Credit Unions Explained
Credit Unions are a worldwide phenomenon and can be found in over 110 counties. The first credit unions were set up over 150 years ago in Germany and subsequently Canada and the USA, with the first credit unions introduced into Britain in the early 1960s.
- The British Credit Union Movement
There are approximately 570 credit unions registered in Britain today. These credit unions provide services to over 600,000 members and hold combined savings in excess of £600 million. Scotland has 130 credit unions and assets totaling over £300 million. Capital Credit Union is the third largest in Scotland, serving over 13,000 members and managing over £13m in assets. Credit Unions in Britain are regulated by the Financial Services Authority – the same regulator as high street banks.
- Credit Unions as a global phenomenon
Credit Unions do have some unique features over mainstream financial services. Worldwide, credit unions follow a set of International Operating Principles, as developed by the World Council of Credit Unions. These principles are:
- Democratic Structure
- Open and voluntary membership
- Democratic control
- Service to Members
- Distribution to members
- Building Financial Stability
- Service to Members
- Social Goals
- On-going Education
- Co-operation amongst Co-operatives
- Social Responsibility
Credit Unions are run on these principles in relation to how members are treated, as well as giving direction to the leadership and providing good practice for the governance of the organisation. However, in order to survive in such a competitive environment, credit unions must also be run on sound business principles.
Credit Unions also tend to have a number of unique benefits that are not found in other organisations within the financial services sector in Britain. Not least, the following features are not normally found in most competitor organisations in the British financial services sector:
- Free Payroll deduction
- Free life insurance
- Ethical lender
- No stock market investment
- Competitive rates for savings and borrowing
- Use of volunteers – keeping operational costs low
- Surpluses paid directly to members or reinvested in business
Another unique selling point (USP) of credit unions is that members’ savings and loans are insured, at no direct cost to the member, in the event of death. Credit unions adopt the principle that the” debt dies with the debtor” (CUNA Mutual 1939).
- Credit Union Regulation
The first credit union legislation in Britain was introduced in 1979 and was written by the banking community. The legislation was so restrictive that credit unions were, and still are, one of the smallest parts of the financial services sector in the UK today. Since 1979, however, the Credit Union movement has changed dramatically, particularly in the last four years. Since 2002, as a result of the change in regulator, members’ savings are covered by the same compensation scheme as the banking sector. The significance of this is that prior to 2002 savings in credit unions in Britain, which would have been in excess of £100 million, were not covered by any form of insurance and members had no recall to their savings if a credit union became insolvent.
Prior to the change in regulator in 2002 to the FSA, Credit Unions were unable to offer regulated products such as mortgages, insurance and higher value loans. In fact, until 2002, credit unions could only lend individual members up to £5,000 in excess of their savings. Also, the total value of savings was capped at £5,000 as was the number of members a credit union could allow into membership.
In 2006, one of the most significant changes introduced by the FSA was a relaxation of regulations to allow credit unions to offer current accounts to their members. The ability of Credit Unions to offer a full range of banking facilities alongside, and in competition with, the traditional high street banks will have a significant impact, not only on the ability of the credit union movement to grow generally, but for Capital Credit Union specifically as the organisation should be in a much stronger position to meet more of its members’ financial needs. The development and introduction of the CUCA also allows credit unions to provide services to people that have previously been “unbanked” and who are suffering from being financially excluded from mainstream financial services. It is estimated in Edinburgh alone that over 23,000 people are unable to open a basic bank account with one of the high street banks due to their financial circumstances and lack of wealth or assets.
- Background to Capital Credit Union
Capital Credit Union is a democratic, member-owned and controlled financial services co-operative. As an independent, not for profit organisation our aim is to provide quality financial services that meet the needs of all our members.
Mission Statement of Capital Credit Union
Capital Credit Union provides services to members who live and/or work in the Lothians and Scottish Borders areas and who save on a regular basis. Regular saving is a requirement of the members of all credit unions. At least 50% of Capital’s members also use the Credit Union for loans, insurance and mortgage products. With its Head Office in Edinburgh, Capital has a number of very small shared branches throughout the Lothian. These shared branches are run by volunteers and offer advice on credit union products and services, however, they do not offer transactional services at this time. These branches are in a shared resource with a partner organisation such as a Citizen’s Advice Bureau, or a local authority office. Transactions are carried out in the Head Office in Edinburgh.
Capital Credit Union is arguably one of the most progressive Credit Unions in Britain. This designation is borne out by a number of factors, not least the Credit Union is one of only 3 credit unions in Britain that are regulated to offer mortgages; it is one of only nine credit unions offering a Credit Union Current Account; and more recently, Capital was awarded the highest Government contract (in monetary terms) in Scotland, by the Department of Work and Pensions, to deliver loans to financially excluded people living in the Lothian and Scottish Borders areas. The Credit Union has also won several business in the community awards.
Another of Capital‘s USPs, over other financial organisations in its common bond area, is the partnership arrangements it has with 48 sponsoring employers. These employers recognise credit unions as a staff benefit and allow employees to save through their payroll, at no cost to Capital or the member. Strategically, this is a significant advantage as the Credit Union gains access to employees from induction and throughout their employment. The employer also gains an advantage, as it is perceived to be concerned with the welfare and financial well-being of staff. Capital’s can be directly attributed to payroll deductions and this has been evidenced as members consistently cite convenience as the number one reason for opening a savings account, as it comes direct from payroll, helping to remove the temptation to spend savings.
Capital Credit Union provides numerous products and services including savings, loans and a range of insurance products to members. Capital Credit Union was formed in 1989 initially as an employee benefit for staff of (the then) Lothian Regional Council. The Credit Union could therefore market its services to just over 23,000 employees. As an employee benefit, employees were able, and encouraged, to save direct from their salary. The employer was known as a “sponsoring” employer. In 1996, as a result of local government re-organisation, Capital moved from providing services to employees from one large employer, to providing services to 18 employers.
In the past 18 years the organisation has evolved considerably, both in product offering, as well as significant changes in the target market from which the Credit Union attracts people i.e. the common bond1. From its early marketplace targeted at government employees, later adding their families, Capital Credit Union now has a “live or work” common bond. Anyone that lives or works in Lothian and Scottish Borders is eligible to take up membership and enjoy the benefits of the Credit Union i.e. a marketplace potential of over 900,000 people. In 2007, the Credit Union is working with 48 sponsoring employers that still support the credit union through free payroll deductions from employees’ salaries.
Figure 1 plots the growth of members and key time-frames in the history of the Credit Union. Chart 1 charts membership growth from 1989 to March 2007.
Figure 1. – Key milestone years
1989– Year of registration.
1992– Amalgamation of Capital Credit Union and Lothian and Borders Fire Brigade Credit Union. This was the first time that two credit unions in Britain had amalgamated.
1996– Local Government re-organisation. Move from 1 sponsoring employer (Lothian Regional Council) to 18 sponsoring employers.
2002– New Regulator – Financial Services Authority (FSA).
2004– New common bond – live or work in Lothian and Scottish Borders. Capital absorbs four small credit unions struggling to meet new regulations – just over 300 active members are brought in from these four credit unions
2007– Over 13,000 members and over £13 million in assets. Serving 48 sponsoring employers and government contract to serve financially excluded members of society.
Chart 1 – Membership Growth from 1989 to 2007