Credit Union Governance - Fiduciary Care

Captive of the "Savers Mandate"

Many observers have been concerned at governance of credit union for some time. In most cases it seems that the member once elected to the board continues to represent the members interests and disregards the credit union as a separate entity. The concept of fiduciary responsibility requires directors act in the best interests of the company at all times.

Yet with Irish credit unions this does not appear to be the case. Frequently voluntary director thinking confuses the role of the board with the interests of the member as a customer. If the purpose of the company is to provide affordable financial services to its customers this should not lead to confusion between the expectation of the individual as a customer and their expectation as an owner (member).

But, the majority of credit unions are run with only purpose in mind and that is to pay a dividend to members at year end. In short they have become captive of the savers mandate which is a phenomena known to students of credit unions worldwide. This acts as a trap into which unwary boards fall time after time. With a sole focus on dividend rate almost everything else becomes irrelevant. Strategy and business planning is short term and amounts to governance by dividend declaration at year end. Immediately after which, the process restarts targeting the next dividend payout date.

This cycle is embedded to such a degree that in many cases credit unions have exploited a local market dominance in providing affordable credit to those who cannot easily access credit elsewhere. Some credit union lending rates have remained stubbornly high which has resulted in a borrowers subsidy to savers. It is an aberration of credit union philosophy and has resulted from the twin effects of (a) loan to asset degradation and (b) aging savers bias on credit union boards.

Since 2000, the key loan to total asset ratio has collapsed from c64% to below 46% in 2007. Despite a booming personal credit demand, credit unions have failed to lend and in particular have failed to increase the loan size. Their members have deserted them preferring to borrow elsewhere at cheaper rates, more convenience and better features. The effect on income has been startling given that at the same time members increased savings, attracted by high dividends and accounts that did not deduct government tax at source on dividends.