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A Credit Union is a Member owned, financial co-operative which provides financial services only to its members (who are also the owners of the business). Basically a Credit Union takes deposits (savings) from its members and then lends that money (loans) out to other members. The interest charged on those loans then provides for a return on the savings. This return is usually in the form of a retrospective dividend – as owners of the business, the depositors share in the risk and rewards of ownership and therefore the amount of the dividend depends on the performance of the Credit Union. Credit Unions are “not for profit” businesses in the sense that they use the income generated to build capital, provide services and provide a return to depositors.
Credit Unions are not “open to the public” in that you have to be a member before you can save or borrow with them. Each Credit Union has a “common bond” which determines which members of the public can join it. Common bonds can be occupational (e.g. all teachers); employment based (e.g. everyone who works for the local authority) geographical (e.g. everyone who lives or works in Liverpool); membership based (e.g. everyone who is a member of the National Trust); or any combination of the four categories. The ethical principles of Credit Unions means that they are non-discriminatory and therefore membership is open to everyone who qualifies under the common bond criteria.
- Partners’s common bond comprises anyone who lives In Merseyside or works for an employer who has a place of business in Merseyside, is a member of the Spirit of Shankly Liverpool Supporters Union or is a member of any TUC affiliated Trade Union (North West Region Only).
What are Credit Unions for?
Credit Unions exist for the economic empowerment of their members. They encourage savings, provide financial education and affordable loans, all the while circulating the money within its membership community – i.e. the money and profits stay within the membership and don’t go to external shareholders.
How many Credit Unions are there?
There are over 500 Credit Unions in the United Kingdom. Collectively they have over 1.5 million members and £2 billion of deposits. Credit Unions come in all shapes and sizes, with the smallest having just a few hundred members through to the largest who have over 30,000 members and £100 million of deposits. No matter where they live, everyone in the United Kingdom is eligible to join at least one Credit Union.
What kind of services do Credit Unions offer?
All Credit Unions take deposits and make loans, however, as they are there only to serve their own members the exact nature of their services and products will be unique to the individual Credit Union. In respect of savings, services may include instant access savings accounts; term or notice savings accounts; Christmas savings accounts and budgeting facilities. Some Credit Unions also offer full current account facilities.
In terms of loans, services may include unsecured lending, secured lending, mortgages and business loans. The lending limits and criteria are set individually by each Credit Union (some require savings and lend on a multiple of those savings or lend based on length of membership whilst other lend on a case by case basis regardless of savings or length of membership. What unites them, however, is their view of an individual as a “member” not a customer: Credit Unions are ethical lenders and do not lend where it is not in the best interests of the member.
Who owns and runs a Credit Union?
Each member of the Credit Union is an owner of the business and controls it in a “one member one vote” democratic structure. A Credit Union will have a Board of Governors/Directors elected by the membership to oversee performance and guide the strategic direction of the Credit Union. The Board are volunteers and do not get paid for their work. In small Credit Unions, the Board (perhaps in conjunction with other volunteers) also run the business, whereas the largest Credit Unions have professional staff to do that and the Board take an overseeing / strategic role. In between, different sized credit unions will have a mix of roles and responsibilities appropriate to their size.
- As one of the larger credit unions, Partners has a professional staff of 12 who manage all of the day to day activities. The board of 9 directors, who are the only volunteers, oversee the performance and strategic direction of the credit union on behalf of the members.
Why are Credit Unions ethical?
Credit Unions are financial co-operatives, owned by their members and are under their democratic control. Credit Unions only serve their members and their interests. That means decisions are made based on the well-being of the members as individuals and as a collective (in fact Credit Unions have regard to every potential member when making decisions and therefore act in a socially responsible manner within their common bond area). Lending decisions are based upon affordability as it is not in the interest of a Credit Union to see any of its members get into financial difficulty. Credit Unions operate “what you see is what you get” lending with standard rates and no hidden charges.
Credit Unions not only co-operate internally (i.e. among the members) but they also co-operate with other Credit Unions and stakeholders in order to promote a fairer society.
All this means that the dividends paid to depositors are ethically sourced.
Are Credit Unions regulated?
Credit Unions are extensively regulated. Not only do they have to comply with the appropriate legislation but, just like banks and building societies, they are regulated by both the Prudential Regulation Authority (i.e. the Bank of England) and the Financial Conduct Authority. Unlike banks and building societies, the regulations pertaining to Credit Unions severely restrict the type of activities which Credit Unions can carry out, as well as the terms on which they can do so. For example, Credit Unions are restricted by H.M. Treasury on the amount of interest they can charge on loans. The current limit is 3% per calendar month (42.6% APR), however, most Credit Unions do not lend at this level and many self-impose a lower interest cap on the basis that as ethical lenders they believe that loans should be issued at reasonable and affordable rates.
Are Deposits in Credit Unions safe?
As evidenced by the banking crash of 2008, no financial institution can ever be considered 100% safe. Just like banks and building societies, Credit Unions are licensed deposit takers and as such all its depositors are protected by the Financial Services Compensation Scheme (which currently protects deposits up to £85,000 per person). Therefore deposits in Credit Unions are protected exactly the same as deposits in banks and building societies. This limit will change to £75,000 on 1st January 2016.
What’s the main Difference between a Credit Union and a Bank?
Banks have to “maximise” whilst Credit Unions focus on service. Banks have to maximise the revenue they generate from each customer and maximise the efficiency of their organisation in order to maximise bonuses, maximise their stock market value and maximise the return to the external shareholders. Credit Unions have members not customers; people are there to be served not financially exploited. Credit Unions focus on service and generating a reasonable return for members.
Some Credit Union Myths!
A) “A Credit Unions is a poor man’s bank” – as Credit Unions are inclusive and are working for a fairer society, people often think that they are only for the financially excluded but this is not true: Credit Unions are for everybody. They are particularly relevant for those who care about the ethics of their “bank”, however, they are also relevant for those who just want the best return on their deposits or access to the best lending rates.
B) “Credit Unions will always lend me money” – Credit Unions are responsible lenders who look after their members and sometimes that means saying “no” to loan requests. That said, because they care for their members, Credit Unions will usually try to work out alternative arrangements (e.g. smaller loan, longer repayment period) to help the member achieve their goals.
C) “Credit Unions don’t offer competitive returns on savings” – As owners of the business, members dividends are retrospective allocations of profits and therefore Credit Unions can’t advertise “rate of returns” on deposits, which is why this myth exists. In many cases dividends often outstrip interest from “high street banks”.
Which Credit Unions can I /should I join?
That depends on which ones you qualify for and, more importantly, which services you are looking for. As with everything in life, “shop around” and don’t forget you can join more than one Credit Union!