MSE News: Government: Why we're putting £38m into credit unions

edinburgher

opinions4u wrote: »

£38m is naff all.

I have to say after newspaper articles of late around the amount of liquidity being pumped into the banks to try and make banks lend to SMEs, this amount does seem like a bit of a joke.

Eco_Miser

dealer_wins wrote: »

I know its so last century, but learning to save and having a meaningful emergency fund are better solutions than any form of borrowing.

Credit Unions are savings institutions. I don't know if it's universal but at my local CU you have to have saved for 13 weeks before you can apply for a loan. You are also encouragd to continue paying in when your loan is paid off.

antrobus

opinions4u wrote: »

£38m is naff all.

On the contrary, given that the combined reserves of all credit unions in Great Britain amounted to £65m in 2009, £38m is a lot of money.

antrobus

spikyone wrote: »

....It's also disappointing that Lord Freud's column contains so little of real substance - where is the investment actually going, how will it help the credit unions, and more importantly how will it help those who are in financial need?
...

Well, you could always read the Feasability Study Report produced by the DWP Credit Union Expansion Project.

http://www.dwp.gov.uk/docs/credit-union-feasibility-study-report.pdf

It's not as if it's some big secret; God gave us Google for a reason.

jamesd

Thanks. Looks from that planning as though this is a proposal that has no real chance of success in getting really widespread use of credit unions.

I'm not very willing to have an organisation that is supposed to have a socially noble purpose pay me 1.5% while charging borrowers 43% for my money. Best to either scrap this or come up with something that is less likely to prompt a rip-off reaction.

Remember here that I can get 8% for FSCS protected savings from a commercial bank for up to £300 a month at the moment and it is fairly commonly possible to do this. And that peer lenders at places like Zopa get something in the 5-7% range, though with capital at risk.

If credit unions want lots of money to lend one really easy way is to pay a competitive rate of interest. Pay 5% and judging by the Zopa experience many tens of millions would be available, quite likely more because the borrowers have a lot of those in financial need and a much higher social benefit factor than at a traditional peer to peer lender. By the time the rate reaches 8% even I'd be interested in putting some more serious amount of money there for sustained periods. Getting the money lent out as fast as it was coming in could be more of an issue - the credit unions would be top of the MSE savings tables.

And that's with a minimal increase in the rate charged to borrowers over the level already proposed.

At least the planning assumes that loans of £1,000 and up would be charged at 2% a month or less, not 3%.

I evaluated placing funds with my local credit unions. For the one where I could obtain sufficient information to make a decision I found:

1. That it practices religious discrimination, with its leaders routinely swearing an oath to promote a particular religion, but with the credit union not presenting itself as a religious advocacy body, and hence is not a socially worthy organisation. I oppose discrimination on religious or other grounds.
2. The dividend wasn't well disclosed but had historically been far less than even quite low commercial alternatives, with no commitment at all as to what ti might be in future years even expressed conditionally based on certain financial goals being achieved. So I would have no clue about what rate I'd receive for my money.
3. The organisation was lending only about half of its funds, so had no apparent need for my money.
4. I was contemplating placing with it an amount that was between 5% and 10% of the total amount of lending it had done in the previous year.

So it failed by being a socially harmful organisation that didn't need my money and wouldn't have paid me anything resembling a commercial rate if I'd done it. If there had been a need for the money I'd have accepted some reduction in market interest rates but definitely not discriminatory practices, at any rate.

bigadaj

You have given a cogent commercial assessment of credit unions but this surely isn't their raison detre. They are supposed to get people on low incomes into the habit of regular savings, and once that discipline has been established allow them to borrow money when they would otherwise struggle.

You can argue they are inefficient, and they probably are in a similar way to housing associations but that seems to be the norm.

I can understand their religious stand point from a moral perspective, but agree that this should be open and above board,after all look at all the parents happy to fir in with Sikh, Muslim or catholic practices when a decent school opens nearby.

So simplistically whilst the credit unions might benefit from greater efficiencies they are small and niche, and definitively nt an answer to payday lending, though having the right attitude to try and make people avoid wonga et al

antrobus

jamesd wrote: »

....3. The organisation was lending only about half of its funds, so had no apparent need for my money.....

Yes, that's generally the issue with a lot of credit unions in the UK. They find it difficult to find sufficient opportunities to lend money.

I know some previous poster considered that an APR of 26.8% wasn't exactly a 'low rate' of interest, but down on the ground floor of society, 26.8% APR ain't really much at all - Provident, for example, charges 270% (or something like that) - given the small loan values it doesn't leave much of a cushion for defaults.

The main problem with credit unions in the UK is that they're too small. (Have a look at the USA to see what credit unions could be like.) Which is why this government, and the previous one for that matter, have this DWP Growth Fund that is at least trying to address that issue.

jamesd

I agree to some extent about the low incomes savings habit but they are also supposed to be lenders to people on modest but not low incomes.

antrobus, it may well have been my post saying that 26.8% APR wasn't exactly low rate that you're thinking of. But I know how doorstep and payday lenders end up with high APRs due to fixed costs. For a low value loan, say £200 over a year, I know the likely costs well enough and can accept that sort of level of APR... except the rip-off appearance which I think can best be dealt with by paying a higher rate to savers.

The credit union savers also need a worthwhile rate to encourage good savings habits - like picking a good commercial rate for their savings. Urging people to save at a poor interest rate isn't really encouraging a good habit, except for those who have no other form of banking available to them. For a credit union that needs money to lend, how can it expect to get it except by charity if its offering lower than market interest rates, and rates that look bad compared to those it's charging?

My local credit unions, if they pass my basic ethics tests, would get some degree of charity from me, but for more serious money from me it needs to make financial sense for me to place my money with them.

The US credit unions have major employer buy-in and are much more commercial organisations. Major players in the market over there.