This post is
about credit unions and whether they should receive support from Christians.
‘At 31 December 2013, credit unions in Great Britain were
providing financial services to 1,122,461 people, including 126,217 junior
savers. The sector held more than £1.1 billion in assets with more than £676
million out on loan to members and £949 million in deposits’.[i]
The Church
of England famously called for parishioners to join credit unions in 2013, but
was subsequently embarrassed to find it was investing share capital in Wonga, a
pay-day lender of last resort. I am
pleased to report that in 2014 the Church of England withdrew their investment
from Wonga. So obviously I have a
view! A loan of £100 for one month will
cost you as little as £2 from a credit union, but £24 a pay day lender, such as
Wonga, over the same period.[ii] Many people are denied access to more
affordable bank loans, due to their low incomes or circumstances. There is an
overwhelming moral case for supporting an alternative to pay day lenders, but
are credit unions the answer? I think
they are part of the answer, but they need people of good will to show
solidarity with them. You used to hear
people say that you were more likely to get divorced than change your bank
account![iii]
Well I’ve changed my bank account twice and opened a further two
accounts; to date I have yet to be divorced.
Inaction can result from lazy thinking, so let’s get informed about
credit unions.
A credit
union is a democratic financial co-operative, owned and controlled by its own
members. They offer savings accounts, a
range of savings schemes, affordable loans (typically 2% interest rates) and
prepaid cards as their main services. Traditionally,
credit unions were small associations of people with a common bond who would
lend to each other at low interest rates.
By cutting out the middle-man, i.e. the bank, you can effectively lend
money to each other at a lower cost. Delinquency
on credit union loans tended to be low, because the common bond between members
ensured a degree of trust and accountability that was rooted in communities
displaying strong bonds. The argument
about the importance of trust to the successful functioning of financial mutuals
like credit unions is made in the film ‘It’s a Wonderful Life’. In the film, the distinction is made between
the Building and Loan that is owned by the community and the bank owned by the
wealthy Henry F. Potter. The film narrates how banks owned by private interest
are extracting profit from those who can least afford to pay and how this is
corrosive of the common good. Most banks
in the UK are owned by private shareholders and are therefore vehicles for
those that already have capital to make even more from those who do not. Charging interest on loans is permissible
when both borrower and lender can mutually benefit from the outcomes of the
transaction (e.g. for investment loans for business ventures), but for those on
low incomes it is obvious that the opportunity to benefit from borrowing money
is negligible. How could anyone consider
profiting from a loan undertaken to pay for a child’s funeral, for example?
Recently I
joined the Plough and Share Credit Union at a service point in Exeter, because
I wanted to support an organisation that aimed to help people on low incomes to
access financial services. I thought I
would be meeting the needs of lower income groups by simply opening an account,
without being paternalistic. I support
co-operatives because they uphold the virtue of self-help and self-responsibility
that they foster. Contrast this with the
dependency culture that can be the unintended outcome of government welfare. I initially thought that the more money the
credit union held in reserve, the more it would be able to lend. However, it is not that simple for a number
of reasons with some notable qualifications that need to be made for each.
First, credit unions often have healthy
reserves of capital, but they cannot lend as often as they would like
to because of credit risks. Most people
approaching a credit union for a loan do not meet the criteria to receive
credit. Therefore, credit unions cannot
be said to meet the needs of the poorest, which are perhaps better met through
charitable organisations and/or the welfare system. However, turning down applications for credit
from those who are not in a position to repay the loan may be an occasion for a
credit union to provide some advice to people in that situation and to help
them improve their credit rating through opening a savings account. Most high street banks will not offer savings
accounts to people who are regarded as credit risks and/or cannot provide the
initial lump sum to open an account.
Second, I learned that credit unions
are reliant upon government subsidies and grants for their existence.[iv] Partly this is due to the
people and organisations taking out loans with them. Many people do not realise that organisations
can now be members of credit unions e.g. churches, housing associations and
food banks can organise their finances through a community friendly credit
union.[v]
Obviously the more loans are taken out and repaid, the more profit the
credit union makes, which it can pass on to savers in the form of a dividend.[vi]
It appears that financially, middle class savers can be a burden to the credit
union, because of the service costs on high levels of unemployed capital. Moreover there is little incentive for
middle-class people to join credit unions if dividends are lower than interest
rates on ISAs or savings accounts in conventional high street banks. However, this situation can be turned around
if a critical mass is generated of lenders and savers. Credit unions could provide better returns
for savers, if a critical mass of members could be achieved.
Third, credit unions in the UK currently
find themselves in a bind. They have
overheads to pay, because they often employ members of staff and need office
space. They are short of funds, but they
cannot receive donations because they do not have charitable status, nor can
they charge higher interest rates due to government regulations. Charging higher interest rates has been
suggested as a solution that would make credit unions less reliant upon
government support, but higher interest rates would mainly benefit middle-class
savers at the expense of those less well off, therefore contravening the
rationale for the credit union to provide access to financial services.[vii]
The reliance on government support has meant that credit unions have had
to dance to the tune of Whitehall policy makers.
Since the
late 1990s, successive governments have viewed credit unions as the solution to
helping people suffering from financial exclusion.[viii]
However, to reach more of those who are financially excluded requires
that credit unions expand in scale and take on new members. The government Credit Union Taskforce
reported in 1998, which concluded that credit unions needed to become more
business-like and more focused on extending services to the poor. Since then,
credit unions have changed in character as they have received greater levels of
government funding. Small credit unions
have merged together to form larger organisations with paid staff and more
professional services. As they have
grown, credit unions have lost the characteristics of the common bond that once
limited the risk of lending, which means that they are now more cautious about
lending as delinquency rates on loans have increased. They must now perform more extensive credit
checks like any bank, before lending.
Credit unions are also more tightly regulated, with government requiring
them to have more capital in reserve (e.g. more money to hand as ratio of money
out on loan) and greater liquidity (e.g. the ability to pay out those who wish
to withdraw their savings). Credit unions
are protected by the Financial Services Compensation Scheme (FSCS), which
currently guarantees an individual’s savings, up to a limit of £85,000 if it
should go bust.[ix]
However, credit unions have to contribute to this scheme and pay for
this insurance.[x]
Modernisation
has increased the cost base of credit unions, which means that they are now
more dependent upon government investment (or some would say subsidy). To tackle the funding shortfall, the
government has suggested raising the cap on the amount of interest credit
unions can charge. The increases are not
significant, in the order of a few percent, but it is somewhat ironic that the
intervention of the government has made it more expensive for people to borrow
money from credit unions, not less.
However, let’s be realistic about this, because credit union interest
rates are still extremely reasonable.
Fourth, I note that one of the problems
that credit unions now face is that lenders will pay off their loans with
pay-day-lenders before they pay back the credit union. If you are being only being charged 2% by the
credit union, it is obvious which creditor you would pay first. Therefore, credit unions have suffered under
the current austerity since the financial crash. In 2011 and 2012, around six or seven credit
unions went bust. Many in the credit
union movement argue that it is irresponsible to open up more opportunities to
take on debt for impoverished households at the current time. However, they are in a bind, because their
reliance upon government funding requires them to extend services to high risk
borrowers who are more likely to default.
What the government is asking credit unions to do is something that I
think is a good thing in principle, because it is asking wealthier low risk
individuals to pool risks with lower income high risk groups. Only where there is a sense of shared
solidarity with the poor can credit unions feasibly succeed. Where would such a solidarity come from? Where would people with such a philanthropic
motivation be found? This is where
churches and Christians can make a difference by showing solidarity and joining
credit unions.
The idea of
joining up may feel alien or threatening.
When I considered joining the Plough and Share Credit Union it exposed
some fears of joining a community I had been encouraged to strive to leave
through educational attainment, career choice and thrift. Many Christians experience ‘redemption and
lift’, where living as a Christian often pays in worldly success and takes you
out of the communities in which you were raised. This is certainly my story. Credit unions, especially under the recent
government influence, have become known as the ‘poor persons’ bank (perhaps
they always carried this tag), which puts off many middle-class investors. This presents a problem to credit unions,
because they need to attract more middle class investors and borrowers to
provide the capital base to accept more risk and to meet government regulations. However, in other countries credit unions
have a different identity and do not carry this stigma. Our narrow UK understanding of what credit
unions can be doesn’t help people to understand the profound transformation
that is possible when wealth is brought into the service of the common good
rather than private interests.
Fifth, there are other objections that
Christians may have with credit unions. Historically, Christians have dismissed
credit on the basis that it goes against the virtues of patience (Philippians
4:11), it violates our trust in God (Matthew 6:33), and it creates dependency
on elites who are often corrupt (Proverbs 22:7). Credit implies debt, and Christians may be led
to believe that debt is necessarily bound up with injustice through their
exposure to initiatives like the ‘Drop the Debt’ campaign. Theologically, we might point to the focus on
the liberation of debts as the good news that Christ brings, whether these
debts are incurred between humans and God, or whether they are incurred between
fellow humans. So we may decide to adopt a principled stance that credit
provision and indebtedness is always wrong.
Luke Bretherton does well to point out the biblical injunctions against
debt, showing how usury (the charging of interest) was rarely accepted by
anyone throughout history, and there are many voices citing biblical visions of
justice who are speaking out against the normalisation of debt in recent times.[xi]
There are clearly injunctions against usury (lending at interest) in the
bible, which are supported by theologians in the Christian tradition.
It is my
hunch that historically Christians have not supported credit unions, because
they believe that supporting credit providing institutions is tantamount to
supporting indebtedness; “never a borrower or a lender be”. However, few would argue that taking out a
mortgage or educational loan constitutes a contravention of faithful obedience
to God. Nor would anyone object to
borrowing money to support the creation of a school for the blind, where the
repayments on loans would be recycled in the local community rather than
expatriated to who knows where. When we
are talking about credit, we need to recognise that there are many types of
credit for many types of goals – some virtuous, others less so. Accepting that some debts are compatible with
Christian ethical principles, most Christians would not want indebtedness to
become an acceptable norm. So rather
than ruling out all forms of credit, we need to ask questions about: the type
of credit available; the purpose for which credit is required; the magnitude of
the credit; the effect on charitable giving that credit provision has; and the
impact on the lives of those who take on debt.
We need to compare this to biblical notions of human flourishing.
Historically,
readers of Bretherton may be surprised to learn that the Church’s policy with
respect to usury has varied. Before, the
12th century only 10% of the rural population in England was
comprised of landless peasants. Those
with a surplus had little option but to informally pool their wealth to smooth
consumption for the poor in times of hardship.
Communities would look after each other’s needs as there was no other
alternative. After the 12th
century, a private capital market arose so that in times of surplus rural
farmers had the option of lending money at interest or informally pooling
wealth. The more farmers that shifted
from charitable giving into commercial loans, meant that the cost of organising
informal pooling increased (it is all related to economies of scale). The cost of supporting informal pooling
through agents increased for the church, which mean that it had to step in to
prohibit usury, both for its sake and for the poor. In so doing it retained a critical mass of
support for informal pooling by encouraging the wealthy to share with the poor. This is one of the reasons that charity was
and still is associated with virtue and status; after all the rich needed to
feel good about themselves! In 1830, the
church relaxed its prohibition against usury, because the state took on more
responsibility for the poor in the form of poor relief and poor law
legislation, and the rise of private insurance reduced the need for the church
to smooth consumption for the poor.[xii]
Therefore, today, it is the policy of the state that has the greatest
importance for the economic provision of credit, debt and poor relief. The church must speak from the sidelines to
influence the state, but the church must also take action to show solidarity
with the poor and lead by example. The
greatest act of solidarity with the poor that the government could take at this
time could be to place restrictions on unemployed capital. For example, for individuals with more than
£50,000 in capital, any amounts above that sum, would need to be invested in a
credit union, social enterprise or co-operative with return rights limited to
2% or similarly low percentage rate of interest – with return rights to the
organisation invested in, set at a much higher rate. This would move us into a situation where
labour employs capital, rather than visa-versa.
In other words, unemployed capital would serve people. Afterall, one of the main things holding back
the economy is the lack of finance to do things. It’s an idea that would force unemployed
capital into community service, which would seem to balance private and common
interests.[xiii]
So what can
we do to maintain credit unions? It
seems to me that we can do a number of things.
First, we can join a credit union and let
them meet our banking requirements as far they are able to. From my perspective, I still bank with the
Co-operative Bank, but this is now only 20% owned by the Co-operative Group,
which means that private interests are being served rather than communal ones.
Although the Co-operative Bank still has an ethical policy, it is owned by
hedge funds that I do not want to support.
However, I do note that the Co-operative Bank supports credit unions, by
allowing them to share their services, as do many other high street banks. Another caveat in the big bad bank
story! Regardless, one of my next inquiries
will be into how I can manage my finances through the credit union in a
convenient way.
Second, you can donate your account to the credit
union when you die. This way your cash
can fund the existence of the credit union, much in the same way as a charitable
donation.
Third, you can volunteer with the credit
union to reduce their overheads and provide the service at as low a cost as
possible to those who need it.
Fourth, by opening an account you can vote
and participate in the governance of the credit union. Being a member means taking responsibility
for financial services and retaining these important activities in community
control. Clearly, given the issues
raised in this blog, there are lots of debates to be thought through and our
contributions will be needed to shape these debates. We must remember that high street banks are
owned by private interests, which means that they are not accountable to their
account holders in the same way as a co-operative. Even mutuals, like building societies, are
often paying their chief executives multi-million pound salaries, when it is
little warranted. More of the money in a credit union stays with the
members.
Fifth and finally, I would argue that credit unions in
other countries have succeeded because they have much more government support
and buy in from the public. In the UK we
have spent billions propping up institutions that are owned by private
interests, should we not be spending more on those institutions that serve
those who need the most support in our society?
In Canada, more than a third of the population are members of at least
one credit union and their scale means that they can provide more services than
those in the UK.
In my
previous post I mentioned that getting involved was the best way to understand
the value of a social movement or organisation.
I believe this is the same with the Christian faith in the resurrection
of Jesus Christ, which is a claim that cannot be rationally evaluated outside
of the kind of relationships that are prescribed in the bible as the ones
through which we come to know God.
Likewise joining a credit union has been a way for me to understand the
issues and is part of my ongoing discipleship of coming to understand Christ. For example, in all this deliberation I keep
coming back to the question of where my security truly exists.
References
[i]
Figures from unaudited quarterly
returns provided to the Prudential Regulation Authority. Cited from a letter
written by Matt Blond, Association of British Credit Unions Limited.
[v]
One caveat is that credit unions are
potentially more exposed to risk as they take on business members and their
accounts. It is more difficult to assess
the credit risk of a business than an individual. Therefore, government attempts to open up
credit unions to new members, may not be in the long term interests of credit
unions.
[vi]
Credit unions are Co-operatives, so
they call interest payments on accounts a dividend.
[viii]
In Britain it is estimated that
approximately 1.4 million UK residents do not have access to a suitable bank
account. Those without access to
financial services face a poverty premium of over £1,280 as they face extra
costs in undertaking basic transactions.
[x]
The FSCS works by borrowing money from
the Treasury. A charge to cover the
interest-only on these borrowings is made by the FSCS on financial
organisations. In 2010 a total of £18.7bn was borrowed and interest-only payments
were £645.4m. From 2012, the principal
on this sum began to be repaid, which meant that the levy has increased. Credit unions were billed for 0.05% to cover
the interest-only. See McKillop, D.,
Ward, A. M., & Wilson, J. O. (2011) ‘Credit unions in Great Britain: recent
trends and current prospects’ Public
Money & Management, 31(1), 35-42.
[xi]
Luke Bretherton (2011) ‘Neither a
borrower nor a lender be’?1 Scripture, usury and the call for
[xii]
Clyde G. Reed and Cliff T. Bekar (2003)
‘Religious prohibitions against usury’, Explorations
in Economic History, 40, 347-368
[xiii]
The point is made in the short novel by
Rory Ridley-Duff (2014) The Dragons’
Apprentice.
