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July 11, 2012

Turn down this investment

In the last edition, we trailed the UK government plans to invest substantially in the UK’s credit union movement but highlighted some hidden dangers for the future of the community based credit unions.  John Patton, a man whose life has been steeped in the credit union movement worldwide, and who is secretary of the Scottish League of Credit Unions, is convinced the move should be resisted.  This proposed investment is a Trojan horse.


The Dept of Work and Pensions has published proposals for providing around £50 million in grant funding to credit unions If implemented, the cash will be offered to a ‘carefully’ selected group of credit unions, for lending and expansion – provided that they comply with changes to their business and culture, recommended in the feasibility study. 

Credit unions are not-for-profit, fully autonomous financial co-operatives which are committed to the service of members, promoting small savings and access to low cost credit. The DWP proposals, which are at total variance with these objectives, have not been welcomed by many Scottish credit unions. 

The report recommends, among other things, that the rate of interest charged on loans should be 3% per month; currently most Scottish credit unions charge a maximum of 1% per month on the outstanding loan balance. Its authors believe that interest rates must increase to at least 3%, if credit unions are to be sustainable. 

They ignore the evidence in Scotland of many large, successful credit unions which have never exceeded the standard 1% per month – St Johnstone, Newarthill, Castlemilk and Cranhill all spring to mind. 

While regulated by the FSA, credit unions are free to exercise control of their own policies and procedures. It is a model that has served credit unions well throughout the world. 

More people, across all income levels, are currently turning to credit unions as financial providers because they appreciate and trust their ethical nature. It is the duty of Government to provide a reasonable standard of living for all of its citizens and to address issues of social and financial exclusion. 

The DWP is the appropriate department through which to attempt change. However, credit unions should not become a vehicle at the disposal of Government to utilise in the process. 

Undoubtedly, there is a greater empathy within the credit union movement for those on low incomes than we would expect to find among other financial service providers.

However, capacity to repay is a consistent criterion for ethical lenders such as credit unions. Adding to the debt burden of the impoverished will not solve their difficulties. Government has shown little urgency in tackling the exorbitant rates, legally charged by home credit providers and the pay-day loans industry. 

Global economies are still reeling from a banking crisis which grew out of sub-prime lending at high interest rates to the poor in the United States. I fear that the Westminster Government will seek unilaterally to re-brand credit unions solely as instruments for tackling financial exclusion. In my view, this would be commercially damaging to an image which our members have been carefully nurturing in Scotland; that credit unions should attract and serve members from across all income groups in the Community. 

When Labour came to power in 1997, Chancellor Gordon Brown, established a ‘Credit union Task Force’ and appointed Fred Goodwin to chair it. 

The Coalition has demonstrated a remarkably consistent insight in its selection. To advise the Credit Union Movement on interest rates, it chose as Head of the Project Steering Committee, Deanna Oppenheimer, a senior executive of Barclays Bank.

John Patton is Secretary of the Scottish League of Credit Unions (SLCU). He writes in a personal capacity.