Rhetoric Rules the Roost in the Face of A Crisis

Debate on credit unions is frequently sidetracked by a rhetoric that demonstrates a serious lack of thought or fact based discussion. The overwhelming majority of credit unionists have few financial qualifications and their only experience is the small works of their local credit union. Their view is formed through constant repetition of doing things as they have been done for the past 50 years. Credit unionists and their human systems have become skilled at incompetence. This is not to criticise, merely to state a position. It explains why since inception not one major core product or service development has been successfully executed. The products and services offered remain the same as they were 50 years ago. No innovation and no change – why?

The Irish governments new DGS laws illustrate that few if any credit union directors, managers are aware of what deposit insurance is and what its objectives are. If they were they would have objected to the states inclusion of credit unions in the banks scheme and would have insisted on a properly designed credit union system as found in the US and Canada. But that opportunity has been lost as the ILCU fought and lost in its demand for a private scheme, it did not have the competence of resources to manage. In terms of what is called the financial safety net, Ireland has the most ineffective system in the developed world. It is wholly inadequate and one of the reasons why the sector is in crisis.

Credit unions are a unique form of banking. This is crucial to understanding what their business is and how the Irish model has become an aberration and why it is now bust. There are three distinct models for credit unions, found across the world, depending on the maturity of the sector. The first is a finance company funded through shares, leveraged off deposits where “interest” is a return on a share in profits. The second is a savings and loans specialist, funded by deposits with a broad line of savings and loan products, tracking the market on rates and the third a full service co-operative banking service offering savings, transaction accounts, small business services, mortgages, credit cards, life insurance, investments and so on.

The Irish model has been stuck in the finance model for the past twenty years and is at the root of why credit unions cannot pay a dividend this year and why over 100 will fail within two years. Some are trying to make the shift to savings and loans but cannot do so on their own – they are missing the central resources found elsewhere.

Stuck with the finance model, they haven’t been making enough loans for over ten years. As costs have escalated margins have shrunk and the core business of savings and loans is loss making. Some have no chance to reverse this trend and have become what the regulator and others call savings clubs. Income is entirely interest income – fee income from the few additional services provided is less that 1% of total income. Contrast this with a movement that did change, Australian credit unions are full service with interest income comprising 70% and fee income 30%.

The reason why this has happened is in credit unionist thinking and response to their customers. Because the emphasis is in on shares and maximising the return to shareholder (dividend) credit unions have been managed to maximise profits to finance high dividend payments. Had credit unions competed close to market rates in the past ten years they would have retained an additional €300m in reserves which should have been invested in improving products, services and expanding lending activity. But they didn’t. Instead they remained fixated on share balances and were sucked into what became an investment bubble, that when it burst lost €500m. In short the ill-advised strategy promoted by the ILCU cost the movement close onto €800m in foregone financial reserves without adding the money written off on IT projects etc.

So why didn’t credit unions away from the finance model to savings and loans specialist or full service co-operatives. The answer lies in the insistence on retaining independent autonomy and innate inability to co-operate. The paradox is Irish credit unions have not learned how to co-operate with each other.

Yet they have a marvellous opportunity to rebuild their business and begin lending again – thing is they will not be able to do this on their own and need help badly. There is only one sponsor with the pockets and power to insist on change and that is government – but what are the chances of it moving from its position where it considers credit unions less than systemically important and is maintaining the most ineffective financial safety net in the modern world.