All credit to credit unions

Credit unions represent the quiet approach to community action. While some groups, like Greenpeace or Extinction Rebellion, seek to bring about change by hitting the headlines, credit unions are rarely in the news and not well understood. Yet figures published by the Bank of England show that they serve some two million members in the UK and have, collectively, assets of around £4bn. They are a major social force.

A credit union is essentially a financial co-operative. They exist to support saving and to provide loans to their members, and are accountable to those members, not to external shareholders. In determining whether, or how much, to lend, credit unions used to rely on a member’s record of saving with them, reinforced by regular personal contact. Now, however, like other financial institutions, larger credit unions will use automated credit checking.

Traditionally, the scope of a credit union has been defined by the ‘common bond’. Members were drawn from a community that had something in common – living in a particular place, working for the same employer or belonging to a specific trades union, for example. When taking out and repaying a loan, therefore, members were not dealing with a faceless multi-national, but a community organisation, staffed in large part by volunteers, who in some ways were people like them. Again, as institutions have grown in size, the role of volunteers and face-to-face contact has become less central.

Banks and other financial institutions continue to withdraw their services from smaller and poorer communities, and credit unions are able to fill the gap. According to the magazine Which, “A third of all UK bank and building society branches were shuttered during the past four and a half years – and of those left, almost one in 20 are open for less than five days a week.” In central Devon, 81 per cent of branches have closed since 2015. The figure in Totnes is 74 per cent. It helps explain why credit unions in the UK have taken off, from 650,000 members in 2008 to 2.15 million in 2020.

As an early – though not very active – member of my local credit union, I wanted to know how they have fared during the past few turbulent years. How have they responded to over a decade of austerity? What has been the impact of Covid-19? The answer is mixed.

At a national level, the evidence suggests that credit unions have grown alongside an increase in financial insecurity. Stagnant wages, an increase in precarious employment, and successive cuts to the social safety net have left more families with difficulties making ends meet. A superficial reading, therefore, might suggest that credit unions are simply responding to an increase in poverty.

Yet credit unions are not food banks. Their role is not to give handouts to the destitute, but to provide accessible financial services for those neglected by mainstream institutions. For a more nuanced account I turned to Kim Robinson, treasurer of the Mendip Community Credit Union (MCCU).

MCCU is one of the smaller unions with 1,200 members and, at its pre-coronavirus peak, 30 volunteer staff. It has assets of £870,000 and currently £520,000 out on loan. Other credit unions in the Southwest have merged to gain financial clout and offer a wider range of products. In 2020, for example, the Dorset-based Wyvern Savings and Loans merged with Bristol Credit Union to create an organisation with 19,000 members and £9m in deposits. MCCU, however, believes that there is still a role for the small, local and volunteer-driven institution.

Kim confirmed that austerity and the pandemic had led to increased numbers of people in serious financial need contacting the credit union.

“The volunteers were faced with more and more people turning up with awful stories” she said, “and it was difficult to explain that we were not set up to help. We had to refer them to foodbanks, to local charities, to Citizens’ Advice or similar organisations.”

The people the credit union could help were those capable of saving and repaying a loan, but lacking the credit history or the regularity of income that high street banks demand.

Not that credit unions only serve the financially marginalised. As Kim says, 

“We would not survive as ‘the poor people’s bank’. From a business perspective, we need to have members who could easily borrow elsewhere, but find the credit union convenient, friendly, and ethical, so that we generate the income we need to operate. We have a lot of Eastern European members who all save a lot and borrow a lot, which helps generate the income we need to pay our running costs.”

It is probably unstable employment rather than absolute poverty that has contributed to the recent growth of credit unions. Many members of MCCU are self-employed, can earn good money but lack a guaranteed level of weekly income. In the Mendip area many members had worked on the festival circuit, now hit badly by the pandemic.  Others worked in hospitality & tourism which is also seasonal and equally damaged by Covid-19. The most common reason for members taking out a loan is to replace a car or van, or perhaps pay an unexpected utility bill. They can afford it, but not to pay it all this week.

The pandemic has made operating a face-to-face service difficult but has also had some surprising effects. “Overall, savings have grown,” said Kim. “People on furlough haven’t had the incidental expenses of going to work, and have reduced spending on holidays and entertainment.” Applications for loans have reduced, perhaps because of lower expenditure or perhaps greater caution in uncertain times.  It is not at all clear, however, what the impact of cutting £20 per week from universal credit will be. 

Although MCCU is a community business which needs to balance its books, it has a clear social purpose. A good illustration of this is the arrangement it has with Mendip District Council (MDC) to manage their ‘Help to Rent’ scheme. Many of those threatened with homelessness cannot cover the cost of a deposit and the rent in advance that private landlords require. An interest-free MCCU loan can be underwritten to pay the landlord, and repaid in instalments that match each tenant’s capacity to pay. MDC believe that the involvement of the credit union, with its emphasis on supporting financial self-reliance, has been much more effective than the previous ‘bond’ scheme at getting and keeping tenants in secure accommodation.

The social priorities of MCCU are also reflected in the fact that few applications for loans are turned down outright. As a local institution, where users are known as people, not just numbers, it is usually possible to negotiate something affordable.

Kim gave me one further example. More than one member is believed to be saving with the credit union to build up a ‘running away fund’ in order to escape their domestic situation. Handling that knowledge sensitively serves a serious social purpose.