Credit Unions – Banking and Social Responsibility
by Michael Patrick O'Leary
This article appeared in the June 2014 issue of The Abacus.
Will the conventional banks ever provide “a New Moral World” of happiness, enlightenment, and prosperity?
When I called in at Midleton Credit Union just before Christmas, I was immediately offered a piece of cake and a glass of red wine. This was around 10am and there was already a good deal of red-faced conviviality in the branch. Whenever I stopped by to make a deposit or withdrawal, the manager would call me in for a friendly chat.
I have a similarly cordial relationship with my local Sampath Bank manager but one could never imagine such a thing with conventional banks in the UK or Ireland. If one tries to phone the Croydon branch of Barclay’s, one finds that all branches have the same telephone number and when one dials that number, one finds oneself speaking to someone in Bangalore rather than Croydon. Barclays plan to cut 12,000 staff this year. The bank’s total bonus pool for 2013 rose by 10% to £2.38bn, from £2.17bn in 2012, with the investment bank’s bonus pool increasing by 13%.The level of personal service is unlikely to improve.
History of Credit Unions
Credit Unions originated in the 19th century, based on the ideas of Robert Owen in the UK, Herman Schulze-Delitzsch in Germany and Alphonse Desjardin in North America. Owen was born in Wales but moved to Manchester, then to Scotland (where he achieved commercial success operating on principles that became the basis for the cooperative movement in Britain). He then bought a town in Indiana which he renamed New Harmony. Unfortunately, the utopia failed. Owen’s vision was of “a New Moral World” of happiness, enlightenment, and prosperity through education, science, technology, and communal living.
A Credit Union is a member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members. Many Credit Unions also provide services intended to support community development or sustainable international development on a local level.
Credit Unions in Ireland
Credit Unions have played an important role in Irish society since the 1950s. The Irish Credit Union movement has achieved one of the highest membership penetrations of any country, with over 50% of the Irish population now holding membership. Credit Unions in Ireland today vary dramatically in size, membership and in the range of services they offer. However, they all share a basic philosophy and set of principles.
Ireland in the 1950s could have been a third world country. There was high unemployment and poor housing, which led to sickness and malnutrition. State unemployment benefits were low and did not last indefinitely, leaving many families in abject poverty, relying on loan sharks. Banks and other financial institutions did not advance credit without substantial collateral or guarantees; you had to be a homeowner in order to get a loan and very few people owned their own homes in the 1950s.
Nora Herlihy (a teacher of under-privileged children), Sean Forde (a baker) and Séamus P MacEoin (a civil servant) decided to do something about it. They recognised the root of the problem as the scarce availability and poor management of money and resolved to identify a system that would allow people to gain more control over their finances.
In 1956, a government sponsored savings campaign prompted a co-operative in Dun Laoghaire, County Dublin, to set up a thrift society, which was reformed as the Dun Laoghaire Borough Credit Union – the first in Ireland.
Peace pioneer John Hume and five others pooled their combined savings of eight pounds and ten shillings, in October 1960, to set up Derry Credit Union, the first in Northern Ireland.
The movement advanced through the 1960s in a series of spectacular leaps. By the end of the decade, 180,442 people had joined 336 unions spread throughout the 32 counties and their savings amounted to almost £9 million. Most members of Credit Unions are savers rather than borrowers, which can be a problem for their viability.
I was a member of Midleton Credit Union in County Cork. Their motto is Not for profit. Not for charity. But for service. Midleton has 18,000 members and provides a full range of financial services to members. Midleton Credit Union was formed in 1968 solely to help its members and aims to offer fair and reasonable rates on savings and loans. It provides loans for cars, holidays, Christmas, weddings and just about anything one can persuade the manager to agree to. Payment periods range from one to five years. Loans are insured at no direct cost to the eligible member. Repayment protection insurance is available as an optional extra. There are no hidden fees or transaction charges. A loan of €10,000 repaid monthly over five years would mean monthly payments of €209.82. The typical interest rate of 9.5% is high compared to the 2% on my Bank of Ireland mortgage, but I found the Credit Union’s flexibility helpful in the refurbishment of my derelict cottage and the refurbishment of my very mouth when I had extensive and expensive dental treatment. Repayments are calculated on the reducing balance of the loan. This means smaller interest repayments as you repay your loan. Repayment terms can be adjusted to suit your particular circumstances. You can repay the loan earlier or make larger repayments than agreed with no penalty. Additional lump sum repayments are accepted with no penalty.
It is ironic, in the light of what I have written in these pages about the shortcomings of the Central Bank of Ireland as a financial regulator, that it should publish a report critical of Credit Unions. In Credit Union Prism Risk Assessments, Sharon Donnery, Registrar of Credit Unions, wrote: “Regrettably, we found the majority of credit unions we engaged with needed to make significant improvements. …We also noted in a small number of cases certain attitudes and behaviours indicative of an unwillingness to comply with legal and regulatory requirements and associated absence of appropriate risk management systems and compliance programmes.”
Ms Donnery pontificates: “As with all other financial institutions, they depend on public confidence for their success and members need to be assured that their savings are safe.”
Despite the shortcomings of the Central Bank, three executives of Anglo Irish Bank are each facing 16 charges of illegal activity.
Research indicates that Credit Union customers are more satisfied with service quality than bank customers are. A survey showed that Credit Unions rate significantly higher than banks on 11 of the 14 service quality questions: access; courtesy; communication; credibility; security; empathy; tangibles; basic service; fairness; fixing mistakes; and guarantees. People between the ages of 18 and 34 have a high regard for the community-owned lenders. Four out of 10 young adults are members of Credit Unions and half of this group would consider a loan of around €6,300. Young adults see Credit Unions as more understanding than banks.
The World Council of Credit Unions is the leading international trade association and development agency for credit unions. Since 1971, World Council has increased access to high quality financial services worldwide by strengthening Credit Unions using a well-defined and thoroughly tested development model. In Sri Lanka, the World Council is strengthening Credit Unions in areas affected by the conflict with the intent of restoring financial stability and a broader sense of security.
It would seem that in Ireland the public, chastened by the antics of the casino banks, have more trust in Credit Unions than banks, whatever Ms Donnery might say. Is there a lesson for the rest of the world? Banking (the service that should protect savings and supply loans for social uses such as productive development) is too important to be left in the hands of a small number of private bankers who, by definition seek only to maximise their profits. Credit Unions bring a measure of democracy, cooperation and mutuality to the ugly world of finance. They are an example of what biologist EO Wilson called “the delicate web of reciprocity”.