Credit Unions

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 12^th 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 12^th 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

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[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.

[ii]     The new caps on pay day lending have now been introduced by the Government. See http://www.fca.org.uk/news/fca-confirms-price-cap-rules-for-payday-lenders [accessed by author 18th June 2015]

[iii]    If you are really bothered about the veracity of that claim, see http://blogs.channel4.com/factcheck/factcheck-divorce-bank-accounts-and-balls/10919 [accessed by author 18th June 2015]

[iv]    http://www.friendsprovidentfoundation.org/wp-content/uploads/2013/03/Roehampton_University_-_Summary.pdf

[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. 

[vii]    http://leftfootforward.org/2013/06/asking-borrowers-to-pay-more-is-not-the-answer-for-credit-unions/

[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. 

[ix]    http://www.theguardian.com/money/2013/may/11/credit-union-liquidation-money-save

[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

responsible lending’, http://www.theology-centre.org.uk/wp-content/uploads/2013/04/bretherton-on-usury.pdf [accessed by author on 14^th June 2015]; Gillan Scott (2014) ‘Taking on the exploitation of payday lenders is a Christian calling’, http://godandpoliticsuk.org/2014/05/15/problem-debt-blights-the-lives-of-over-2-4m-children-what-would-jesus-do/ [accessed by author on 14^th June 2015].

[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.

Diggers and Common Ownership

Gerrard Winstanley (1609-1676) wrote more than twenty radical political religious tracts, which provide support for his practical experiment in common ownership known as the "Digger" colony. This was an attempt to cultivate common land to provide the landless with a livelihood, but also a utopian statement about the shape of an ideal society where common ownership was the norm. It is an interesting moment in history, because the republic under Oliver Cromwell might have been influenced by this movement if landowners and the propertied class had not asserted their power to oppose the 'Diggers'.

I am reading about Winstanley in the book Radical Christian Writings: A Reader. My interest in common ownership comes from my teaching at the University of Exeter on co-operatives and member based enterprises. These have the potential to be more democratic forms of business than investor owned organisations. The Hebrew scriptures state that: 'The earth is the Lord’s, and everything in it, the world, and all who live in it' (Psalm 24:1).  Ownership is very much God's relation to creation, not ours. Therefore, our ownership is more akin to the relation of a tenant to a landlord; witness the parable of the tenants (Matthew 21). From passages such as Exodus 16, we learn that sufficiency and equality are the guiding principles of God's economy. And we find that mutuality was at the heart of the New Testament church as the Apostle Paul insisted on economic distribution as the expression of our gratitude to God. Witness the levelling involves in 2 Corinthians 8 through the collection for the churches suffering from famine.  You can read more about the collective principles of church governance in Andrew McLeod's book Holy Cooperation: Building Graceful Economies. It all seems very akin to Winstanley's writings.

So how did Winstanley view the church in his own time, in relation to these ideas of mutuality and common ownership? He makes a bold stand by replacing the name of God with that of Reason. In Truth Lifting up its Head Above Scandals (1648) it appears that Winstanley was so oppressed by the institution of the Church and its support of the status quo that he gave up the name of God because it had been devalued by the church. This is a sad inditement of worship in England during the 17th century, but the same argument could be made today in many contexts. Today we see the charismatic churches busting out of the respectabile strait jackets of Christian traditions that have been ordered by forms of rational religion, those that leave the spirit and heart untouched by compassion for the poor.  These charismatic churches have the potential to develop practical knowledge of God through solidarity with the poor. The parable of the Sheep and the Goats in Matthew 25 is worth some reflection.

Another aspect of Winstanley's writing that strikes me was when I learned that the community was forced to leave their occupation of St George's Hill and were moved on to Little Heath, Cobham. As a gardener and allotment holder I know that this is one of the most painful experiences you can face. The hard labour that goes into making land productive becomes part of your character, your future hope, your satisfaction and your dignity. Moving on to another plot destoys the external landscape, but it also rearranges the internal landscape of the soul. It can be damaging to character, to hope, to satisfaction, and to dignity to be forcibly moved on. I too have had to leave farmland behind that I love, leaving my sweat and tears in that place. I can't really empathise with those who have been forcibly evicted from land, but I have touched the edge of that circle. Thankfully, I have a better life after moving on, but the same was not true for Winstanley I suspect.

I note Winstanley's preference for practical experience over book-learning. This is something that I am now understanding about the Co-operative Movement. You really need to experience the movement first hand as a co-operator to speak with authority about the pros and cons of the movement. Being a co-operator reminds you that co-operation is inseparable from human relationships and experience. For example, how can you teach self-responsibility outside of community? I'll speak about this in my next post on Credit Unions.

In The New Law of Righteousness (1649), Winstanley discusses legitimacy and how this is performed in society. In his day, the powerful got to write history and shape how commuities interpreted the revelation of God through scripture. This domination ignored the teaching of the Bible that suggests there 'shal be no bond-man nor beggar in all his holy mountain'.  This is perhaps not so prevalent today in the churches that I frequent, but not so long ago many school children were obliged to sing the hymn, All Things Bright and Beautiful, which has the lyric:

The rich man in his castle,
The poor man at his gate,
He made them, high or lowly,
And ordered their estate.

Christianity has often been the supporter of blind injustice and fatalism that does not correspond to the teaching of scripture about the judgement coming upon the unjust e.g. James 5:4. So I think Winstanley provides a prophetic memory for the church to recover, which involves our relationship to property and the vision of common ownership found in Acts 4:32 'All the believers were one in heart and mind. No one claimed that any of their possessions was their own, but they shared everything they had'.