limited access to financial services – often due to low income and/or lack of a developed credit profile. The Financial Inclusion Committee recently noted a decline in the size of the high-cost credit sector without a corresponding increase in regulated and responsible alternative credit options, further highlighting the important role credit unions can play in supporting financial inclusion.
There are approximately 360 credit unions active in the UK today with more than 2.1 million members, £4.1bn member balances and £2.6 billion lending. Membership of these unions has been growing, while loan books and profitability have been scaling at almost 10% per year. Globally, credit union memberships have doubled in the last decade.
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About credit unions:
Credit unions are registered as Co-operative Societies under the Co-operatives and Community Benefit Societies Act 2014 and the Credit Unions Act 1979. As deposit-takers, they are dual-regulated by the PRA and FCA and offer FSCS protection for deposits up to £85,000.
Capital requirements operate as simple leverage ratio requirements on a sliding scale from 3% (assets of less than £5m), to 10% (assets of more than £50m) with liquidity requirements of 10% of relevant liabilities.
‘Common bond’ regulations place constraints on the breadth of membership and there is a 3 million potential member limit on locality-based credit unions.
Interest rates are controlled. They are capped in the interest that they can charge at 42.6% APR (3% per month) except in Northern Ireland at 12.68% APR (1% per month). Interest charged on loans depends mainly on the ability to repay loans and the rate of interest paid on deposits. Credit unions can enhance lending efficiency by structuring loans in line with members’ ability to repay, while maintaining prudent deposit pricing. Avoiding excessive interest payments on deposits helps preserve net interest margins. Additionally, credit unions should align deposit inflows with lending demand to prevent excess liquidity that strains balance sheet performance.