Credit unions offer an alternative to high-cost loan sharks

This article by Andrew Bibby, in a slightly different form, was first published in Choice, 2013

Here's an idea: you and your neighbours all save a little spare cash together, so that when one of you needs a short-term loan the money is there to be lent out, at a nice low rate of interest.

Sounds unrealistic? Quite the contrary, it's the basis on which Britain 's four hundred or so credit unions successfully operate every day of the week. Britain 's credit unions (sometimes described as savers' and borrowers' cooperatives, run by and for the members) are now present in most of the country's urban areas and in many smaller communities too, although we're still a long way behind countries such as Canada , the US and Ireland . There, credit unions are major organisations and an established part of the financial system.

In Britain , perhaps around 900,000 people have chosen to sign up as credit union members. Credit unions vary enormously in size: the two largest, Glasgow Credit Union and a police officers' organisation with the somewhat unusual name of No 1 Copper Pot, both have assets over £100m and offer sophisticated financial services for their members, but equally there are small credit unions with less than 200 members. Some (as in Glasgow ) are geographically based. Some are linked to particular occupations or employers; both local authority workers and the police have been early adopters of the idea, for example. But there are also credit unions linked to particular church congregations, or (as with the Leicester Caribbean credit union) to ethnic minority communities. Members of a credit union are all expected to have something in common with each other, and although the so-called ‘common bond' has been interpreted in some cases quite widely the principle is an important one: it aims to help ensure financial probity and a low level of default on loans.

Credit unions are flavour of the month with the present government which has recently announced a £38m funding pot to help the movement develop its administrative and support systems. The idea is to help credit unions offer a viable alternative to the pay-day lenders and loan sharks who have been springing up across the country during the recession, often charging exorbitant rates of interest. The need for a low-cost alternative to the sharks is certainly there. The Guardian newspaper, for instance, recently reported on one lender charging more than 16,000,000% APR. By contrast, the maximum a credit union can charge is fixed by law: the current maximum is 2% per month or 26.8% APR.

Many of today's credit unions started small and were originally run entirely by volunteer help. But recent years have seen a move towards mergers and towards increased reliance on paid staff to carry out the basic administration involved in taking in money and making loans. Nevertheless all credit unions remain ultimately member-run: members elect the Directors who have the responsibility of overseeing the staff and establishing strategies.

As credit unions have grown bigger, they have also been able to offer more services. Thirty or so offer basic current account banking and many more provide debit Visa cards for members to withdraw their savings through cash machines. The big dream of the Association of British Credit Unions Ltd (ABCUL, the main UK federation for credit unions), is to be able to use the Post Office counter network for credit union transactions. Discussions have already been held and ABCUL's chief executive Mark Lyonette talks of this becoming possible within the next two or three years.

Meanwhile, recent reforms to credit union legislation are helping too. Credit unions have always been able to pay out dividends to members from any annual profits they make but now they can also, if they want, arrange to pay interest on savings. It means they can advertise for savings in just in the same way as banks and building societies do. Another recent change is that it's possible for organisations to join as members, and ABCUL is hoping that a wide range of community groups and housing associations will consider putting some of their funds into their local credit union.

It would be fair to say that not all credit unions have managed the trick of looking after their members' money and managing the loans. In recent years there have been a number of credit unions which have become insolvent, and just this April the Marches credit union based in Kington in Herefordshire went under. Marches was a relatively small credit union, with 350 members and about £160,000 in deposits. Fortunately for the Marches ' members, savings in credit unions are backed by the government's compensation scheme for depositors (see Q&A below).

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