Co-op Study 2

Credit Unions

by Manfred Davidmann

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CONTENTS

Introduction
Credit Unions
Extent and Influence
Services Provided
Restrictions
Reserves and Ownership
Failure and Insolvency: Lending and Decision-taking
Conclusions
Notes <..> and References {..}

Relevant Current and Associated Works

Relevant Subject Index Pages and Site Overview



INTRODUCTION

This study describes what credit unions are and what they can, and cannot, do. It also looks at some which failed.

It is one of a series of eight studies of co-operatives and mutual societies which were undertaken to determine causes of failure and reasons for success, to see how these enterprises were controlled and managed, to learn from the mistakes of others. What is taking place is fascinating and often unexpected (See 'Relevant Current and Associated Works').

The main report 'Co-operatives: Causes of Failure, Guidelines for Success' is based on these studies. Its conclusions and recommendations are entirely relevant and cover fundamental and practical problems of co-ops and mutual societies, of members, of direction, management and control (See 'Relevant Current and Associated Works').



CREDIT UNIONS

Credit unions provide loans at rates of interest below those charged by high-street banks. And it is easier to obtain a loan from a credit union than from a bank.

Refused loans from high-street banks for essential living expenses, the needy borrower too often falls victim to loan sharks, to money-lenders charging high rates of interest. Those with the lowest incomes usually have to pay the highest interest charges.

So credit unions are a lifeline for those in need, for those who often need to borrow small amounts to keep going till their next payment arrives. A source of funds in an emergency for the needy borrower, credit unions also offer a cheap form of borrowing, say for paying for a holiday or for buying a car.


Credit unions are financial co-operatives, are in effect community banks. The owners of a credit union are its individual members and it is run for the benefit of its members. Its members pool their savings to provide loans at favourable rates of interest.

Credit unions are started, and mainly run, by volunteers, at least while still small. Many credit unions are small, based on neighbourhood or local church community, but some are very big.


Each member has one vote regardless of the amount of his savings or the size of his loans. Policy is decided, and officers are elected, at an annual meeting.

Each member pays a small joining fee and saves regularly with the credit union. Any surplus after paying expenses and adding to reserves is distributed to members. A member may get a fixed rate of interest on his savings or he may get a fixed rate of interest plus a dividend which distributes any remaining surplus.

After saving regularly for a qualifying period, borrowers may take out loans of up to 1.5 per cent of the credit union's funds on top of the value of their own savings. <1>


It is often a legal requirement that each credit union needs to have a 'common bond of membership', each member living in the same area, or working for the same employer, or being a member of a trade union, or of some other special interest group. It has been said that credit unions have a low defaulting rate because of the common bond between members.


EXTENT AND INFLUENCE

Canada in 1990 had 2,800 credit unions with 9 million members and assets of CAD 72 billion. {CRE 01}


In the USA in 1990 there were 15,000 credit unions with 60 million members and assets of USD 202 billion, possibly about 4 per cent of the total assets of US financial institutions. Over 75 per cent of credit unions were run by employers, just over 5 per cent were residential co-operatives, the rest were run by local community organisations like churches. Only about 2 per cent of credit unions offered services for low-income people. {CRE 01; CRE 02}


In the UK in 1992 the assets of UK credit unions amounted to GBP 6.8 billion <2>. By 1995 there were 400 credit unions with a membership of 130,000. Here also there are credit unions run by employers for their employees. {CRE 04}

Between 250 and 500 adults per 1,000 of the adult population are members of credit unions in Canada, Australia, Ireland and Jamaica, but only 3 per 1,000 in the UK.


Note that in the USA over 75 per cent of credit unions are run by employers which in this way may control the lending and investing of over USD 151 billion. In the UK there are also credit unions run by employers for their employees.


SERVICES PROVIDED

It is easier to get a loan from a credit union than from a bank and borrowing from credit unions can be much cheaper than borrowing from banks or finance houses.


In the USA in 1990, credit unions were undercutting banks unsecured loan interest rates like credit cards by 4 per cent to about 15 per cent. Members can borrow anything from a car loan to a mortgage. Credit unions also offered interest on current accounts with no minimum balance and generally charged no fees. {CRE 01; CRE 02}


In the UK the interest charged by credit unions is restricted to not more than 12.68 per cent each year (1 per cent a month). The interest rate charged by credit unions in the UK each year is thus 12.68 per cent or less.

This compares with interest rates of between 20 and 30 per cent charged by banks and finance houses, and with say 15 per cent charged by banks for authorised overdrafts.

Savings deposited in UK with banks and building societies, earn interest of about 2 to 6 per cent. Credit unions are not allowed to pay out more than 8 per cent and tend to pay out between 4 and 6 per cent.


Credit unions seem to be challenging commercial banks in the USA with the services they offer. Credit unions in the UK would like to be allowed to compete with banks by offering banking services such as overdrafts and credit card as well as cheque-book facilities.

Credit unions are regulated both in USA and UK. Regulation brings both advantages and disadvantages and the next section looks at government restrictions.


RESTRICTIONS

In the UK, credit unions are regulated by the 'Registrar of Friendly Societies' and have to submit quarterly financial returns to the Registrar.

A minimum of 21 members is required to set up a credit union and membership is limited to 5,000 people.

Credit unions in the UK are also required to reach a statutory minimum reserve of 10 per cent of aggregate assets, apparently to protect members. Until they reach this level credit unions should transfer at least 20 per cent of their surplus to reserves each year.

Savers are allowed to hold shares (save) up to 1.5 per cent of a union's total funds. Borrowers are able to take out loans up to 1.5 per cent of funds on top of the value of their own shareholding (savings).

An unsecured loan is one which exceeds a member's shareholding. It has to be repaid within four years. But secured loans may be repaid over a ten year period.


Members of credit unions in the UK apparently benefit from limited liability. The liability of an individual member for the debts of the credit union is then limited to the value of the shares he owns, that is to the value of his savings.


While in the UK a credit union has to take out insurance to protect its members' funds from fraud and mismanagement, there is no industry-wide compensation scheme to protect members' savings should a credit union become insolvent.


I understand that in USA credit unions
are only restricted to lending 10 per cent of their total capital to members with no upper limit on the size of consumer loans. Up to 20 per cent of their loan portfolio can be business loans which do have a ceiling of Dollars 25,000. {CRE 01}

As non-profit organisations credit unions pay no tax in the USA, and there are no limits on assets or membership numbers. {CRE 01}

While credit unions are regulated by both state and federal government, their deposits are insured by one independent federal agency. {CRE 01}


The UK credit union movement is small and still largely serving those who are in need, restricted by law from gaining size or offering services which could compete with profit-maximising banks.

Reserves are being accumulated, apparently to enable credit union to meet day-to-day demands without running out of funds, and for expansion.

US credit unions are much more established and much bigger than in UK, offering loans not just to members but also to enterprises. Far less restricted, able to do more, competing more with commercial banks. Almost banks on their own accord, apparently regarding themselves as such. As a result coming under pressure from banking establishment to be regulated and taxed like commercial banks.


RESERVES AND OWNERSHIP

We saw that a British credit union has to accumulate reserves by allocating 20 per cent or more of its surplus to reserves each year until reserves amount to at least 10 per cent of its assets.

It seems that in 1992 the assets of UK credit unions amounted to GBP 6.8 billion. The aggregate reserves of all unions were 7 per cent of assets but 32 out of 400 credit unions had reserves of more than 20 per cent of assets. {CRE 03}

So the reserves held by British credit unions amount to GBP 475 million.

Some credit unions are started and run by companies for their employees and by some local councils (local governments) for their citizens. Whoever controls a credit union also controls its reserves.


Regulations apparently demand that reserves need to be invested securely (in government bonds which carry a low rate of interest) and that cash be deposited with commercial banks (who can then use these funds). A credit union can also lend funds to other credit unions.


It would seem that credit union members should be told how their credit union's funds would be distributed, and to whom, in the event of a credit union being dissolved.



FAILURE AND INSOLVENCY: LENDING AND DECISION-TAKING


TWO JAPANESE CREDIT UNIONS

The Bank of Japan reported in February 1995 that two credit unions had lent 65 billion yen (GBP 430 million) to companies connected with a property developer which was headed by a former head of one of the credit unions and adviser to the other. They had unrecoverable loans of 110 billion yen (GBP 730 million). {CRE 05}

A special institution, the Tokyo Kyodo Bank, was later set up by the government to take over and handle the operations of these two failed credit unions. {CRE 07}


A THIRD: COSMO CREDIT CORPORATION (COSMO SHIMYO KUMIAI)

In July 1995 thousands of depositors withdrew 63 billion yen (pounds 450 million) from Cosmo Credit Corporation (Cosmo Shinyo Kumiai), the country's fourth-biggest credit union. Depositors were afraid that Cosmo would be overwhelmed by bad debts, put by one newspaper at 180 billion yen (GBP 1,290 million). By the end of the day the credit union had lost about 14 per cent of its deposits. {CRE 06}

'Employees at Cosmo's 24 branches frantically emptied vanloads of cash, piled it high on carts and rushed these to waiting tellers but neither this, nor promises by the financial authorities to lend Cosmo 40 billion yen, was enough to stem the panic.' {CRE 06}

The Tokyo government ordered Cosmo to stop all business. Cosmo had lent heavily to property speculators and collapsed with debts of GBP 1.6 billion. Japanese regulators then dissolved Cosmo and insisted that taxpayers must meet some of the cost.

Cosmo's operations were to be taken up by Tokyo Kyodo Bank. Since Cosmo will be handing over far more debts than assets, Tokyo Kyodo will need heavy infusions of cash: GBP 650 million from the Deposit Insurance Corp, an institution set up to protect investors; and GBP 140 million from the Bank of Japan, the central bank. {CRE 07}


AND A FOURTH: KIZU SHIMYO KUMIAI

In August 1995 depositors with Kizu Shinyo Kumiai, the biggest of Japan's 400 credit unions, rushed to withdraw their savings from the credit union which had irrecoverable loans of 600 billion yen (GBP 4 billion). Japan's authorities told the credit union to suspend its activities and repeated pledges that depositors would be protected. {CRE 08}



What comes across forcefully is the large size of these bad debts and what appears to be the commitment of massive credit union funds to a few commercial enterprises on what may be a basis of who knows whom rather than the commercial viability of the borrowing enterprise and its plans.


CONCLUSIONS

Credit unions are financial co-operatives, are in effect community banks. The owners of a credit union are its individual members and it is run for the benefit of its members. Its members pool their savings to provide loans at favourable rates of interest.

Credit unions provide loans which are easier to obtain and at rates of interest below those charged by high-street banks.

Each member has one vote regardless of the amount of his savings or the size of his loans. Policy is decided, and officers are elected, at an annual meeting.


The UK credit union movement is small and still largely serving those who are in need, restricted by law from gaining size or offering services which could compete with profit-maximising banks.

Credit unions in the UK would like to be allowed to compete with banks by offering banking services such as overdrafts and credit card as well as cheque-book facilities.

US credit unions are much more established and much bigger than in UK, offering loans not just to members but also to enterprises. Far less restricted, able to do more, competing more with commercial banks.

US credit unions are almost banks on their own accord, apparently regarding themselves as such. As a result coming under pressure from banking establishment to be regulated and taxed like commercial banks.

Applies to bigger credit unions which seem to have forgotten about the movement's aim of helping those in need.


Reserves are being accumulated, apparently to enable credit unions to meet day-to-day demands without running out of funds, and for expansion. Being accumulated in a way which places them under the control of the credit union's officials.

What comes across forcefully is the large size of the bad debts of the failed credit unions and what appears to be the commitment of massive credit union funds to a few commercial enterprises on what may be a basis of who knows whom rather than the commercial viability of the borrowing enterprise and its plans.

We saw that in the USA over 75 per cent of credit unions are run by employers which in this way control the lending and investing of over USD 151 billion. In the UK also there are credit unions run by employers for their employees. Whoever controls a credit union also controls its reserves.

It would seem that credit union members should be told how these massive funds would be distributed, and to whom, in the event of a credit union being dissolved.



NOTES AND REFERENCES


NOTES

<1> This limitation depends on local legislation and can vary from country
to country and from time to time.

<2> This figure seems on the high side for only credit unions.


REFERENCES

{CRE 01} Pressure mounts in US as banks prepare to fight back
Pratap Chatterjee
Guardian, 27/01/90

{CRE 02} Unions that are a real credit to their members
Rebecca Smithers
Guardian, 20/10/90

{CRE 03} Lancashire and Yorkshire members rename it an unfriendly society
Karen Zagor
Guardian, 18/12/93

{CRE 04} NCC seeks boost for credit unions
Teresa Hunter
Guardian, 23/02/94

{CRE 05} Tokyo party official quits
Kevin Rafferty
Guardian, 15/02/95

{CRE 06} Run on credit union sends ripple of fear through Japanese banks
Kevin Rafferty
Guardian, 01/08/95

{CRE 07} Japanese taxpayer asked to help save failed credit union
Financial Staff
Guardian, 29/08/95

{CRE 08} Depositors panic in Osaka
Kevin Rafferty
Guardian, 31/08/95


Relevant Current and Associated Works

MAIN REPORT
CO-OPERATIVES: CAUSES OF FAILURE, GUIDELINES FOR SUCCESS
https://www.solhaam.org/
Manfred Davidmann

ASSOCIATED CO-OP STUDIES
https://www.solhaam.org/
Manfred Davidmann
1. The Trustee Savings Bank Give-Away
2. Credit Unions
3. Building Societies
4. Co-operative Retail Services Ltd
5. 5a. Co-operative Wholesale Society Ltd
5b. Co-operative Bank PLC
5c. Co-operative Insurance Society Limited
6. John Lewis Partnership PLC
7. Mondragon Co-operatives (Mondragon Corporacion Cooperativa)
8. Kibbutzim



Other relevant current and associated reports by Manfred Davidmann on leadership and management:

Title   Description
     
Directing and Managing Change     How to plan ahead, find best strategies, decide and implement, agree targets and objectives, monitor and control progress, evaluate performance, carry out appraisal and target-setting interviews. Describes proved, practical and effective techniques.
     
Style of Management and Leadership     Major review and analysis of the style of management and its effect on management effectiveness, decision taking and standard of living. Measures of style of management and government. Overcoming problems of size. Management effectiveness can be increased by 20-30 percent.
     
Role of Managers Under Different Styles of Management     Short summary of the role of managers under authoritarian and participative styles of management. Also covers decision making and the basic characteristics of each style.
     
Organising   Comprehensive review. Outstanding is the section on functional relationships. Shows how to improve co-ordination, teamwork and co-operation. Discusses the role and responsibilities of managers in different circumstances.
     
Work and Pay   Major review and analysis of work and pay in relation to employer, employee and community. Provides the underlying knowledge and understanding for scientific determination and prediction of rates of pay, remuneration and differentials, of National Remuneration Scales and of the National Remuneration Pattern of pay and differentials.
     
Work and Pay: Summary   Concise summary review of whole subject of work and pay, in clear language. Covers pay, incomes and differentials and the interests and requirements of owners and employers, of the individual and his family, and of the community.
     
Social Responsibility, Profits and Social Accountability   Incidents, disasters and catastrophes are here put together as individual case studies and reviewed as a whole. We are facing a sequence of events which are increasing in frequency, severity and extent. There are sections about what can be done about this, on community aims and community leadership, on the world-wide struggle for social accountability.
     
Social Responsibility and Accountability: Summary   Outlines basic causes of socially irresponsible behaviour and ways of solving the problem. Statement of aims. Public demonstrations and protests as essential survival mechanisms. Whistle-blowing. Worldwide struggle to achieve social accountability.
     
Motivation Summary   Reviews and summarises past work in Motivation. Provides a clear definition of 'motivation', of the factors which motivate and of what people are striving to achieve.
     
The Will to Work: What People Struggle to Achieve   Major review, analysis and report about motivation and motivating. Covers remuneration and job satisfaction as well as the factors which motivate. Develops a clear definition of 'motivation'. Lists what people are striving and struggling to achieve, and progress made, in corporations, communities, countries.
     
What People are Struggling Against: How Society is Organised for Controlling and Exploiting People   Report of study undertaken to find out why people have to struggle throughout their adult lives, in all countries, organisations and levels, to maintain and improve their standard of living and quality of life. Reviews what people are struggling against.
     
Community and Public Ownership   This report objectively evaluates community ownership and reviews the reasons both for nationalising and for privatising. Performance, control and accountability of community-owned enterprises and industries are discussed. Points made are illustrated by a number of striking case-studies.
     
Ownership and Limited Liability   Discusses different types of enterprises and the extent to which owners are responsible for repaying the debts of their enterprise. Also discussed are disadvantages, difficulties and abuses associated with the system of Limited Liability, and their implications for customers, suppliers and employees.
     
Ownership and Deciding Policy: Companies, Shareholders, Directors and Community   A short statement which describes the system by which a company's majority shareholders decide policy and control the company.
     
Ownership: Summary   Ownership means control, means decision-taking. This short review covers where the right to ownership comes from and how it is exercised. Ownership of land, means of production, and wealth. Ownership in relation to incomes, need, and human rights.
     
The Right to Strike   Discusses and defines the right to strike, the extent to which people can strike and what this implies. Also discussed are aspects of current problems such as part-time work and home working, Works Councils, uses and misuses of linking pay to a cost-of-living index, participation in decision-taking, upward redistribution of income and wealth.
     
Using Words to Communicate Effectively   Shows how to communicate more effectively, covering aspects of thinking, writing, speaking and listening as well as formal and informal communications. Consists of guidelines found useful by university students and practising middle and senior managers.
     
Exporting and Importing of Employment and Unemployment   Discusses exporting and importing of employment and unemployment, underlying principles, effect of trade, how to reduce unemployment, social costs of unemployment, community objectives, support for enterprises, socially irresponsible enterprise behaviour.
     
Transfer Pricing and Taxation   One of the most controversial operations of multinationals, transfer pricing, is clearly described and defined. An easily-followed illustration shows how transfer pricing can be used by multinationals to maximise their profits by tax avoidance and by obtaining tax rebates. Also discussed is the effect of transfer pricing on the tax burden carried by other tax payers.
     
Inflation, Balance of Payments and Currency Exchange Rates     Reviews the relationships, how inflation affects currency exchange rates and trade, the effect of changing interest rates on share prices and pensions. Discusses multinational operations such as transfer pricing, inflation's burdens and worldwide inequality.

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Relevant Subject Index Pages and Site Overview


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Copyright    ©    1996    Manfred Davidmann
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History
18/10/96 Completed
05/01/97 To alt.co-ops
17/03/97 To Website
02/06/02 Added 'Relevant Current and Associated Works'

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