Focus on: Credit unions

Background

Credit unions are non-profit cooperative banks owned and managed by their account-holder members under a cooperative ‘one member, one vote’ structure. Members’ combined savings accounts can then loan money to each other at low interest rates. Credit unions are an important part of civil society in the way that they connect to a broader, member-led tradition that came about in the cooperative movement beginning in the 19th century.

Credit unions began operating in 1964 and have traditionally targeted people with lower incomes and credit scores to help them access mainstream financial services and address local poverty. Members are entitled to dividends on top of interest and have equal voting rights. Credit unions tend to be centred on a common bond – whether geographical (for example credit unions set up in a local community), associational (for example a Church of England credit union for clergy and staff) or occupational (for example organised via an employer).

Size and scope

The number of credit unions have continued to decline

According to the Bank of England, between 2015 and 2019, the number of credit unions submitting annual returns fell from 500 to 410.[1] This compares to 835 credit unions in 2001.

The reasons for this long-term decline in numbers are mixed. Over 70 credit unions went into default in the last decade due to bad debt. Mergers, the rise of larger high street credit unions and a lack of digital services in some local credit unions may have also contributed to this decline.

Credit union membership has increased, driven by growth in England

While the number of credit unions have declined, credit union membership in the UK has increased by 12% from 1.9m in 2015 to 2.1m in 2019. This equates to about three percent of the total UK population[2]. However, data from the Bank of England shows that this growth was driven primarily by England, where membership increased by 12% from 771,605 to 866,438 over the same period. 89% of UK members were adults while 11% were aged under 18 in 2018.

The number of staff has increased slightly

Between 2015 and 2019, UK-wide staff numbers increased by five percent (2,450 to 2,581)—ranging from eight percent in Scotland to minus eight percent in Wales.

Financials

Income and expenditure have increased steadily, though expenditure has risen faster

The income of credit unions in the UK increased by 13%, from £186m in 2015 to £211m in 2019. This rise was driven by England and Scotland, which saw an increase of 17% and 18% in their respective incomes.

The increase in expenditure was even larger, however, rising by 29% between 2015 (£123m) and 2019 (£158m), which included a 38% increase in Scotland, 28% in England, 24% in Northern Ireland and 16% in Wales.

Lending has increased, especially in England and Scotland

Outstanding loans went from £1.3bn in 2015 to £1.6bn in 2019, an increase of 30% in the UK. England drove this increase with 42%. Northern Ireland made up the largest proportion of lending, with £629m worth of loans in 2019, whereas Wales made up the smallest proportion with £25m.

Assets and liabilities grew steadily

According to the Bank of England, net assets and liabilities increased relatively steadily, having grown by 25% from 2015 to 2019 (£2.8bn to £3.5bn). This increase was driven by England (30%), Wales (27%) and Scotland (26%).

Spotlight: Northern Ireland

Credit unions have a larger presence in Northern Ireland than any part of the UK. Total assets held by Northern Irish credit unions were worth £1.8bn (50% of the total UK assets) while membership was 703,405 in 2019 or 37% of the total Northern Irish population[3] and 34% of all UK membership.

This considerable difference can be explained by the far stronger historic foundation of credit unions in Northern Ireland. This strength is likely due to the role of local churches and prominent politicians like John Hume in establishing and promoting them. Neighbouring Ireland may also be a driver, as over 70% of the Irish population belong to a credit union.

Reflections

How sustainable is the growth in credit union membership and finances?

Though data shows that credit unions themselves have been declining in number, overall membership, income, expenditure, and loans have continued to grow in recent years. The fall in numbers can be attributed to longer-term trends in consolidation and mergers of existing credit unions including the emergence of larger credit unions to compete with high street banks. In addition, there have been closures of some credit unions which tended to be smaller with lower membership and bad debts.

The 2008 financial crisis has seen a revived focus on credit unions as a viable alternative to high street banking and payday lenders. In contrast to mainstream financial institutions, credit unions benefit from membership built on local bonds, and provide lower levels of interest on loans.

Concerned with their reputation as the ‘poor man’s bank’, many credit unions have made an effort to reach out to a more middle class customer base including branching out into offering current accounts and mortgages.

While some would like the credit union sector to expand, others argue that going after higher risk customers might put unreasonable pressure on income margins and expose credit unions to more risk. This raises an important question of whether continued growth in credit unions is sustainable going forward and if so, what changes are needed to increase access to their services while reducing risk.

Footnotes

  1. Note: all data is recorded in calendar years

  2. Based on mid-year population estimate by ONS

  3. Based on 2019 mid-year population estimate by NISRA