How credit unions can succeed where banks fail
2nd February, 2010
If you're looking for small, short-term loans for a green project, it's worth borrowing from a credit union instead of a bank
In March 2009 I took up the post of project worker for the Transition Town movement in Rhayader, Powys.
The group had recently become one of three in Powys chosen by a local energy agency to roll out a two year project aimed at developing a community-owned renewable energy scheme, while raising awareness of low carbon issues in the town. The total capital spend for the project was to be around £40,000.
Unfortunately, neither the energy agency or members of the transition group were very good at reading the small print and quite a few months later it was made clear to the group that they would have to find all monies in advance and claim back from the capital budget only when showing evidence of expenditure from their own account.
As a small group of volunteers they didn't have anything like this kind of money. I felt that a series of short-term loans over several months would be the only answer, as taking out a loan for the entire £40,000 would be too onerous. However, on approaching the main high street banks it appeared that not only were they not interested in short term loans, but they were also not particularly interested in 'small amounts' as short term loans either.
This included the ethical bank Triodos, which was suitably apologetic, but said that it wasn't interested in loans of less than £25,000 over any period less than a year.
Fortunately, a flash of inspiration and a meeting with the chair of the Red Kite Credit Union, Richard Bramhall, saved the day, with the credit union, (CU), agreeing a series of loans of up to £6,000 over periods of a month or less, the loans to be guaranteed by my, or another member's, shares.
Richard Bramhall, however, decided that hanging the success of a European project on the shares of an individual volunteer, while financially acceptable, is morally not so, and has written to the Government department in question asking that they stand as guarantors for the loans instead.
In my experience, there aren't that many high street bank managers who could or would do that for a customer.
What are credit unions?
Not everyone may have heard of credit unions. Some may think that they're a hangover from the days when Labour politics were seriously left wing. Others may hear the word 'credit' and presume that they're designed to lure the underprivileged into debt.
Yet worldwide, 82 countries have credit unions with over 100 million members and assets exceeding £300 billion.
Credit unions were developed by the father of the British socialist movement, Robert Owen (1771 - 1858), born in Newtown, Montgomeryshire, to engage the privileged and underprivileged alike in common and mutual financial support.
They are cooperatives with each member having one vote not linked to the amount of savings, or shares, owned by that member. The majority of unions are run on a voluntary basis by their members and are accountable to the FSA (Financial Services Authority), with members' shares covered by insurance.
Each CU has a board of directors whose role is management, formulating policy and ensuring that it operates legally. In addition to the Board of Directors there is a credit and a supervisory committee. The credit committee assesses loan applications and monitors the savings accounts. The supervisory committee acts as internal auditors to the CU, reporting to the board of directors and the members at the AGM.
Accountability, shares and profits
CUs base their membership boundary on what's called a 'common bond', which is exactly what it says: something that binds the membership together. Most often this is geographical, usually applying to an existing community; it can also mean the commonality of the workplace such as a police force, a hospital or county council offices.
This common bond establishes a degree of mutual accountability amongst the membership, which minimises the risk of default on loans, as well as encouraging active support.
CUs are essentially not-for-profit, but this doesn't mean that savings don't earn money. All profits are shared equally among the membership and the amount received depends on the amount of shares saved. Each CU sets its own dividend figure annually and bases it on how well it has performed the previous year.
There is a legal obligation to keep a reserve of money against defaulting loans called liquidity. Once the liquidity figure has been established and all overheads and running costs accounted for, profits are returned to the members as the dividend.
Loans are normally required to be supported by shares, generally to about one third the value of the loan. In some cases instant loans are possible - these are decided on a case-by-case basis by the loans committee. This is often where the common bond is advantageous to the CU, as loan applicants are often known in the community and their risk levels more easily assessed.
Easier to repay
Credit union loans are decided on an individual basis and repayment terms set to ensure continuity. Unlike high street banks the monthly repayments are taken from the loan before interest is added, which makes a significant difference to the amount of overall interest paid.
Equally, unlike high street banks, a loan can be paid off in full before its finish date with nothing left to pay. Many other financial institutions require a percentage, if not all, of the interest that they would have earned if the loan had gone full term.
So what is a real world example of what a loan would cost? My favourite is this: borrowing £100 for a year costs 2 pints of beer.
How so? Well, in banking terminology this equates to 1 per cent interest per month on the diminishing balance, which, providing the loan is repaid to schedule, would cost the borrower £6.60 over a one year period.
Try telling that to your high-street bank manager.
- For more information on credit unions click here
- To find out if there is one near you click here
- To set one up click here
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