Life SavingCommunity Development Credit Unions

Mick Brown, Pat Conaty and Ed Mayo New Economics Foundation, the National Association of Credit Union Workers and the National Consumer Council The New Economics Foundation and the National Association of Credit Union Workers gratefully acknowledge the support of Royal Bank of Scotland and NatWest.

The grant from Royal Bank of Scotland and NatWest that has been used to fund this publication, and associated events, and the direct work of the New Economics Foundation and National Association of Credit Union Workers is in no way connected to the National Consumer Council which has only contributed to the text of this report Contents

Acknowledgements 2 Foreword by Ruth Kelly 3 Preface 4 Executive Summary 5 Lifeline Services 6 A Brief History of Credit Unions 7 The Dance with the State Development Dilemmas Community Development Credit Unions in the USA 10 New York State of Mind Competing with Predatory Lenders British Credit Unions – Growth Pains and Game Plans 17 1. Southwark Credit Union, London 2. Northern Oak Credit Union, North Tyneside 3. Enterprise Credit Union, Knowsley 4. Riverside Credit Union, Liverpool 5. Robert Owen Credit Union, Wales 6. South East Birmingham Community Credit Union Community Development Conclusions Winning Market Share Against Predatory Lenders 27 Should Government Back Community Development Credit Unions? 30 Recommendations – A Lifeline Banking Service through Community Development Credit Unions 32 First …Definitions CDCU Development Framework Recommendations Appendix A – List of Research Interview Sample and Case Profiles 37 Appendix B – The New York City Financial Network Action Consortium 38 Appendix C – Marketing Campaign for Community Development Credit Unions in Britain to tackle Financial Exclusion 40 Appendix D – Bushwick Co-operative Federal Credit Union 41 Appendix E – Work of the New Economics Foundation, the National Association of Credit Union Workers and t he National Consumer Council 43 References 45 Notes 47

1 Acknowledgements

The New Economics Foundation and the We would additionally like to thank over National Association of Credit Union Workers 100 US and British credit union practitioners would like, first and foremost, to thank the that we interviewed or had contact with Community Development Banking Unit at The during the course of the six-month project. Royal Bank of Scotland and NatWest for their In particular, we owe a deep debt of gratitude strategic and financial support of this research to Cliff Rosenthal and his staff in New York at project. The authors alone are responsible for the National Federation of Community the contents and any views expressed. In Development Credit Unions for organising our coming to the interpretation of the findings itinerary and giving us bundles of time to and in framing the recommendations we have answer our questions. We also would like to been ably guided by a strong and experienced thank Peter Bray of the New York City Advisory Group who we wish to thank for their Financial Action Network Consortium for practical experience and wisdom. The answering questions patiently and taking time members were: out of his busy schedule to guide us through the New York subway networks, enabling us to Andrew Robinson, interview community development credit Royal Bank of Scotland and NatWest unions in the South Bronx and Harlem. Matthew Pike, Home Office Additionally we are grateful to Jack Lawson of Geron Walker, Lloyds TSB Bushwick Co-operative Federal Credit Union. Jim Dearlove, Birmingham Credit His help was invaluable in gaining an Union Development Agency understanding from a grass roots expert on Lucy Aldous, Community Development how to start up a community development Finance Association credit union from scratch, get fuelled up, and Bob Brennan, Department of Trade moving from 0 to 60, in less than a minute. and Industry Small Business Service and Phoenix Fund We would also like to thank all five British Fiona Price, Department of Trade Credit Union trade associations and their and Industry representatives for their assistance, support Chris Stoddart, Financial Services Authority and participation in the 10 March 2003 Will Paxton, Institute for Public Focus Group. Lastly a special thanks is Policy Research needed for the patient administrative, editing Niall Cooper, Church Action on Poverty and design work of the artistic Lily Swan and Debt on Our Doorstep Campaign at New Economics Foundation who has put Lesley Bird, Wales Co-operative Centre lots of heart and soul into this report to finish Glynis Sharpe, Community Wealth it off superbly. Credit Union Ltd, Doncaster Elaine Kempson, Personal Finance Research Centre, University of Bristol Mick Brown, Pat Conaty and Ed Mayo Gina Hocking, Oxfam UK July 2003

2 Foreword by Ruth Kelly

Britain has one of the most competitive and sophisticated financial service sectors in the world, but for many people, not least in my own constituency, access to financial services still means cheque-cashing shops and loan sharks. Access to basic financial services is a vital part of bringing people back into the mainstream of society. A job is not enough, freedom from crime is not enough, if you are marginalised from the financial system and ghettoised in a cash economy.

That is why this Government’s approach to social inclusion and asset-based welfare acknowledges the central importance of improving access to financial services. The complexity of the issues which make up financial exclusion call for joined-up solutions. Credit unions that aim to tackle financial exclusion are part of the solution — providing access to savings and affordable loans. In Ireland and in the USA they are able to play a key part in improving access to financial services. We want to see strong growth in the credit union sector in this country, capable of meeting a wide variety of needs. I hope this report on community development credit unions stimulates discussion and debate about different approaches to development and how that growth might best be achieved.

Ruth Kelly Financial Secretary to the Treasury May 2003

3 Preface

This report marks an important milestone. but rooted in current practices. No single credit union in England may correspond 15 years ago, when the National Federation to the Platonic ideal of a community of Community Development Credit Unions development credit union – but then, even first received credit union visitors from the after 30 years or more of experience, United Kingdom at our New York offices, the few if any do in the US. Reading this report, British movement was small and scattered, it seems clear to me that there are enough labouring under an impossibly restrictive credit unions with sound, effective practices regime that all but foreclosed its growth of various kinds to show the way forward for potential. Five years ago, when I commenced scores, if not hundreds, of others. The time a series of visits to England and began to is ripe for public and private sector resources share the community development credit to nourish these seedlings. union (CDCU) story with Treasury officials, bankers, and credit union activists, there were There is no more difficult, or vital, work in the hundreds more credit unions, growing public financial-services sector than promoting interest, but only a hypothetical and savings and providing legitimate, affordable controversial strategy for applying the CDCU credit to the financially excluded. The concept to solving the problems of the problems of economic disenfranchisement in financially excluded in the United Kingdom. developed countries are increasingly global; In the past two years, I have observed the some of the same institutions and predatory quickening pace of development of the credit lending schemes to drain wealth from poverty union movement, as well as that of the communities are found on both sides of the nascent community development finance Atlantic – sometimes, under the same industry, of which CDCUs are an integral ownership. With the emergence of the CDCU part in the US, though just beginning to be movement in Britain, we can say that the so in the UK. The National Federation’s responses to poverty and exclusion are transatlantic collaboration has deepened becoming global as well. through exchange visits and study tours with the National Association of Credit Union Workers, the New Economics Foundation, Clifford Rosenthal the Community Development Finance Executive Director Association, the Scottish League of Credit National Federation of Community Unions and credit unions from Birmingham, Development Credit Unions Wales, Yorkshire and elsewhere. USA

The "state of the art" in this cross-fertilization is richly evidenced in this report. The authors have studied and judiciously translated the US experience into the British context. More important: they have appraised a half-dozen credit union models operating today in England, analyzing their strengths and vulnerabilities. Their assessments and recommendations are not based on hypothesis or theoretical constructs,

4 Executive Summary

In the face of market uncertainty, long-term The report recommends that the Treasury, and savings have emerged as a major political the devolved administrations in Scotland and concern. But uncertain pensions are an Wales, initiate a programme of investment obsession largely for the better off. For the and support to develop a cluster of 100 less well-off, ranging from the traditional poor CDCUs in the UK. to the aspirant lower middle-classes, that are above benefits, in work but far from The goals for a lifeline banking service in comfortable in terms of access to housing or Britain are two fold. Firstly to encourage job security, there is a different crisis — which savings among Britain’s low-income is short-term savings. Without savings and households and thereby provide a localised having typically to borrow at exorbitant rates, way and means for the promotion of asset far higher than those charged to better-off based welfare solutions including the Britain, the crisis in short-term savings is really Savings Gateway and financial literacy services a new form of poverty and social exclusion. to help reduce child poverty. Secondly to take 10 per cent market share from The report examines the scope for creating a sub-prime lenders, the largest of which have lifeline banking service based on a new up to 1.6 million customers. model of credit union, successful overseas. On current projections, credit union members Winning this market share over a five year will number half a million by the end of 2004. period of assertive, direct competition would But the alternate tightening and loosening of make a significant impact on the life of a state regulation has limited the sector. The large number of households. This report most recent changes, with the transfer of provides a quantitative estimate of the regulatory powers to the Financial Services outcome of such an initiative. It would: Authority are likely to lead to closures among the weakest credit unions. While the attraction inject around £227 million of affordable of the credit union model is that it is one of credit into many of the least well-off the few financial services institutions that is households in Britain; relatively straightforward for a community to save an additional £36 million in interest start small, it is the very lack of scale that can payments from hard-pressed budgets; prove problematic. bring a benefit to wider society and the taxpayer from the capital invested In the USA, around one in three of the 220 directly in low cost loans, of £250,000 ‘community development credit unions’ for an investment of £145,000 in each (CDCUs) have received public investment credit union. packages from the Federal Government and other sources. As a result, credit unions serving The CDCU model represents a practical the poorest Americans have grown dramatically, and positive development model for credit with increases in asset growth (in some cases unions that wish to address financial exclusion up to 800 per cent), financial growth in net and poverty. It also offers innovative policy worth (up to 1,200 per cent) and membership solutions, and partnerships, to a government growth (up to 500 per cent). Every year, in the in search of ways to promote a more USA, credit unions assist over 600,000 people inclusive society. in need, who would otherwise be preyed upon by down-market lenders.

5 Lifeline Services

School uniforms, paying the gas bill, term debt, and yet routinely denied abiding by some key principles, such unexpected repairs can have the same access to consumer credit or, in the as a maximum interest rate for effect on a low-income family as a South East, priced out of housing lending, they are exempt from many of stock market crash on investors, altogether, facing a daily commute of the regulatory demands made of hollowing out the few assets that they three hours and more. banks, meaning that they are the only may have – whether a National organisation of its type that ordinary Savings Bank account or funeral plan It is a myth that loan sharks are the people at local level could feasibly set with the Co-op. But, whereas the stock illegal operators, unlicensed by society, up to provide affordable and locally market can bounce back within operating only at the roughest end of accessible financial services. 24 hours and investors recover their town. Many of Britain’s flourishing ground, the everyday shocks of life on ‘sub-prime’ lenders generate huge The report draws on an extensive low income can fast become profits by lending at margins that are set of national and international quicksand, as poor families are sucked essentially asset-stripping the poor and interviews, and the findings of credit into a vortex of debt. low to moderate income households. union practitioners that visited They are Britain’s very own financial CDCUs overseas.2 Our proposal for the This is why short-term savings and disservices industry. Other countries uptake of CDCUs is, however, not for access to affordable credit (along with have cracked down on exploitation or, any one body to implement. Rather, a safe place to deposit money, a way as in Ireland and the USA, fostered the proposal is designed for comment to cash cheques and make payments alternatives that can win market share and discussion. to third parties, and access to money by competing for the business of those and budgeting advice) represent a at risk. It is for this reason that we published lifeline service, no less important than an earlier version of this report for nurses or the local police. They reduce This is the subject of this report. We consultation as an ‘exposure draft’ in vulnerability and help people to cope argue that the UK can develop a May 2003. The credit union sector is with the risks of life in modern society. framework for low-income savings, by still young, has seen false dawns and supporting the spread across the its fair share of internal debate. There Without this, as research study after country of a new type of credit union, are other stakeholders too, such as research study has shown, people on dedicated, among other things, to community regeneration organisations, low-incomes have to turn to borrowing serving those in need. central and local government, banks at exorbitant rates, far higher than and ethical investors that could play a those charged to better-off Britain. We call these ‘CDCUs’ – a term that role, and whose views will matter. This is true not simply for the can help distinguish and recognise Community development credit unions traditional poor, out of luck and out of credit unions that have a particular, cannot be imposed. But the potential work, but also for Britain’s new working while not necessarily exclusive, focus clearly exists for a wider constituency poor. These are the aspirant lower on the needs of the poor. Not all credit of support to come behind the idea middle-classes, from nursery teachers unions will have this. Indeed the of a credible national framework, to cleaners and manual workers, that proportion of credit union members backing the efforts of people on bear the brunt of economic risk – without bank accounts is estimated by low-income themselves to get out of above benefit levels but caught in low- some researchers in fact to be no financial exclusion through access paid, ‘flexible’ and insecure jobs. Many different to the adult population at to a supportive local credit union, open are tenants, but just as many are large.1 But credit unions do have a five days a week in a convenient, modest home-owners, tied into long- unique legal status. In return for High Street location.

6 A Brief History of Credit Unions

The first credit union in Britain was set Smaller credit unions soon found the 30,000 population. The first rural up on 1 April 1964 by members of the registration fees a burden and argued credit union, the Robert Owen in West Indian community in Wimbledon. that it prevented them from offering Newtown, Wales opened during 1995 It was set up as a company, open to dividends on their members’ savings. – the first eligible to residents members from the local parish. The need for an annual return and a dispersed over hundreds of square Two more credit unions soon followed, professional audit also caused miles. Further deregulation in 1996 in Highgate, London, and in Hove, complaints of being ‘paperworked to allowed credit unions to open out to Sussex. As there was no specific legal death’. In 1982, the regulator reported members that worked in an area even model for credit unions, they adapted on the subject: if they did not live locally. Of the 690 existing structures to suit their or so credit unions now operating in purpose.3 By 1979, when legislation “Some credit unions were formed Britain, more than half were first was passed, a further 51 credit unions and registered in a spirit of optimism registered with a community common had got going. engendered by the provision of bond – that is, designed to serve a a specific statutory framework. neighbourhood rather than a workplace The Credit Unions Act was passed in Inevitably, in some cases, the euphoria (the so-called ‘industrial’ credit 1979 as one of the last acts of present at the launching of a new unions). However, since 1996, it has the dying Labour Government. It was enterprise has given way to the more increasingly become the norm to the direct result of work by the credit sober realisation that the day-to-day register new credit unions with the ‘live unions and the National Consumer responsibility of running the enterprise or work’ mixed common bond. Council and followed a pattern effectively and prudently involves a set earlier in Northern Ireland by great deal of commitment and regulating the size of loans and voluntary effort by individuals. Development Dilemmas shareholdings, the rate of interest Regrettably, not all of those involved The credit union movement has payable on loans and the dividend had appreciated the scope and depth matured in cycles of stronger and payable on shares.4 of their responsibilities to take care of weaker growth. By 1998, after nearly the funds their members placed with 20 years of formal life, credit unions them, or the time necessary to had recruited a quarter of a million The Dance with the State discharge them adequately.” members. On current projections, The first credit union to register under credit union members may number the Act was Skelmersdale, with In the previous 12 years, 24 new half a million by the end of 2004. Wimbledon registering soon after. The credit unions had started. But in the new credit unions included a number following three, six were closed, The alternate tightening and loosening of activists, particularly among the leading the regulator to impose new of State concern has played a role. West Indian population, who had requirements. If credit unions were Regulation has tended to be one step previously been involved with informal dealing with people’s money, many of forward, one step back. For each extended family groups who clubbed who were not rich, then they had an improvement, other requirements have together to save and give each other entitlement to a reasonable degree of been imposed from elsewhere, such loans. This tension between formality protection.5 It was only by 1994 that as money laundering regulations.6 The and informality and between the regulation started to loosen up again, most recent changes, with the transfer capacity of members and the demands and in particular, accepted credit of regulatory powers from the Registry of regulators has proved to be an unions that aimed to serve a of Friendly Societies to the Financial enduring one since. residential ‘common bond’ of over Services Authority, are likely to have a

7 significant impact, with a number of Table 1: Credit Union growth in Great Britain, 1974-2000 closures expected among the weakest 800 community credit unions.7 700 600 However, whatever significance 500 regulation has in terms of barriers to 400 entry, the growth of credit unions looks 300 like a classic ‘S’ curve of innovation 200 and diffusion, whereby the early 100 adopters start, but find it hard to 0 spread as they suffer from low 74 80 86 88 90 92 94 96 98 00 investment or capacity. But as pioneers, they help win acceptance for Source: Registry of Friendly Societies the concept of credit unions, making it easier for the next generation in Table 2: Credit union models, 1997-2001 neighbouring areas to grow. 35,000

Community credit unions have been 30,000 growing at a fast rate. In 1997 42 per cent of members were within the 382 25,000 community credit unions and 47 per cent in industrial unions. By 2001 20,000 those figures had changed to 38 per cent and 41 per cent. Additionally, 15,000 alongside this was the rapid growth of community credit unions with the new 10,000 live/work common bond. Over the same four years, new registrations and 5,000 changes to existing common bonds created some 135 credit unions in this 0 new category, accounting for 13 per 1997 1998 1999 2000 2001 cent of all new members by 2001. Community Industrial Live/Work (see Table 2 below). Source: Registry of Friendly Societies

However, in the late 1990s, two research reports warned of the unsustainability of fund even one full-time worker from unions to succeed, they had to secure some of the credit union development asset income. Written by two of the better facilities and resources. No models. A Commitment to People and authors of this report, Ed Mayo and longer could they be expected to Place: the case for CDCUs by the New Pat Conaty, it called for a new focus compete for custom from the back Economics Foundation (NEF), for the on getting community credit unions to of the church hall. Local authority National Consumer Council, in 1997 scale and sustainability and introduced funding and development models were warned that at current rates of asset the idea of CDCUs to the UK. criticised as focused on organising accumulation, most community credit and start-up work rather than unions were far too weak to reach the Two years later a Liverpool John sustainable growth.9 In fact this report point at which they could Moores study8 argued that for credit endorsed many of the proposals in the

8 earlier New Economics Foundation Case Study - River Valley Credit Union report, in respect of the need for Manager Peter Kelly, describes the River Valley Credit Union strategic investment to help credit as unashamedly ‘old model’, with roots firmly in their unions acquire high street premises, community. The credit union is 14 years old and boasts paid staff and more expertise over 1500 adult members and 500 juniors. It covers a within their management teams – 90,000 population area of Salford, Manchester and its size all vital ingredients needed to achieve in large part has resulted from a merger of three smaller quicker growth. credit unions. . They would also like to merge with the nearby employee credit union which would increase their The report spawned a ‘new model’ membership significantly more again. The credit union is approach to development, where high based in an old NatWest bank, an imposing building, the initial subsidies are applied as the most impressive in the area. The credit union is route towards securing long-term professionally run with 5 staff, £800,000 in assets and sustainability. Recently established over 100% of their savings out on loan. ‘beacon’ credit unions are piloting this approach. While relevant as an They have a third of their members on a direct deposit approach for any credit union, the basis – including around 150 members on payroll success indicators are largely based on deductions and another 350 on standing orders. However passing the breakeven point on the two thirds of their members are on low incomes or on balance sheet, so that social benefits with the bulk of payments as weekly cash deposits objectives do not form an explicit made over the counter. Some of the services that the credit component of the new model. union offers are specifically aimed at those on lower income. For example they provide a debt consolidation Here is the central issue. Does there service linked with a local money advice agency and are need to be a trade-off between prepared to take chances with some of their members, financial sustainability and social many of whom might be seen as too high a risk for other objectives? If there is, then credit lenders to consider. The credit union has a partnership with unions that wish to grow financially, a local broker to provide car and home insurance. They as a priority, will tend to target also offer a free cheque cashing facility to compete with members that are better off to start more expensive private companies. with, while credit unions that do serve Last year they gave a 3% dividend on savings which was a significant number of low-income higher than most of the high street competition and members might find themselves something that they promote heavily. unable to meet the extra costs, whether in terms of a lower asset base or higher risk, that might occur. The arguments below show that a trade-off is neither inevitable nor desirable. In the next chapter, we look at the evidence that exists from overseas, in the USA, where CDCUs have operated for many years and have shown how to achieve a street- wise balance of both social justice and business development goals.

9 Community Development Credit Unions in the USA

“We do not select members based unions played a role in President protection insurance scheme (of up to on their potential to profit the credit Johnson’s ‘War on Poverty’ in the $20,000) was set up, a 1971 union. Rather, we seek those whom 1960s, although the experience inspection by the regulator showed that we can benefit, whose lives we can confirmed that government was better almost 1,000 low-income credit unions enrich, and with whom we can placed to play an enabling rather than failed to meet the strict standards strengthen the broader community. a promotional role in building required to qualify. In 1972, though, a We seek to build our members wealth community institutions.10 compromise was reached, which – to help them escape poverty, to combined provisional insurance improve their lives, and at the same However, over the past 20 years, the arrangements together with a concerted time, to lift up the communities in larger credit unions have operated effort, through the formation of what which we live …..inclusion is our increasingly like full service banks and became the National Federation of mission and our passion. Our goal is the average membership in most credit Community Development Credit Unions, to leave no one behind.” unions, as with UK building societies, to upgrade the quality and capacity of National Federation of Community has become middle class. To balance low-income credit unions. Development Credit Unions the drift of credit unions upmarket, a dedicated trade association for credit The original name for the trade With its notorious lack of a welfare unions catering for the needs of low association was the National state, the USA does not, in and moderate income households was Federation of Community Credit international terms, lead the way on founded in 1974, the National Unions. The grass roots organisers preventing domestic poverty, nor Federation of Community Development could see the challenges involved in indeed financial exclusion, but it does Credit Unions (NFCDCU). sustaining the viability of community offer solid evidence of the positive credit unions. As a result the word large-scale role that credit unions can Around the same time, the new ‘development’ was specifically added play – and that they can serve low- US federal regulator (National Credit to their incorporated name to income communities at scale and on a Union Administration) recognised distinguish their unique approach to sustainable basis. One of the building that credit unions serving a low-income promoting credit unions in low-income blocks for this has been a patient and membership deserved extra regulatory communities. To spell out the nature enabling policy framework. flexibility to achieve their aims. and methods of this approach, the This came in the form of a change founders of the National Federation of There are over 90 million credit union in the law to enable such credit unions Community Development Credit members worldwide but three in four to accept savings from people that Unions, in January 1975, produced a are resident in the USA. Most were outside of their targeted ‘master plan’ for the CDCU movement: American credit unions were organised membership constituency. This could The Community Development Credit around the workplace and only a few include charitable foundations, Union: a Proposal for Strengthening developed from a community base. banks and ethical investors willing and Expanding the Impact of this The first American credit union was to put money in on preferable terms. Effective Low-Income Community registered in 1908 in Manchester, New To secure eligibility, credit unions Agent. From the colour of its cover, Hampshire. The first community credit applied to the regulator for ‘low-income the plan became affectionately known unions started during the Great credit union’ designation. by activists, as the ‘Blue Book’. The Depression – in the rural South, where Blue Book indicates crucial ingredients African Americans were excluded from The origins of the National Federation of for assisting low-income credit unions banking services due to segregation, Community Development Credit Unions to be enabled to grow and flourish. and in some major cities, especially lay in one of the many regulatory shifts A national investment programme was New York, where the numbers of urban that have characterised the credit costed to achieve this with the poor had grown dramatically. Credit union movement. When a new share following development tools:

10 1. technical assistance to credit By 1992, NFCDCU membership had The tracking of success has shown unions to help develop their reached 100 and in response to an dramatic increases in asset growth business plans and systems; election pledge by Bill Clinton, credit (in some cases up to 800 per cent), 2. training services of a high union and non-credit union providers financial growth in net worth (up to standard – especially in ways to of financial services to disadvantaged 1,200 per cent) and membership reduce costs through data communities came together to form growth (up to 500 per cent).14 As a processing capabilities; the Community Development Finance result, CDCUs in the USA, over the 3. strategic investment of deposit Institutions Coalition in 1992. The year 2002: capital to enhance credit union Clinton administration reopened the assets for lending; Office of Community Development mobilised savings from their 4. time limited subsidies for operating Credit Unions at the National Credit members of $2.29 billion; budgets and staffing. Union Administration and passed the loaned $1.04 billion to their Community Development Finance member borrowers; This programme won support Institutions (CDFI) Act in September saved up to $300 million in from government, although not, over 1994 to provide a wide range of interest — otherwise payable to the subsequent years, with full investment and financial support for predatory lenders; consistency. The Federal Government the full spectrum of Community recycled over $34 million under President Carter provided Development Finance Institutions. in dividend income to support in terms of the deposit To date, around one in three of the low-income communities; capital and technical assistance.11 220 CDCUs have received public assisted around 600,000 This though was short lived as the investment packages from the CDFI low-income households to acquire Reagan administration dismantled Fund managed by the US Treasury. assets and build wealth. the programme, closed the special Office of Community Development Credit Unions, set up by the regulator Figure 1: High Street vs Wall Street in the Carter years, and withdrew all federal funding in 1981-82.12 CDCUs After years of struggle with a tiny budget from membership dues, Dow Jones Industrial Average and little else, the National Federation of Community Development Credit NASDAQ Index Unions revived the tools of the Blue Book by securing support from 0 20406080100120 charitable trusts and foundations. Value on 31.12.02 of $100 invested on 31.12.99 At last in 1989, the Ford Foundation Source: National Federation of Community Development Credit Unions, Annual Report 2002/3 funded the National Federation of Community Development Credit Unions to develop a National CDCU Demonstration Project which for the first time provided community credit unions a complete package of support including both deposit capital and time limited subsidies for operating budgets and staffing.13

11 New York State of Mind

An example of a CDCU that has In its first five years the Lower East Side Yet, CDCUs in New York have not benefited from this patient support is People’s Federal Credit Union built up a solved issues of financial exclusion. one first set up to replace a closed deposit base of $2 million and One in four New Yorkers (2 million bank branch in lower Manhattan, New reinvested more than $1.8 million to people) are unbanked citywide. In the York. The Lower East Side People’s low-income borrowers – mostly Hispanic ten years to 1999, almost one in four Federal Credit Union (LESPFCU) came and African-American. Today its assets bank branches (22.3 per cent) out of a campaign by local residents are over $9 million and its new loans have closed in New York City and there against the closure of the last local issued are running at $1 million a year – are also more bank mergers on the bank branch by Manufacturer’s some three times the volume in 1991. cards. Consequently, cheque cashing Hanover Trust. Under the terms of the Its membership level is over 4000 and it firms and sub-prime lenders are US Community Reinvestment Act, is presently developing a second branch proliferating. In the past four years, passed by President Carter in 1977, office to expand its membership. pay-day loan outlets in the USA have banks have an obligation, as part of increased from a low base to over their banking license, to meet the Across New York is a second CDCU 10,000, offering long opening hours, financial service needs of the success story. Bethex Federal Credit widespread locations and quick communities where they have Union was founded in the South Bronx access to cash. branches. They can fulfil this by the Bethany Lutheran Church. The responsibility to the banking regulators credit union grew steadily over its first Yet CDCUs have been able to take both directly and indirectly, i.e. through twenty years, but in the late 1970s fell market share from predatory lenders a non-banking intermediary that they out with its church sponsor, ironically in the neighbourhoods they are may choose to support in a community because of the success of its work present in and so are now thinking big delivery role. British and European with black single parents on welfare. in terms of reducing financial services banks have no such legislative The credit union had to move from its exclusion in a significant way. To help responsibility, through such obligations church base and struggled until, in to do this collaboratively, CDCU have been considered in reports both 1994, a housing association, Mount regional networks are emerging, both to the British Treasury and the Hope Housing Company, provided an in New York City and in the rural European Commission.15 office in the basement of a multi- South. For example, five CDCUs, storey housing block. They charged a including both the Lower East Side The Lower East Side campaign pepper corn rent of $1 per year and People’s Federal Credit Union and brought one of the earliest Community helped to introduce their tenants to Bethex, have come together to form Reinvestment Act test cases to positive the services of the credit union. a partnership to spread CDCU services fruition. In response to the Community across the city (described in Appendix Reinvestment Act challenge, the bank Membership of the credit union rose B). The success of these strategic agreed to lease their vacant bank from 700 in 1994 to almost 10,000 networks suggests that they will be building to the Lower East Side at the end of 2002, with assets also vital to watch, as early achievements People’s Federal Credit Union for two rising from $700,000 to $9 million are impressive. years at a peppercorn rent, to make a and a net worth, secured over the social investment deposit in the credit same period, of £1 million. Through its union of $100,000 and to provide active work with local schools, Bethex grant support, for a limited period, has recently built up 1,800 children’s for staffing. saver accounts.16

12 What a Community Development Stages of community development credit union Credit Union Looks Like Assistance – Credit Path to Financial Inclusion

It is hard to generalize about community development Transactor: for those with limited income or in debt, credit unions as they vary in asset size from $100,000 to payment and money transmission services are either $700 million with corresponding membership ages as extraordinarily expensive or unavailable. Community registered credit unions from 1 year to 70 years. development credit unions need to develop affordable Membership sizes among community development credit payment and budgeting mechanisms to help overcome unions also vary widely from 200 to 220,000. Not all this problem. common bonds are community based. Many have faith Saver: traditionally credit unions provide this as the based, associational, employee or mixed common bonds. first stage, but increasingly they cannot attract All tend to be active partners with other organizations low-income members without first tackling the transactor concerned with community development. This ranges from problem. Savings can be incentivised by special the active involvement in government-sponsored financial programmes and by offering attractive rates of interest literacy services designed to promote savings (the Individual on even the smallest minimum account balances. Development Account programme) through to active co- operation with social housing providers. Borrower: most households need to borrow periodically if only to even out cash flow or to acquire assets. Also, The profile of a ‘typical’ community development credit effective borrowing skill builds up a credit rating and union might be: helps households gain experience for large commitments Assets: $1.5 million such as home purchase. Unlike conventional lenders that Average membership: 835 rely on credit histories and electronic credit scoring, Average staffing: 4 credit unions specialise in ‘character-based lending’ Member profile: 80 per cent low-income, 61 per cent where savings histories are focussed on. Credit unions female and 78 per cent ethnic minority also are unique in providing micro-loans that enable Net Worth (Equity): $115,120 (9.77 per cent) households to borrow sensibly and affordably at low Delinquent loans/total loans: 3.75 per cent rates of interest. Total operating revenue: $130,150 Return on average assets: 1.27 per cent Owner: evidence shows that asset ownership is Non-member deposits/total deposits: 5 per cent important in helping move households out of poverty. Average loan size: $3,500 Community development credit union specialisation in Standard services: Savings, loans, checking/bill loans for enterprise development and for low-income payment, automated social security payments home ownership and repairs contributes uniquely where transfer, financial literacy and financial counselling, other lenders are unprepared to make credit available and Individual Development Accounts at low costs. ATM machines: operated by 25 per cent of community development credit unions and growing

NFCDCV members provide more than consumer loans. Purposes for borrowing include: Personal (98%), car or transport (79%), housing (62%), micro-enterprise and small business (32%), and community projects and social enterprise (16%).

13 Competing with Predatory Lenders

Bill Myers, Founder and Manager of an electronic benefits transfer card to provides $500 loans at 16.5 per cent. Alternatives Federal Credit Union in welfare recipients. But cash machines Since 1995 it has advanced 1,800 Ithaca, New York has developed a were not always accessible to low- such micro-loans. Initially, the loans process model for helping low-income income households, so subsequently required credit union membership for households overcome disadvantage Citibank moved to install such facilities at least a year, but, thanks to a and the lure of moneylenders. He calls with a number of CDCUs. guarantee fund, grant-aided by this CDCU strategy the ‘Credit Path’, Northern Trust Bank, this restriction with four stages of development, as The CDCUs have demonstrated that has been waived. set out on page 13. providing financial services to the poor need not require exorbitant charging The new Payday Alternative Loan is Both Bethex and the Lower East Side and interest rates. As they have grown, available with no waiting period or People’s Federal Credit Union have they have started to take on predatory savings requirements. In the first nine developed membership services along lenders more aggressively. ASI Federal months of lending from April 2002, these lines, helping to take members Credit Union in Louisiana, for example, 440 people with very low credit ratings from extreme vulnerability and the has developed an emergency loan have received loans, including 70 clutches of predatory lenders, to self- facility. This popular ‘Stretch Plan’ is a people with a prior bankruptcy. To reliance. Their introductory services, for six-week loan service for a $200 loan date, nine per cent of those borrowers the ‘transactor’, for example include: repayable at only $222.15 – or one are slow payers, but given the high risk personal checking accounts; money fifth the cost of predatory lenders. of the market serviced, this is below orders (for one-off payments) and In the past two years, it has advanced expectations and overall over nine in money transmission internationally; 2,390 such loans for an average sum ten of the loans are performing and up electronic welfare benefit and pension of $300 each. Out of $700,000 in to date. Loan product models like transfer into credit union accounts; loan advances in the initial period of these are now being rolled out across and cash payment service monthly for operation, only 27 loans have been USA, through the PRIDE (Predatory energy and telephone bills.17 In written off for a net loss of some Relief and Intervention Deposits) respect to money advice, Bethex $4,000 (or 0.56 per cent of the funds programme launched by the National provides a financial budgeting advisory advanced). This loan service includes Federation of Community Development service through a partnership with a one-to-one financial counselling and Credit Unions in 2002.18 credit counselling agency, Balance – a efforts to help people to break away service that is free to members for from pay-day lenders. In Cleveland, Yet, it is also true that some services initial sessions. Ohio, the Faith Community United are more expensive to provide. Credit Union has developed a similar, Community development credit unions Both credit unions have played a ‘Grace Loan’. They make no credit have been reluctant to provide significant role in assisting low-income check, offer loans at an APR of 17 per cheque-cashing services, since such households in the shift, driven by the cent and have faced only marginal services offer no incentive for people US Treasury in recent years, from losses to date. to open savings accounts. Money benefits paid in cash to benefits usually goes in and out pretty rapidly paid electronically. New England and North Side Community Federal Credit and thus they are both labour intensive New York States reached a deal Union in Chicago began work on an and expensive to service. Bethex in with Citibank to handle state welfare anti-predatory loan system in 1995. Its New York therefore concluded that payments exclusively and to issue ‘Hot Funds and Cold Cash’ service they were not going to compete with

14 commercial cheque cashers, but as Good Partners: Community Development Credit cheque cashers do not provide savings Unions and Banks facilities or make loans, they would go The first ever partnership between a commercial bank and into partnership with them. An a community development credit union was the one forged experimental scheme launched in under the Community Reinvestment Act with the 2001 with two cheque cashers in the Manufacturers Hanover Trust Bank and the Lower East Side Bronx was controversial at the start, People’s Federal Credit Union in New York in the mid- but so far is proving successful, 1980s. Since then many more partnerships have followed. allowing the CDCU to reach more of the most disadvantaged households Under agreements struck, banks have made redundant in the Bronx.19 premises available at pepper corn rent levels, have sold ATM machines at discounted prices and offered technical The lessons of the US experience know-how. But there are two main ways in which banks suggest that countries affected by a have helped. Either they make grants or they make sub- polarisation between rich and poor will market investments. What works depends on the age and attract exploitative ‘predatory lending’. needs of the community development credit union. So for Community development credit unions new or young community development credit unions in start do not offer a complete answer, as up mode during their first five years of trading, banks have they don’t exist in every neighbourhood assisted by providing grants for operating expenses and and they take time to develop. staff salaries and also contributed non-member deposits at But with patient and proactive support rates varying from 0-1%. As community development credit from banks, the state and voluntary unions grow, because they can not issue ordinary shares, sector, CDCUs can achieve an they can run into liquidity problems and insufficient levels outstanding track record, not simply in of reserves. So for fast growing or more established dealing with the deep-seated community development credit unions this increased complexities of individual poverty and capitalisation by banks is hugely important. This is often financial exclusion, but in developing complemented with further secondary capital levered in as sustainable ‘social enterprises’ through Community Development Finance Institutions such serving the poor on a continuous as the National Federation of Community Development basis. To that extent, they offer the Credit Unions and the National Capital Investment Fund very best route to choice for low- (NCIF). This arrives as ‘deeply subordinated debt’ and at income consumers, by competing low margins of 1% or so for terms of up to ten years. directly with predatory lenders but on American banks win regulatory credit for such actions under affordable rates alone, at a fraction the US Community Reinvestment Act and even public subsidy of the cost. under the innovative Bank Enterprise Award scheme. The public support is important, but the business case for support But while CDCUs can boast wider also stems from the fact that partnerships have developed a positive returns, in terms of benefits to track record for delivering not just a better reputation for the both the individuals served and the banks but market share, as consumers graduate from taxpayer in reducing the wider costs of community development credit unions with a credit history poverty, they do require a degree of and turn to mainstream finance.

15 support and subsidy to grow, A Rural CDCU in Vermont State: particularly at the outset. “We don’t say no. We say when.”

In the next chapter, we test these Vermont CDCU is a relatively new credit union, established findings from abroad against the very only in 1989 and initially restricted by the regulator to only practical experience of six credit taking savings and deposits for their first three years. unions in the UK. Now with 10,000 members, 22 staff and over $20 million in assets they have won many awards in their short history. They have around 150 non-member depositors ranging from the Shaw bank and churches to Ben and Jerry’s Ice Cream Company. These make up over 50 per cent of the assets allowing them to lend around $16 million in ‘mortgages’ such as for mobile home loans, the main form of affordable housing in the region.

As a rural credit union they have developed products suited to the needs of a rural population. They apply a ’counselling-based lending‘ approach, a combination of lending and targeted planning with their members, many of whom arrive with an “un-bankable” status. For these they have created a 'tracker loan' to first help them build a positive credit history.

Of the 10,000 loans they made last year, the most popular were for car purchases, an essential commodity in a region with little public transport. They build partnerships only with local second-hand dealers who will guarantee the safety and quality of the cars sold to their members.

16 British Credit Unions Growth Pains and Game Plans

There has been an active search merge with: this is particularly the case additional offices above. The credit underway in Britain over recent years for for credit unions in small towns, rural union used its own assets to finance more effective ways for credit unions to areas, or those on many outlying the purchase of the property on a grow. With less than one per cent of housing estates. mortgage and raised a grant from the British households in membership, Council for the refurbishment work. there is a recognised need for better The six credit unions set out below have models. The Association of British Credit operated with more conscious ambition. The Camberwell Credit Union, the main Unions Ltd (ABCUL) has, for example, Some are striving to win financially and community credit union in Southwark, led the call for a far more business-like others are determined to succeed had been established in the early approach. As Shaun Spiers, their chief socially. They illustrate the diversity of 1970s before the Credit Unions Act executive has, on occasion, put the credit union growth, but also the real 1979 but in 2000 had become need for business focus to his challenges that face a CDCU insolvent. Southwark Credit Union was members, “if you do not believe in development path premised on both encouraged to come to the rescue. [financial] discipline, discipline will business growth and social impact. However, of the £100,000 that the quickly believe in you!” Council and other bodies strove to raise, to pay for the take-over, they As one would expect, the research 1. Southwark Credit Union, London could raise only £45,000. Due we have completed in England and Southwark Credit Union was founded diligence work revealed a loss of Wales suggests not just one but many in 1982 as an employees' credit union £155,000 due to poor record keeping, pathways for individual credit unions for Southwark Council. Growth was non-collection of debts and general to grow, depending on local slow for the first 13 years until it took mismanagement for many years. In circumstances.20 But the findings also on a full-time manager in 1995, taking over Camberwell Credit Union in reveal that there are many credit unions Lakshman Chandraskera, a former 2001, Southwark had to use its with no particular pathway in mind at computer analyst and programmer with reserves to pay for the acquisition of all. For a good many community credit the Prudential who had been made share capital of members of £650,000 unions, and probably the majority, the redundant. When Chandraskera joined but at the cost of £110,000. The key sheer pressure of running the credit the CU had 400 members and reason for the action was principally union, motivating the volunteers, and £700,000 in assets. He developed a that of reputation risk to the credit complying with the Financial Services marketing strategy and promoted the union movement in Southwark should Authority strictures and reporting credit union every month at different the credit union be allowed to fail and requirements leaves little if no time to canteen sites for Council staff. local people lose so much of their look ahead and figure out what ‘should He also used a prize draw, private money. Southwark has seen its be done’ to expand the business. lottery to attract interest. This strategy reserves, as a result, drop to only four alone gained 1000 new members. per cent of its share capital base and Indeed, the smaller community credit To further develop the credit union he was not able to pay any dividend to unions, some several hundred, which negotiated a merger with the Kings members in 2001-2002. are run by volunteers with no paid staff College Hospital Employees credit may be happy just to survive. union in 1996 and then a subsequent Southwark Credit Union today has total Discussing the future with a number of merger was pursued successfully assets of £3.6 million – including three them, they report that they worry all with the Borough and Bermondsey shops (the main one in Camberwell, the time about carrying on. Many say Credit Union (a community credit one in Peckham and one in that they would welcome merger to union) in 1999. Bermondsey), two of which are open gain strength from others like them, five days a week and the Bermondsey to cope better with growing pressures High street premises were acquired in one is open two days. Share capital in such as regulation. But for many, there 1995 through the purchase, from the the past eight years has grown to £3.2 are no local credit unions nearby to Council, of a derelict shop front with million – about 75 per cent of which is

17 lent out. Seven in ten members are on accounts. Without the advice and the resource their business plan strategy payroll deduction from either the support to do this, as in a CDCU which they have begun to deploy at a Council or Kings Hospital, about 16 per model, Southwark Credit Union is rate of £100,000 a year for two cent pay in by bank standing order or unlikely to have a significant impact on full-time staff (a full-time Chief Officer direct debit and 9 per cent pay cash financial exclusion. and Development Worker and an through the shops. The cash payers are Administrator), office and equipment, primarily the former members of the and development of a high street shop two community credit unions. A recent 2. Northern Oak Credit Union, front. They have also successfully partnership to begin to widen access to North Tyneside recruited a full-time volunteer. those on low income, has been formed David Hodgson runs a chartered with London & Quadrant Housing accountancy practice in the centre of The shop in the centre of North Association under the Community North Shields, a few minutes walk Shields has been fitted out and Development Finance Institution from the Tyne. He is also a Director of opened in Spring 2003. Funding has initiative Change. This seeks to attract the Mercantile Building Society which been secured from the Tyne & Wear low and moderate income tenants to moved its head office from North Community Fund and the National join Southwark Credit Union. Shields to Wallsend a few years ago. Neighbourhood Renewal Fund. Hodgson came to learn about credit The merger strategy has been agreed Chandraskera and his team of seven unions by doing audit work for the with the other community credit full-time staff have worked hard to build Northumbria Police Credit Union. In unions in the area and when complete a very successful credit union that 1999, he joined a study group which they will have a share capital base despite the challenging rescue of was successful in forming the North of £300,000 and a membership Camberwell Credit Union has continued Shields Credit Union. The North base of 800. to grow strongly. Systems are fully Tyneside area had a good number of computerised, internet and telephone very small community credit unions Beyond these mergers, the business banking services have been developed and the North Shields Credit Union plan strategy is ambitious with targets and a good range of financial services group have developed a strategy to set of achieving, by 2006, a ten-fold are provided including car loans, home build a community based credit union increase of assets to £3 million improvement loans and household by collaborative mergers with other and a four and a half fold increase of insurance services. smaller, volunteer run, community members to 6,000. To do this, credit unions. This strategy is currently Northern Oak Credit Union (the name Staff have been well trained, up to under implementation. chosen for the new, merged credit NVQ level 3, and are good at multi- union) has developed a marketing plan tasking. However Chandraskera is well To prepare for this, Hodgson and based on outreach through 10 weekly aware of the difficulty of lending to the North Shields Credit Union have collection points each with a weekly low-income households without bank raised funding of £300,000 to target of signing up two new members

Community Development Financial Institutions (CDFIs) It is useful to note that, in the personal lending field, community credit unions are not the only provider of affordable loans to the unbanked. Community Reinvestment Trusts are the brain child of Bob Paterson, former chief executive of Portsmouth Housing Association. The first was Portsmouth Area Regeneration Trust (PART). PART was set up in July 2000 and it employs seven staff plus volunteers. In the first two years, PART has lent over £375,000 to over 600 people rejected by mainstream lenders. Credit unions and community reinvestment trusts are both examples of a wider field of ‘community development financial institutions’ (CDFIs), now recognised and supported by government’s Phoenix Fund though, to date, primarily for its work on enterprise lending rather than in tackling household credit needs and financial exclusion.

18 a week. The credit union has entered work of enterprise agency advisors on credit union with the Registry of into a partnership with Churches Acting North Tyneside. Friendly Societies as ‘live or work’ Together (which organises furniture for common bond. This took 18 months to the unemployed and a prison link The rigour of business planning and get approval for. service for families). The business plan the marketing strategy of Northern Oak seeks to develop membership for the is hugely impressive. The benefit of the They employed a co-ordinator, in poorest in North Tyneside and is leadership of a talented accountant 1998, to manage the development of impressive in its focus and no like Hodgson with the ability to raise the Credit Union: Karen Bennett, who nonsense approach to the business. funding on the strength of a credible is from a retail background and was an All the numbers add up, look realistic set of numbers and targets highlights active credit union volunteer. When and if these targets can be secured, the skills based and hard headed she took on the job, the credit union then the asset base can be developed. approach that community based credit had 500 members on its books but unions can benefit from. only 150 accounts were active. Northern Oak Credit Union is one of Turnover was low and there were only the only credit unions in the country Hodgson has resisted pursuing growth two collection points. Funding from which has successfully applied to the via payroll deduction pathways as he the Single Regeneration Budget and Phoenix Fund to become a ‘community has not pursued the potential scope for European Regional Development development financial institution’. They a merger yet with the North Tyneside Fund of £325,000 enabled the credit initially applied for £500,000 but in Employees Credit Union which has union to buy a building and renovate the end were awarded just over half assets of over £300,000 and has a it, to create a shop front and this sum — £250,000 in loan capital larger common bond area of 120,000 conference centre, along with three plus revenue funding for office (including all of North Tyneside). In upstairs offices. overheads of £20,000. The way the Hodgson’s view, this merger arrangement works is interesting. The prematurely would have held back the In 1999, the credit union recruited a capital can be drawn down in quarterly community based strategy that he feels full-time administrator and, in 2000, advance amounts of £25,000 and credit unions concerned with a full-time fundraiser and development more can be drawn down beyond this community development need to focus worker. The credit union is now open so long as the first sums have been on. Later on, a merger on Community five days a week – including one late loaned to the self-employed and Development Finance Institution terms evening. In addition, a further seven micro-enterprises. with the employee credit union can be collection points in the community done he hopes. But for now until he are run by volunteers weekly and the Whatever funds are repaid, Northern can secure a self-financing capital base common bond area has been Oak Credit Union can keep this as its of a cool £3 million in share capital, extended to a population of 46,000. own capital. Average small business Hodgson and his community credit Membership has been built up to loan sizes are projected to be £2,500 union board are biding their sweet 1,900 adults and 800 juniors. The and there are no savings required, apart time. outreach and promotional work to the from the initial membership fee of £2. junior schools has been wonderful. As Hodgson is confident that they can 3.Enterprise Credit Union, Knowsley the co-ordinator explained: attract the target number of 150 new Enterprise Credit Union was founded business customers over the next few originally as Huyton Central Credit “The minimum deposit we set for the years. From his decades of expertise Union in 1988 – a community credit kids was 10p and the first promotion advising family size businesses as an union with a small common bond of we did we walked out with three accountant, he has already developed a only 10,000 people. In 1996, the carrier bags full of small change. simple business start up course for the credit union board were successful in This savings scheme is so popular with local Business Link, which connects the raising regeneration funding and at the the schools, but you need the Credit Union loan service directly to the same time applied to re-register the manpower to deal with it”

19 The credit union offers a range of loan. Enterprise CU has advanced and very positive indeed, with membership services from standard savings and grown by a friendly merger with one growth of 25 per cent a year since loans to insurance services, a budget other community credit union in 1999. Current membership is 3,500 account and a money management Knowsley. This merger will increase and assets in shares have grown course. Enterprise Credit Union has assets by £45,000 and total credit from £181,000 four years ago to over made links with credit unions in Dublin union membership by an extra 500. £750,000 today. and they have helped to develop a As a tribute to their rapid year on year Money Advice & Budgeting Service growth from a low base, the Liverpool Loan demand is constant with over (MABS), which is the first such service Daily Post and Echo awarded Huyton 100 per cent of savings lent out at to get underway nationally. The Esmee Credit Union the ‘Social Enterprise of Christmas and over 90 per cent out on Fairbairn Charitable Trust and North the Year’ against stiff competition. loan normally. The Co-op Bank Huyton New Deal for Communities As a result, the former Huyton Credit provides an overdraft facility to assist have funded a pilot over the past year, Union has changed its name to with seasonal demand peaks. Member which finishes in Summer 2003. To Enterprise Credit Union. It’s clear all savings levels are low and for this date 120 people with money worries involved have earned it! reason Riverside Credit Union struggles have been seen, there are 30 enrolled to pay a dividend as it needs to build on the special budget account scheme reserves. Its current level of reserves is and all have been helped with money 4. Riverside Credit Union, Liverpool 3.5 per cent. and debt advice. Speke in South Liverpool is one of the poorest wards in Britain. The Speke In addition to savings and loans, The pilot is supported by a £10,000 Credit Union was formed in 1989, Riverside Credit Union provides loan guarantee fund, made possible by grew slowly in the first five years household insurance and car insurance. the Health Action Zone which enables and by the mid-1990s encountered It is constantly looking to develop new small loans to be advanced to those in problems with slow payers and services to increase membership in debt, to help them avoid returning to delinquent loans of almost 30 per ways to benefit its local community. For money lenders and doorstep creditors. cent. The board of the credit union example, in partnership with the Health In a mirror image to Southwark Credit took tough action and in the end Service it has developed ‘The Baby Union, 80 per cent of Enterprise Credit had ‘to take some people to court’ and Barrel’ service for young mums on the Union members pay in by cash and also ‘use debt collectors’ to bring estate. It bulk buys goods for maternity only 20 per cent pay by standing order. bad down to levels under three per needs and sells them at a discount. A The minority of non-cash members cent. This experience strengthened full baby barrel includes £200 of alone though pay in collectively the credit union management group goods for £150 loan and includes £12,000 per month. Enterprise plans and the credit union has grown well whatever goods needed from ‘prams to to establish a payroll deduction service since then. carrycots to pushchairs and clothes’. In and target some of the larger the credit union shop an online service employers in the area but, given In 2000 the credit union changed its is being installed so families can scarce resources, the additional common bond to a larger ‘live or work’ operate on a ‘you choose and the development work needed to achieve area including both Speke and Garston. credit union will purchase’ for you this is a challenge. It also changed its name to the basis. According to the Riverside Riverside Credit Union and attracted Manager, Colin Strickland: ‘In less than Share capital of the credit union has regeneration funding for staff and to one year, we have handled over grown six-fold in the past five years develop a shop front in an ex-TSB £25,000 in bulk purchased goods, from £45,000 in 1998 to £275,000 branch in Speke. With the investment and this is only the beginning!’ today. At present, £180,000 is out on for staff and premises, growth has been

20 To take the service development for The credit union is seeking to relocate market towns including the historically young families further and to help its shop next year to the new shopping independent and culturally different develop savings by direct deduction, centre development in Speke near the communities of Welshpool, Llanidloes Riverside Credit Union has negotiated Morrison superstore. Discussions are and Machynllyth. The population here with the Benefits Agency for Child underway about a merger with the Earl is sparse (one person per 10 acres) Benefit to be paid directly into credit Lawrence Credit Union in the and totalling only 56,000. union accounts. Beyond this initiative Wavertree area of Liverpool. Should it aims to have other benefits paid this be agreed, as looks likely, the The Board were faced with a dilemma. directly into the credit union. As wider common bond area would be Extending a common bond is a Strickland explained: more than 100,000 population and comparatively easy process but with encompass more affluent areas of dispersed and impoverished “What the credit union can do best is South Liverpool as well. communities, running costs are high to capture local money and recycle it and can easily erode profitability. The over and over again. We get fed up credit union was not interested in though with the wasted funds that 5. Robert Owen Credit Union, Wales expanding unless these deeper rural leave the area. We have seen for The Robert Owen credit union was areas where the greatest need resided years millions of quid in regeneration founded in 1995 and was the first could genuinely be serviced. Yet equally money spent on consultants and rural credit union in Britain. It originally they were not prepared to take on the other professionals and very little of it serviced a 25,000 population living liability of having to service regions that directly invested to improve the lives within the 200 square mile area were financially non-viable. The of our members.” around Newtown, a small market town challenge was therefore to design a in mid-Wales. The district council has new model that ensured profitability and In their latest development project, provided, for a low rent, a small shop which could justify expansion. Riverside has succeeded in its social front located in the main shopping enterprise bid to the Home Office area and adjacent to a busy market. The approach was an innovative one. backed Adventure Capital Fund for a The credit union business plan was With a credit union development project to develop new social business informed by the advice and worker, three local study groups were opportunities. A local skills register of encouragement of Michelstown credit recruited and trained over an 18 the credit union has shown many union in County Cork, Eire, with which month period. They were given targets members in the building trades. Robert Owen Credit Union has and deadlines to work towards. The The project will establish an approved 'twinned'. This expert guidance ensured central team had identified a specific builders list based on checks for that from day one the Robert Owen number of ‘tests’ that would need to qualifications, insurance, and licenses. opened with a high street shop, ran be met if ‘convergence’ was to be Home improvement loans will be made computerised accounts and had possible. If the conditions for these available and jobs carried recruited a good management team. were achieved, all the groups would out for fencing, minor repairs, decorating then have the option of converging into work, security systems installation and By the year 2000 the credit union a new large credit union. Otherwise other odd jobs. Jobs will be checked Board were aware that there was a they would each have the alternative before the loan disbursement is made. wider rural demand and need for credit choice of registering as a separate Riverside has secured £100,000 for this union services beyond their restricted credit union of their own. project on an investment basis as a ten boundaries. They therefore started to year loan with a three year payment look at how they could cover the The tests were met and a new credit holiday and then repayments at one per county district of Montgomeryshire, union formed in 2001, which has cent a year over seven years. an 800 square mile area, with six nearly doubled in size, approaching

21 1,200 members with around 400 support to this vulnerable commercial 20,000 and total assets over £19 junior savers recruited mainly from five sector in mid Wales. million. The three workplace credit local schools. Assets are currently unions cover separately city employees, around £200,000 with over 70 per On Oldford Estate in Welshpool, the police and the fire service. All have cent of savings out on loan. The credit identified as being eligible for paid staff and have grown rapidly since union has two new offices in the other Community First support, some of the their formation. The community credit main market towns, as well as part- credit union volunteers have chosen to unions are run by over 400 volunteers time collection points in two of the undertake door to door promotion, and together account for over 7,000 poorest wards in Wales. On feeling it is the best way to compete members and about £3 million in assets. Maesyrhandir estate they have built a with the increasing presence of partnership with the Housing Provident Financial. One of the Provident A Birmingham-wide survey of over 400 Association Tenancy Officer and collectors has even joined the credit community credit union members in established good links with the local union, encouraging her customers to 1999 indicated that their primary school recruiting many new members join as well. The manager comments, financial service interests were: through that route. Once credit union “We instinctively went down this road special savings accounts for staff have established a new collection as that is where our services are Christmas and clothing; they encourage local participation and needed most. It is hard work in rural insurance services; volunteers to take over and run it in areas and things usually take longer. budget and bill payment accounts; keeping with their bottom-up attitude People need time to trust and feel money and debt advice. to growth. They also have linked into confident in what are often much more the local Sure Start Initiative, in unfamiliar initiatives. However we are Members also wanted longer opening partnership with National Children’s not trying to establish services and hours and larger loans. A citywide Homes to work with young mothers facilities that are at the expense of strategy was developed that has and single parents. more middle class/income members as led to community credit unions we don’t want to be viewed as a ‘poor clustering into six groups of four to A high percentage of their loans are for person’s’ bank either. In rural market five, in order to work together and business purposes. Around 20 per towns every person counts and you provide common services. To reduce cent of stall holders in one of the local have to aim for a variety of sectors.” costs for all community credit unions, markets have loans from the credit a central back office administration union. These are mainly around the centre has been established to £1,000 to £2,000 level to assist the 6. South East Birmingham computerise all credit unions and offer businesses to buy stock, for transport Community Credit Union central account servicing through or other equipment. A member who Credit unions are co-operatives and one the Birmingham Credit Union runs an ethnic stall, for example, of the guiding principles set down for Development Agency. borrowed for a trip to India to buy new mutual organisations like it is that of stock. For many stallholders the credit “co-operation among co-operatives”. In 2002, in line with this strategy, the union offers short term loans below Birmingham is the site of efforts to put first cluster group merged to form the the threshold of what is possible or this into practice. The city boasts 30 South East Birmingham Community competitive at the bank. The market is credit unions – three workplace, three Credit Union (SEBCCU) and the first of the lifeblood of the town and the credit associational and 24 community based. two credit union shops for the network union offers valuable hidden financial Total membership citywide is over was established. The second cluster

22 Figure 2: Connecting Credit Unions to Community Development: the Birmingham Model

Informal learning Formal training Reducing isolation Building trust

Caring Developing skills neighbourhoods

Linking with Accredited training community initiatives

Credit Unions

Clusters

Business Added value Savings and loans development projects

Money Advice and Administration Shops Budgeting Service - Financial literacy centre Factor Four

23 group in North Birmingham is now ‘We need investment to overcome this the “Factor Four” service this year applying to the Financial Services problem. We desperately need a CDCU which includes bill payment, energy Authority for merger and the second in this poorest ward in Birmingham. I advice, debt rescheduling, and the credit union shop has just opened to have seen the work of CDCUs in New take up of energy insulation grants. In provide local services. The third cluster York first hand, in Harlem in the Bronx practice, Factor Four is a CDCU based group in Handsworth (serving North and on the Lower East side. This is the extension of the Irish MABS system. West Birmingham) is moving forward community banking system we need and the third shop will be opened later with shop fronts, staff, bill payment, Jim Dearlove, Co-ordinator of the this year. The full plan is for five to six money advice, financial education, Birmingham Credit Union Development shop fronts – one for each merged benefit transfer and other services for Agency, sums up the way in which cluster group and all with common inner city people in Birmingham. When Birmingham is developing co-operation branding for citywide marketing on the I saw Lower East Side Peoples Credit among credit unions. buses and through local radio and Union in action last year, I said regional media. immediately: ‘This is it, we need to get “Credit unions lose the ‘people plot’ CDCUs going in Birmingham!’ when they aspire to become banks. Like many other credit unions, South Sparkbrook credit union is now part of Banking seeks to save costs ruthlessly East Birmingham Community Credit South East Birmingham Community and as a result rigorously separates Union identifies with a community Credit Union and we are going to the economic and the social because development mission and has set its become the first CDCU in Britain!” the latter is costly. Joining back up the sights on becoming the first CDCU in two and managing the tension Britain. Norma Maynard the credit As a result of the merger of the three between building reserves and paying union President made the credit unions, assets of South East dividends to credit union members on announcement in a keynote speech Birmingham Community Credit Union the one hand while being committed at the National Association of Credit are near to £500,000 and membership to service the unmet needs of the Union Workers conference in is about 800. To achieve the CDCU unbanked is extremely difficult. November 2002. She described the goal, a joint bid by Maynard and the We are determined to manage this SEBCCU ambition in this way. Birmingham Credit Union Development art by pioneering CDCUs in the Agency has recently attracted funding West Midlands.” “Credit unions have always been part from the innovative Home Office pilot of my life since a child in St. Kitts. investment scheme for growing social In the West Indies before credit unions enterprise organisations, the Adventure were established in the 1960s, there Capital Fund. was ‘the partner system’ of rotational and group savings. My grandmother The other five Birmingham cluster was the local manager of the system. groups range in size from 900 I have been involved for years in the members to 1,700 and from assets, Sparkbrook Credit Union but I am busy when aggregated, of £270,000 to with my daytime job. This means £800,000. South East Birmingham approving loans in the evening, doing Community Credit Union and two other books at weekends and being worried of the Birmingham clusters with about everything to keep the Financial support from the Birmingham Credit Services Authority happy all the time. Union Development Agency will launch

24 Community Development Conclusions

All the credit unions highlighted above regional size credit union. In the case city centre premises funded over five have walked something of a tightrope, of Southwark, the benefit to the years from the Council and in terms of running a business while community credit union, which was at regeneration funding. The Leeds Credit developing its membership and risk of failing, was immediate. But at Union has had similar large-scale diversifying services. While the the same time, the case of Southwark funding for a “beacon” model, and attraction of the credit union model is also offers a warning that growth alone more recently has stressed its efforts that it is one of the few financial will do little to ensure that a credit to promote financial inclusion, along services institutions that is relatively union targets people in need, an the lines of CDCUs. straightforward for a community to essential element of the CDCU model. start small, it is the very lack of scale Subsidy can play a positive role. that can prove problematic. The pure business model of credit Riverside Credit Union left on its own union development, by its nature, with a mere volunteer base would not One way to address issues of under- moves away from high transaction cost have achieved 3,500 members without capitalisation is through merger with services. High transaction costs funding for both staffing and premises other credit unions. This can reduce increase overheads, reduce profitability to take them up to this stronger operating costs and make broader and hold back the build up of reserves. financial state. But while there is need marketing more achievable. Examples Yet high transaction costs often go for subsidy to get to a point of scale such as Northern Oak Credit Union with the territory of low-income and sustainability, it makes sense to show how carefully-prepared and communities. In many areas of the tie subsidy to some clear commitment intelligent mergers can promise country, large areas of cities, entire of social purpose. In the North West, significant synergies, opening the way towns and ex-mining regions are poor. elements of the CDCU approach have to a CDCU-style model of financial The majority of people living in such been deployed to great effect, but inclusion on a sustainable basis. In areas are poor or moderate income have often not won the same level of Birmingham, mergers have emerged and credit unions such as Enterprise strategic support and investment from from “clustering success”, and have Credit Union and Riverside Credit the public sector that some other been inspired directly by the examples Union simply need to get on with the approaches have. of CDCUs in the USA.21 But as the job. For them the “poor person’s bank” case of South East Birmingham is nothing to be apologetic about but Paul Jones, Liverpool John Moore’s Community Credit Union suggests, the all the same, extremely difficult to do. University Researcher and developer of aspirations of merger need to be the “new model” and the “Beacon” matched with development resources, At the same time, the “beacon” approach, has since visiting the USA if it is to move forward. approach, which is operating steadily become more comfortable successfully in places such as with the scope for CDCUs in Britain. The example of Southwark Credit Rochdale, Leeds, Tower Hamlets and He used his own Moneyspinner Credit Union illustrates an element of a Portsmouth, does confirm an important Union as an example of the need for different approach – the “Beacon development lesson from CDCUs in the such a solution — in particular in poor Credit Union” model promoted by the USA, which is the need for adequate sub-regions nationally. Association of British Credit Unions early-stage subsidy. The Portsmouth Limited, in which an employee based City Savers credit union, for example, “My own credit union was set up in credit union absorbs community credit took four years to register but has 1989 in Hattersley – an overspill unions in order to create bigger scale started with the equivalent of two full- estate of Manchester in Tameside. Like and to secure a citywide or sub- time members of staff and high street many other community credit unions in

25 poor areas, there are no richer local “What is clear from all my visits to areas to extend to easily. Hattersley is a CDCUs in America is that their success place where those who get a decent rests heavily on professional paying job leave and the area has been management, not just non-member losing population as a result for years. It deposits and secondary capital. Ed is hard to see an easy way of expanding Jacob, the manager at Northside credit our common bond beyond the level of union in Chicago [who developed the 10,000. We have since 1999 benefited alternative Payday loan] and Pablo from external subsidy from a Single DeFillipi the manager of Lower East Regeneration Budget grant. This has Side People’s credit union in New York paid for two staff, an attractive shop are exceptionally skilled and are not front and the membership has doubled easy to find.” in a few years and we are doing all the things for our local members you would The credit union sector will probably want from a community credit union — always be hard to classify. Its diversity and 70 per cent are on benefit. But the reflects not just the need to respond population here is not diverse and we to the differences of place, culture, are not going to be self-financing in less ethnicity and circumstance, but than three years when the subsidy runs additionally mirrors the value of trying out. We will need to attract additional things out and learning what works in grant aid to keep up levels of service an open and evolutionary way. This at the local community deserves. least can be said though: there are Community development credit unions clearly the seeds of a more ambitious are impressive and because of what approach to financial inclusion in they have achieved, one can justify Britain, and signs that elements of the subsidy to grow and expand. The case US CDCU best practice – though can be made in Britain in places like clearly not yet all the elements brought East Manchester but we need to avoid together – are around us. dependency on the whims of an external funder. This is the challenge.” If so, this raises the strategic question. If some credit unions in Britain could Jones commented that the develop along the successful lines of Moneyspinner Credit Union and its CDCUs, could they win market share needs for careful investment and from the high-cost lenders of the sub- subsidy were the same as those for prime market and make a significant other similar community credit unions contribution in doing so to tackling in Manchester such as River Valley poverty and contemporary social Credit Union, Wythenshaw Credit Union exclusion? and East Manchester Credit Union. But he observed from his visits to CDCUs in the USA that money needed to go hand and hand with high quality staff and management.

26 Winning Market Share Against Predatory Lenders

In theory then, British community What a British Community Credit Union Looks Like credit unions and the “new model” As with the American community development credit unions, it is also hard to variants that have developed on a generalize about what a typical British community credit union looks like. British live/work common bond are well community development credit unions vary hugely depending upon age, the placed to develop and serve people levels of investment and the development support that may have been available. that are financially excluded. They There are approximately 460 of them in Britain ranging from Dalmuir with over understand their members, and the £5 million in assets and 5000 members to the new starters with just a handful community and local business base. of members and a few thousand of savings in their company accounts. With They are able to call on voluntary input such a broad spectrum it is perhaps more helpful to look at the largest 100 and support – after all, setting up a community credit unions in terms of assets and compare these against the most credit union is an arduous process, so youthful sector – the 100 youngest credit unions that are at least 5 years old. that the driving motive is typically one The profiles of these ‘typical’ Community Credit Unions from the latest data reveals: of fairness and a desire to transform the community. They are well ASSETS: (5 yr min) LARGEST 100 YOUNGEST positioned to make risk assessments that “outsiders” would find difficult. Average assets: £400,000 £100,000 Many individuals whom the banks Average paid staffing 1 none avoid as being “higher risk” often Total out on Loan £300,000 £65,000 prove themselves to be no more than Average loan size: £750 £500 average risk within a credit union. Loans as % of Assets 70% 60% Bad debt ratio: 1% 1.7% The crunch question is whether, with Annual Surplus (profit) £15,000 £3,000 the right enabling framework, they yet Dividend 2% 0% have the capacity, professionalism and Total annual income £50,000 £12,000 support to grow large and sustainable Annual expenditure £35,000 £9,000 social enterprises to serve low–income Grant income average £12,000 £3,500 members. An analysis of the most Source: Financial Services Authority recent Financial Services Authority figures, for 2001, on the 460 registered community credit unions businesses find their route to growth. alone raises questions about other suggest a positive answer for the However with additional resources commercial lenders to low-income majority. Many though are still too many of the younger and weaker credit households, who try to justify much small for this role — either through unions can be nurtured up to a higher interest rates as compensation structural weakness or immaturity. position where they too have the for supposed, disparate levels of risk. Over one third of these businesses are capacity to take on some of the Even mainstream banks typically run less than five years old. Nonetheless, initiatives identified in this report. higher bad debt figures on unsecured even amongst this youthful section lending than the top 100 credit there are some rising stars that have Regardless of age, the ability of unions, which will achieve around a 99 attained sufficient capacity already. community credit unions to make per cent repayment rate, despite the quality assessments on their lending is greater selectivity and security they Taking the 100 largest community borne out by the statistics. Despite demand. Even less experienced credit unions by way of assets, operating in what are classed as community credit unions that are there is a strong correlation with age, higher risk categories, the return on around five years old achieve better suggesting that with time, these their lending is impressive and this than 2-3 per cent bad debt.

27 Counter to allegations sometimes over a five year period of assertive, retained the overall saving to Britain’s made, community credit unions do not direct competition would make a poorest households would accumulate appear heavily grant-dependent, from significant impact on the life of a large to £200 million. This additional Financial Services Authority data and number of households. Capturing over income within the pockets of this the fieldwork interviews conducted for 16,000 new members in the first year, sector would impact significantly within this research. Certainly, as a group, and 54,000 by year five would redirect the economies of their communities, the 150 newest credit unions receive £227 million of credit away from sub- contributing much towards around 40 per cent of their income as prime lenders. This would earn many regeneration and asset building. grants. Even new industrial credit of the poorest households in Britain an unions with significantly lower extra £75 million, representing the As argued elsewhere in this report, the transaction costs attract 20 per cent savings to them in excessive interest delivery of essential financial products grant support. But once they are charges. The growth figures for such a to this sector is expensive. Such a established, community credit unions campaign are set out in Appendix C. campaign requires an external are far less dependent upon external These are indicative sums only and provision of capital, which could be sources. Community credit unions that exclude the development support government or ethical investors. A £12 are more than five years old generate critically required to build capacity for million per annum support for this 80 per cent – 90 per cent of their CDCUs in Britain. But if half the programme over a five year period income through their core businesses, current number of community credit would represent a 350 per cent return according to data available. unions were involved, it would present on this investment after 10 years, and each with an additional average 650 leave a vibrant network of strong If we assumed that there are at least members and provide an added gross community businesses that can 250 community credit unions in Britain income of over £100,000 during the continue to compete with and eat into that had the capacity and the desire to first five years. Once captured, this the market share of sub-prime lenders. serve the lowest income sector, and additional market share would create that a supportive development income generation of £500,000 over a All this suggests that there is a strong framework was in place, what ten year period, positioning the credit social and economic case for CDCUs collective impact could they make? union into sustainability in Britain to be able to play the kind of role that has been seen to achieve One goal would be to take 10 per cent These figures alone fully justify scale in the past ten years, especially market share from sub-prime lenders investment into the community credit in the USA. It suggests that the such as Provident Financial, which unions to initiate and support such a business model for CDCUs can stack even considered alone as the largest targeted campaign. The returns over a up in Britain, if they reach a sufficient doorstep creditor has 1.6 million 10 year period are even more point of capacity to innovate and serve customers. Winning this market share convincing. If this market share is their local market. But simply

Coventry Financial Exclusion Initiative The local Credit Union Development Agency has initiated a number of projects across the city aimed specifically at members on low incomes and to those otherwise excluded from traditional financial services. They believe that the problem for many families is not so much the amount of money coming into the household, or rather lack of it, but often the difficulty many people have in effectively managing whatever that income is. As a result the local credit unions have introduced a ‘Budgeting Account’ to assist members with priority bill payments. In return for regular saving payments, the credit union sorts out and pays off specified household bills.

However despite its success in many ways, it has also proved problematic in the way it has been used, as well as in terms of costs and the complexity of administration. At present there is a disincentive for users of this service to take over responsibility for organising their debts, foisting this chore onto the credit union.

28 identifying point B does not tell you The ‘Predatory Loan Scheme’ how to get there from point A. The real This initiative is targeted at customers of sub-prime lending question is whether community credit companies, such as the Provident Financial in a particular unions will want to or be able to go area of Coventry, although the service is accessible to other down the CDCU route, and whether, as credit unions throughout the city. Money Advice Project in the USA, there will be a concerted workers refer potential recipients onto the credit union, which development framework available to buys out the debt from the company. A small initial fund of help them do that. £18,000 has been established through monies from Sure Start, a Community Business Economic Development grant, a The new regulatory regime for credit church charity, a bequest, and a donation from a local unions has brought home the need to residents group. This non-members fund underwrites the increase efficiency and sound business loans, thereby protecting members’ savings. practices. While change is slow and a This initiative recognises that many people have difficulty in shake-up is right, most are coming calculating the real costs of interest rates and credit charges. good and should be better placed if This makes them more vulnerable to misleading or they were to choose to serve more sophisticated promotional techniques. The credit union pays demanding sectors. However, there are off the debt of the referred individual who then becomes a dangers in this process of change. member of the credit union from which they borrow the Unthinking mergers and consolidation equivalent sum. The new loan may be re-scheduled, but in could lose local knowledge that is key any case will be at a much lower weekly repayment sum. The to the strength of a credit union. If the new member recognises this as being of an immediate cost mood inspired by regulatory change is saving benefit. The new repayment figure also includes a that “to survive you need to be big”, surplus that is swept into their new savings account. This there is a danger that potentially represents the secondary benefit or incentive, and starts the strong, community based businesses process of helping the new member appreciate the benefits of are then steam-rollered into giving up a habit of regular savings. their autonomy. As the US experience shows, the introduction of share Insurance Services and Health Plan protection and closer regulatory Another service that the Coventry credit unions have scrutiny is a turning point that needs introduced for those on low incomes is a ‘Health Plan’. This to go hand in hand with an active has been set up in partnership with the Local Authority and programme of support for credit unions Westfield Insurance Company. Whilst those who are in receipt that serve poor communities and want of benefit are entitled to free dental and eye care, many who to professionalise. are marginally above this threshold find the costs of treatment prohibitive. Through the credit union they are able to pay If credit unions are to help address weekly premiums of below £2.00 to receive a minimum cover the needs of Britain’s worse off for service. The City Council deals with the administration side of lifeline financial services, a development the Plan to reduce the costs to the credit union. framework for CDCUs is essential. First, however, it is important to ask Although in theory this is an admirable initiative that should whether such a framework is prove popular, take up has been slow. Partly the cause for this something government should back, has been insufficient funding available for adequate market or just leave to credit union members research to be undertaken. With additional resources the themselves, perhaps with the community credit unions in Coventry feel they would be able backing of banks and the wider to identify where demand might lie and target appropriate voluntary sector. promotional resources for the scheme to take off.

29 Should Government Back Community Development Credit Unions?

The present government has set But there are now good additional Post Office Card Account with limited targets for reducing child poverty and reasons to explore the wider roll-out of functionality. A partnership between neighbourhood disadvantage. In both CDCUs. Firstly, the Government is banks, the Post Office network and cases, there are few quick fixes. These introducing several changes in 2003 CDCUs could as, in the USA, help are endemic problems, forged over which will impact in diverse ways on limit the attraction of the Post Office generations, and not likely to be solved low-income households – some Card Account over time and save in a sustainable way through single positive but others potentially negative. Government money in doing so in initiatives or services. In both cases, The main change is the shift from cash due course. financial exclusion plays a significant book payments of pensions and social role, so that, in principle, there is a security to low-income households to Second, the Treasury are also piloting public policy case for considering Automated Credit Transfer into the Savings Gateway to encourage what if anything could be done to Basic Bank accounts. The experience low-income households to save with support CDCUs. in the USA of this changeover in the incentivised matched funds based on late 1990s to automated payment the innovative American Individual The landmark report on financial systems threw up many problems Development Accounts (IDAs). exclusion was published by the and in some instances in New York As many analysts have commented, Treasury in 1999 (the Social Exclusion and elsewhere led to increased to date attempts by Labour to reach Unit’s Policy Action Team 14).22 Since financial exclusion as cash points low-income households with affordable then, though a number of policy were unavailable in many poor financial services have struggled to initiatives have been taken forward, in neighbourhoods. Through the Universal achieve this objective in major the past four years, support for credit Banking Service, this particular programmes from Individual Savings unions to tackle financial exclusion, problem will not arise in the UK. Accounts to stakeholder pensions.24 beyond regulatory change, has simply But here too according to research stalled. The most effective change However a related problem could well findings by Michigan State University secured is that the Government, in arise as recent press reports have and the Ford Foundation, US CDCUs consultation with trade bodies, has raised concern about as in the USA, have been arguably the best delivery updated and modernised credit union the poor opted in the main for a partners for Individual Development legislation, so that now, in fact, credit plastic card like the Post Office Card Accounts and for devising relevant unions have more legal powers than Account rather than for a Basic Bank financial literacy programmes which ever before. Half the barriers to Account.23 CDCUs, with their ability to are vital to secure optimum outcomes development have therefore been respond to the changing needs of the via such specialist savings accounts.25 removed. But there is still an communities they served, were well identifiable opportunity to invest placed in America to play a positive Thirdly, CDCUs would assist wider strategically in community based credit role in this change-over and in doing governmental efforts to engender an union development nationally to so offered a third alternative, a credit inclusive and entrepreneurial culture in demonstrate what really can be done union style “lifeline account” providing disadvantaged areas. In recent years, with the right package of support and credit as well as bill payment facilities the Government has supported the methods to widen access to affordable and access to cash. Thus CDCUs in development of Community financial services. The failure of the offering small affordable loans as well Development Financial Institutions 1999 Policy Action Team 14 are potentially superior providers of (CDFIs) to widen access to financial recommendations on credit unions to financial services to many of the services, but to date, since the be fully implemented means that it is poorest households intimidated by Department of Trade and Industry now in urgent need of review. banks and by default opting into the Phoenix Fund was launched in 2000,

30 only those CDFIs providing business Authority. To date this funding and its support CDCUs. The concept here is finance have been assisted. Given that impact has not been independently that private sector support would be the principle remit is regeneration and evaluated but as such funding is intended initially as catalytic and act the provision of such Community coming from several diverse principally as a forerunner to more Development Finance Institution Governmental programmes, it is significant public sector backing. funding is through the Department of certainly clear that such funds are not Trade and Industry Small Business being deployed in a strategic or At the least, it is clear that, if there Service, this focus is not surprising. coordinated way, which builds on and is a support role that government is However both the concept and learns from successes. By contrast best placed to fill, then there are practice of Community Development with enterprise finance and Community strong arguments for a degree of Finance Institutions is an American Development Finance Institutions, the public investment to do so. Community one and in fact in the USA when the Treasury has ensured in working with development credit unions are a Community Development Finance the Department of Trade and Industry dynamic and flexible group of Institution coalition was formed in the a clear and coherent strategy with Community Development Finance early 1990s in New York, community joined up thinking. The failure to fully Institutions (able to deliver both personal based credit unions providing access implement Policy Action Team 14 in finance and some micro-enterprise to both consumer finance and micro- the same way that Policy Action Team finance as well) that the British state credit for the self-employed were at 3 was fully implemented is an issue has not taken notice of properly thus far. the forefront of the US CDFI that needs urgent examination by the Such an oversight is unfortunate from movement.26 Indeed the National Chancellor and his team. the findings here marshalled. Federation of Community Development Credit Unions currently chairs the CDFI The fact that CDCUs appear to offer an Coalition. Community development effective approach to financial inclusion, credit unions in the USA in many areas with its overlapping challenges of are excellent providers of micro- outreach, education and affordable enterprise loans and in rural areas in services, does not mean that particular as the Vermont Development government alone is best placed to Credit Union shows, they are simply provide support. As with Community the best delivery Community Development Finance Institutions for Development Finance Institution enterprise, there is a key role for a vehicle as they are so flexible. partnership approach involving other stakeholders such as housing Of course there are dangers in associations, charitable funders and government getting involved in a banks — all of which should additionally bureaucratic way with activities that be involved. Indeed this research shows are essentially about participation clearly how they have provided and social entrepreneurship. In reality, additional investment, grant funding and government is already supporting credit expertise so productively in the USA to union growth through an average of fast track CDCU development. £12,000 of regeneration funding among the largest 100 community For example, already here in Britain, credit unions according to data Lloyds TSB has announced its support available from the Financial Services for a “credit union growth fund”27 to

31 Recommendations - A Lifeline Banking Service Through Community Development Credit Unions

First… Definitions

There is growing recognition in Britain Community Development Credit Unions as part of an integrated strategy to about the huge potential for CDCUs to are defined and acknowledged in other tackle financial exclusion on a more develop, as they have done in the ways too. This is both by the regulator29, ambitious level. In the UK therefore, USA, to tackle financial exclusion. All and also by the National Federation of there might be four different ways of five national credit union associations Community Development Credit Unions classifying CDCUs. are impressed with the achievements which defines them as “credit unions of CDCUs and are interested in how whose primary mission is to serve low- The first level would see the label of they may work over here. Issues of income people and communities”. CDCU applied in the same way that demarcation though are sensitive the phrase “social entrepreneur” has because in Britain, unlike the USA, In this report, we have focused on the emerged, as something that people most credit unions have formed initially mission of CDCUs, which is arguably identify with and self-select as how around a community common bond no different to that of many they wish to describe their work. The rather than an employment one. community credit unions, and the second level would supplement this, by organising strategies (such as the reserving the status of CDCU for credit There is no strict definition in the USA of Credit Path to Financial Inclusion), unions that wished to operate as a CDCU. The Community Development some of which are being developed on CDCUs and had completed training or Finance Institutions Act in the USA, an ad hoc basis in the UK, but other development processes relevant passed by the Clinton Administration in nowhere brought together yet to CDCU activities. 1994, recognises Community Development Finance Institutions and among these, CDCUs are acknowledged Figure 3: Pyramid of Definitional Levels as a specialist credit union targeting low- income households to widen access to savings and credit for personal, housing and enterprise needs.

“A low-income credit union” under US legislation is defined as a credit union government where over 50 per cent of its members recognition have income less than 80 per cent of the national median.28 In the USA , low-income and low pay is generally institutional definition regarded as less than 80 per cent of the local area median, and in the UK as 60 per cent of national median. But accreditation it must be remembered that Americans have to pay for health care privately, so in effect given the high cost of health insurance in the USA, self-identification the American levels are relatively lower than they appear.

32 The third level would have a harder efficient IT and management and committed group of volunteers edge to it, by setting out clear, information systems; can be found, supporting, managing empirical criteria required for a credit high quality and reliable and training such volunteers requires union to be considered as a CDCU. services plus an attractive an enormous investment of time by These would include a socio-economic range of products; the community credit union leadership profile of members, such as the a strong sponsor body group and securing the support of a numbers in employment or income (e.g. an employer, church, local strong sponsoring body is easier said levels. As a low-income designation development agency, trade union than done. would be based, as it is in the USA, or non-profit organization). on an area's low-income profile, this In its 1997 report on CDCUs, A would suggest that CDCUs are likely Employer based credit unions have Commitment to People and Place, the to be distinct from the generally by definition a strong sponsor and New Economics Foundation looked at large city wide common bonds. in such circumstances also benefit Birmingham and showed that with the Thus such an approach would from contributions to the credit inherent economies that all employee- naturally, from demographic data, union leadership – not infrequently by based credit unions benefit from and rule in more localised areas or small allowances of paid time off to with a reasonable business planning and sub regions like South East employees to enable the credit union to good internal promotional work, Birmingham, Newham, West Newcastle, both operate and develop. Employer employing staff, initially part-time and rural mid-Wales or Rotherham. based credit unions also have marginal thereafter full-time, can readily be transaction costs on the savings and loan achieved within two years. This has been The final level would apply if operations thanks to payroll deduction the experience in fact with Birmingham’s government recognised, CDCUs as a and assistance from the employer’s three employee based credit unions: the distinct class of credit unions, for accounts department. Marketing, for local authority credit union, the police example by opening up powers to such employee-based credit unions, is credit union and the fire service credit credit unions such as the scope to clearly targeted and not diffuse as it is union. On the other hand, Birmingham raise non-member deposits. for a community based credit union. community based credit unions, like the vast majority nationally, have not been Community credit unions as a rule, able to readily achieve this. Paid staff on CDCU Development Framework by stark contrast, find all the building at least a part-time basis are crucial for All credit unions require the following blocks harder to secure and nothing significant credit union development to building blocks to develop and thrive: can be taken for granted. Costs are be secured and an ambitious business enormously higher and the more so plan to be achieved. active leadership by a strong board when a community credit union of unpaid Directors; chooses to target low-income The New Economics Foundation a strong and quite large group of customers without bank accounts assessed from the empirical evidence committed volunteers (the sweat and seeking local paying in points for available in 1997 that, at present equity element); cash transactions. Such community rates of share capital accumulation, good business sense along with credit unions to thrive and develop community credit unions could take business planning, product pricing need shop front facilities and 40 to 50 years to reach £1 million of and marketing nous; collection points. Even where a strong assets, a level at which a small team

33 of paid staff could be afforded The US experience provides backing for to degree level and post graduate sustainably. This delay, now as then, the importance of each of these. With level master credits. Community is a non-starter if community credit thre decades of American experience development credit union work is far unions are to play a significant role in in developing and refining a training, harder than City Fund management addressing financial exclusion. Thus as finance and support infrastructure for work with risk management skills that with other Community Development low-income and community based require intensive investment in Finance Institutions, the New credit unions to grow and thrive, the training and skill development in a Economics Foundation concluded six UK will benefit from learning from the broad range of areas including setting years ago that strategic investment by effective framework developed in the up an office, negotiating a lease, Government with assistance from USA by the National Federation of business planning, regulatory banks and other financial institutions Community Development Credit compliance, effective marketing and was vital for community based credit Unions. This is based on four media work, selecting and developing unions to graduate from “low-income principles: programmes, advocacy, IT and management information credit unions” to CDCUs. The call capitalisation, and education (“PACE”) systems, portfolio tracking and much then for a National Development Fund more. Supplemental to first level for CDCUs is thus even stronger now Programmes: specialised support knowledge bases are other product as a clear need.30 The legislative systems and investment systems development specialisms from micro- modernization achieved since 1997 tailored to develop low-income credit credit and small business lending to provides the necessary framework for unions to become strong and self- real estate and property loans. Other CDCUs to develop and this was also reliant institutions; areas like alternative financing called for in the first New Economics mechanisms to deliver cost effective Foundation report. So how might Advocacy: dedicated support from a alternatives to payday loans and progress on enabling CDCUs to specialist CDCU trade association to predatory finance organisations are emerge be achieved? change legislation, Government policy more complex still. and bank behaviour to support the As with the development of the reduction of financial exclusion through An example of how this model is Department of Trade and Industry community banking services to reach applied in the USA is set out in Phoenix Fund, there are four key things the unbanked and service the needs of Appendix D. With strong support to be done: disadvantaged communities in well from NFCDCU staff, Bushwick targeted ways; Co-operative Federal Credit Union 1. piloting CDCUs through in Brooklyn, New York was a national challenge fund to Capitalisation: a wide range of launched in December 2000. establish pathfinders; financing instruments to meet in flexible Within two years of trading, 2. establishing a specialist training and dynamic ways the requirements of membership reached 1,067 and programme for practitioners to learn CDCUs for different forms of capital – total member savings $627,021. CDCU techniques; from seed capital, sponsorship funds Compared to the slow and uncertain 3. evaluation of performance and guarantee funds, to lines of growth of many, credit unions in and the development of credit, ethical investment from the UK, Bushwick shows how to accreditation systems; non-members, secondary capital and escalate the path to financial 4. legislative changes to allow key policy related investment; sustainability without resort to development tools such as non reliance on a majority of better member deposits and secondary Education: to train CDCU staff and paid members and payroll deduction capital for CDCUs to access. board members beyond NVQs alone, strategies to achieve growth.

34 At the end of the day, you get what Recommendations you pay for. Critical to CDCU success in the USA has been proper In the UK, CDCUs will only grow if Appendix F outlines a specific and investment strategies that do not credit unions emerge that see the complementary set of recommendations waste scarce tax payers or charitable potential to address financial exclusion on these, drawing on The New funds on the one hand, nor are “penny on a sustainable basis, and they Economics Foundation’s wider wise and pound foolish”. As in the receive the support they require to programme of work on predatory lending case of all social enterprises or fulfil this social business mission. The and on social enterprise. businesses, undercapitalisation and involvement of a range of stakeholders underinvestment invite slow, paltry is needed to support CDCUs. It seems Drawing on our research findings of the growth and, more often than not, poor clear that the public sector is the only relevance and timeliness of the CDCU performance and early failure. Getting one that is strategically placed to approach for the UK, we recommend proper “PACE” on the ball, as the resource the development framework the development of a lifeline banking National Federation of Community required for CDCUs to play a significant service with two main goals: a) to Development Credit Unions have role in promoting savings and promote savings and financial literacy proven, is crucial to success. addressing financial exclusion, whilst and b) to provide affordable credit as a simultaneously meeting a range of practical local alternative to high cost public policy goals. loan sharks and sub-prime creditors. This should be achieved through the In the USA, CDCUs have been very following actions: good delivery vehicles for Government supported programmes such as 1. The Treasury should establish a Individual Development Accounts, national challenge fund for CDCU (which in xxxxxx savings xxxxx low- development with lessons drawn income households effectively), from the Phoenix Fund process for and financial literacy services that setting up Community Development assist with the take up of the Finance Institutions for enterprise. Earned Income Tax Credit. Both The CDCU development should be these programmes are similar phased with the first Phase seeking to the UK Savings Gateway and to fund a first round of 25 Working Tax Credit – aimed to pathfinder CDCUs in Britain through secure the Labour goal of reducing a bidding process and a second heavily child poverty. Phase to roll out a 100 CDCUs nationally based on best models The recommendations below cover developed in Phase One for the the development of the CDCU sector. diverse local circumstances of They do not talk to wider issues or community credit unions — ranging current Department of Trade and from densely populated inner city Industry Consumer Credit Act review neighbourhoods to dispersed rural considerations for improving the areas. As part of any future round regulation of sub-prime lending and of legislative change, such as reducing consumer exploitation in the through a deregulation order, the licensed credit sector more widely. government should introduce legal

35 changes to enable CDCUs, 5. A wider Community Development role of the welfare state. It will be appropriately defined, to secure Finance Institution Coalition should different to each of these in that its non-member deposits and to clarify come together to support the purpose is to enable non-profit, value- powers for credit unions to accept development of CDCUs — including based social enterprises to compete secondary capital. Additionally this the five credit union networks with sub-prime lenders and draw review should seek to explore the and the Community Development people out of social exclusion and a impact of raising the interest rate Finance Association, joint vortex of personal debt. Such a service credit unions can charge to a new consideration should be given to would represent an authentic attempt ceiling of 18 per cent APR (as in other helpful reforms such as a to tackle one defining set of issues the USA) to facilitate both higher VISTA style programme to support underpinning contemporary poverty risk lending to small businesses CDCUs and other Community and to promote life-saving alternatives. and for refinancing high cost Development Finance Institutions moneylender type loans. with secondments and postgraduate placements.

2. Government should establish the Drawing on US data for the mechanisms alongside its development of CDCUs, such as investment in CDCUs to review Bushwick (Appendix D), each CDCU progress, including an inter- would require operating revenue departmental review to assess support of around £125,000 a year, activity since its PAT report in 1999 for three years, which indicates £37.5 on financial exclusion. million.in subsidy required. In addition to this is the need for seed capital grants for reserves, equipment 3. Charitable foundations that have as well as training and programme pioneered models of “programme development. This suggests a total related investment” to support programme of around £60 million over enterprise-oriented activity in the five years, or £12 million per annum. public interest should experiment to assist credit union growth with This investment would bring a broad non-member deposits, or their spectrum of benefits. It would retain equivalent, in the form of patient, £400,000 of loan repayments within concessionary secondary capital. the immediate community of each credit union. These returns would come specifically to those on low- 4. The Treasury should explore the incomes, to the credit unions potential for a Bank Enterprise themselves, and to the initial provider Award Scheme, based on the US of capital, which could be government model, to provide public recognition or ethical investors. and financial support for banks that provide the most effective support The lifeline banking service we propose and investment in CDCUs and is a complement to mainstream wider enterprise lending. financial providers and the insurance

36 Appendix A List of Research Interview Sample and Case Profiles

United States England and Wales

Bethex Credit Union Burnley Area Community Credit Union Union Settlement Federal Credit Union Rotherham Credit Union Network Lower East Side People’s Federal Credit Union Enterprise Credit Union, Merseyside Citizens East Community Development Credit Union South East Birmingham Community Credit Union Vermont Development Credit Union Morecombe Bay Credit Union Northside Federal Credit Union Coventry Credit Union Network Alternatives Federal Credit Union Community Wealth Credit Union Ltd, Doncaster Bushwick Co-operative Federal Credit Union Cornish Credit Union Development Project Financial Inclusion Newcastle Further information was obtained from the National (four Community credit unions in West Newcastle) Federation of Community Development Credit Unions’ senior Robert Owen Montgomeryshire Credit Union managers and their published reports. During the US field River Valley Credit Union trip, the techniques for developing CDCUs and their core Northern Oak Credit Union services were learned about in considerable detail through Southwark Credit Union attendance on three intensive days of training at the CDCU Builth & Llanwrtyd Credit Union Institute at the University of South New Hampshire. Redditch Credit Union Moneyspinner Credit Union Specialist methods to tackle predatory lending and to Riverside Credit Union develop affordable financing products was learned about Portsmouth Area Regeneration Trust through contact with managers of Northside Federal Credit Union, ASI Federal Credit Union (New Orleans, Louisiana), Self-Help Credit Union (Durham, North Carolina) and Faith Community United Credit Union (Cleveland, Ohio). Additional information on pioneering services to promote long term savings and financial literacy was obtained from Santa Cruz Community Credit Union (California), and Progressive Neighbourhood Federal Credit Union (Rochester, New York).

37 Appendix B The New York City Financial Network Action Consortium

The New York City Financial Network Action Consortium is a ATM Network Development: special discounts on good novel network of four CDCUs with a fifth CDCU, to join in quality, nearly new, ATM (cash) machines have been July 2003. The Birmingham administration centre for negotiated at a savings of $15,000 per machine (i.e. at Community Credit Unions is moving in this direction, but $20,000 rather than $35,000 each) and a strategy drawn without comparable levels of investment. New York City up for locating these in each of the four CDCU areas of New Financial Network Action Consortium, alongside the National York at their new branches and in major places of Federation of Community Development Credit Unions and employment. Installation work for the Lower East Side the North Carolina Minority Support Centre, has achieved People’s Federal Credit Union has been completed and work recognition from the US Treasury as one of the first with other CDCUs is underway. specialist Community Development Finance Institution intermediaries in the USA. The network is owned and Partnership with Community Based Organisations (CBOs): democratically governed by Union Settlement Federal Credit initiatives are now in operation to work with organisations Union, Bethex, the Lower East Side People’s Federal Credit specialising in financial literacy, money management training Union and Homesteaders Credit Union. Bushwick Federal and debt advice. Community Based Organisation trainers Credit Union will become the fifth member in summer and advisor experts in these fields deliver surgeries at credit 2003. In practice the network consortium acts as a union branches linked to specialist accounts, such as the secondary co-operative system with six strategic objectives, Individual Development Account for home purchase or to: repair, business start up or financial education.

create economies of scale thereby saving costs; Shared Small Business Lender: Lending to the self- develop new opportunities to generate more revenue; employed and small businesses is a challenge for CDCUs undertake research and development related to new without specialist business lending expertise. This is a products and services; conundrum because until the volume of lending can be co-ordinate marketing activity; generated by an individual CDCU, hiring specialist staff is define and move toward a unified vision of affordable not viable. To tackle this for all CDCUs in the consortium, financial services; funding has been raised for a small business lender to finance their fixed asset needs so they can reach more service the needs of NYCfNAC members. In addition to of the target “low-income” client group. undertaking credit analysis for small businesses, the shared lender will facilitate the participation of loans between the In its first three years of operation, the New York City CDCUs to mitigate risk and permit them to make larger Financial Network Action Consortium has already delivered loans. Strategic partnerships are being developed with micro through the partnership consortium, the following results: enterprise lenders to secure loan referrals and with a national CDFI to access a government guaranteed loan Branch Development and Improvement: branch program, which provides an 85 per cent loan guarantee. construction and renovation projects have been carried out The programme will assume a significant share of the for three CDCUs with funds raised thus far of $1.3 million. CDCUs' marketing activities for small business loans. $400,000 of grants was secured from diverse programmes to open a fifth Bethex Branch in 2001. Design work Integrated Financial Services: a full-time Director of completed and shop fittings done on the Lower East Side Product Development and Marketing is now working for the People’s Federal Credit Union second branch. Over four credit unions. Additionally work has commenced on $600,000 has been raised and invested in the Union examining the achievable economies of scale between the Settlement refurbishment project to double the size of its four CDCUs and other New York CDCUs that will be invited previous, inaccessible office branch and to establish with to join the New York City Financial Network Action the investment in a store front branch. Consortium at a later stage, once the integrated model is

38 fully operational. Areas under development include: insurance services, central back office facilities, common data processing, joint marketing, common branding, inter- lending facilities, collaborative policy development, shared recruitment and training programmes and improvements to the Electronic Benefit Transfer system for welfare and pension payments.

Earned Income Tax Credit Education Project: a financial literacy project which seeks to inform 50,000 low-income households about their eligibility for tax credits, to promote the use of free tax preparation services and encourage them to become CDCU members to widen access to affordable financial services and specialist savings accounts like Individual Development Accounts.

The vision and commitment of CDCUs in New York are impressive and it is likely that, coming together in this way through shared back office and other secondary co-operative facilities like the above at a time of increasing inequality will enable them to make a significant future impact on the lives of poor people in the city.

39 Appendix C Marketing Campaign for Community Development Credit Unions in Britain to Tackle Financial Exclusion

Table 1. Capture rate of new members, and income generated within each CDCU Years 12345TOTALS Capture rate/members16,330 22,094 29,894 40,446 54,724 163,489 Accumulated members16,330 38,424 68,318 108,765 163,489 Capture rate per CDCU 65 154 273 435 654 New loans of £564 £9,394,322 £22,104,841 £39,302,172 £62,570,161 £94,051,750 £227,423,245 Income £1,127,319 £2,652,581 £4,716,261 £7,508,419 £11,286,210 £27,290,789 Income for 250 CDCUs per annum £4,509 £10,610 £18,865 £30,034 £45,145 £109,163

Table 2. Financial benefits of captured custom within each CDCU community Years 12345TOTALS Total customers captured from Loan Co. 16,330 22,094 29,894 40,446 54,724 163,489 Interest charged @ 177 % APR £5,986,578 £14,086,418 £25,045,502 £39,873,142 £59,934,939 £144,926,578 Interest saved via a credit union Loan £4,859,259 £8,440,548 £13,286,032 £19,841,972 £28,712,158 £75,139,969 New members per CDCU 65 154 273 435 654 Wealth retained within each CDCU community £23,946 £44,373 £72,009 £109,402 £159,993 £409,703

40 Appendix D Bushwick Co-operative Federal Credit Union

Bushwick in Brooklyn is one of the poorest New York city An additional relief cashier was funded on a one day a week neighbourhoods. Similarities with Salford are strong. 38 per basis initially, increasing to full time as membership levels cent of the population live below the poverty line of 60 per increased. The Marketing officer was funded by the VISTA cent median national income. The local population is 103,000 programme of the US Government. A grant based operating and there are only two bank branches for this large area. In budget of $193,500 based on a 30 page business plan was general as in many parts of Salford, conventional financial secured to pay for both staff and shop front lease costs. Funding services are invisible and in short supply. Small business loans for the operating budget was apportioned well with one third from banks are almost unheard of. Down market lenders are coming from three major banks (Citibank, JP Morgan, and rife. In the late 1990s, local affordable housing organisations FleetBoston), one third coming from state and Federal and local politicians sought to develop a CDCU and a local, Government sources (Empire State Development, Fannie Mae community based housing organisation, Ridgewood Bushwick and New York City Council) and one third from charitable Senior Citizens Council agreed to become a sponsor and foundations such as the New York Community Trust. The funding provide senior management time to foster and incubate a was scheduled to gradually taper yearly in a conservative way credit union, with a well-planned strategy, to meet the needs against business plan forecasts for income growth. of local people. The shop front lease was carefully selected from market The stages of Bushwick’s history highlight how a strong analysis work to be in a prominent, high street location with sponsor supported by a National Federation of Community good footfall and near to the New York public transport stops. Development Credit Unions style “PACE” based approach Concentration was not on direct deposit and payroll deduction can quickly yield strong CDCU growth. There is no escaping customers but on the unbanked and reaching them through the need for adequate resourcing at each stage. an outreach and financial literacy programme strategy.

Stage One – Organising pre-registration: with release of a Capitalisation was secured by attracting the aggregate level full-time member of staff with community development nous in the box below of non-member deposits by the end of the and with business planning skills, the pre-registration work first year of trading. of the credit union was done intensively over 18 months. Grants were raised to resource the market feasibility work of It is important to note here that the Municipal Credit Union is $32,000 from the New York Community Trust and the linked a city employee credit union which is investing in the CDCU to business plan of $12,500 from Chase Manhattan Bank. A foster development. It is also interesting to note that Green large market survey was carried out among 1,317 low and Point CDC is a non-profit affordable housing organisation in moderate income local residents. Of those surveyed, 827 Bushwick – the equivalent of a British housing association. pledged to become CDCU members. Investment Both the housing body and the public employees credit union commitments from the survey of $193,455 were made and are investing long term at no financial return at all. Might average savings per week indicated from the pledge form large employee based credit unions in the UK and Registered returns was $30 per member. Social Landlords do the same?

Stage Two – Year One and Investment Resource Base: as a Brunswick Co-operative FCU - Non member Deposits result of the comprehensive market study carried out and (Year 1 Achievments) the business plan completed, promotional work to funders European American Bank $100,000 @ 2% was successful in raising funding for five years to support a Fuji Bank $75,000 @ 1% four person staff team including: Independence Community bank $50,000 @ 0% Municipal Credit Union $50,000 @ 0% Manager and Development Officer US Trust Company of New York $50,000 @ 2% Loan Officer and Financial Literacy Programme Worker Greenpoint Community $40,000 @ 0% Office assistant manager (chief cashier) Development Corporation Cashier TOTAL $365,000 Marketing Officer 41 Stage Three – Year Two Outcome: over the first twenty four Most noteworthy, the balance sheet showing net worth is months membership and savings growth has been 14.28 per cent, which has been aided by grant impressive. On 31 December 2002 at the end of Year Two contributions to reach this level to allow expansion and of trading, membership had reached 1,067 and total rapid growth from a strong base. member savings of $627,021 were almost double non- member deposits raised in the first year. New members All services are also provided bi-lingually, in English and joining are now signing up at the rate of 45 per month and Spanish. They have initially concentrated on basic budget the average savings level per member was at the end of accounts, deposit accounts, higher interest savings year two, $588. Of the members recruited, the financial accounts, consumer loans and organisational accounts as literacy outreach work and the marketing strategy more well for local tenant and community groups. Checking broadly was hitting target with 40 per cent of members accounts have more recently been introduced. With joining not having a savings account before and 75 per cent strategic investment, by Government programmes, the never having had a bank loan before. banks and charitable foundations, Bushwick Co-operative Federal Credit Union have assembled “four legs to form a On the loan side at the end of Year Two, 341 loans had proper chair” to work from. As Bushwick Co-operative been made totalling $518,162. The average loan size was Federal Credit Union founder and manager, Jack Lawson $1,520 and the approval rate for new loans was 91 per summed up the vital requirement for the necessary strategic cent. The two most common needs for loans were to buy investment that needs to be mobilised to do community household durables (fridges, washing machines, and second banking “for Real”: hand cars) or to refinance debt in a more affordable way. Delinquency and slow payment on loans was $3,663 in "You cannot do this type of work well with only a half start. aggregate – a slow payment percentage of only 1.16 per The poor, just like anyone else, will not place their hard- cent. It should be noted that 26 per cent of customers are earned savings in a rundown storefront with one on public assistance, the equivalent of Income Support. overstressed manager, an under-qualified cashier and someone's old computer. The ability to put into place a solid The proactive financial literacy work at the end of the operation — hire really good staff and bring in high quality second year of trading had attracted over half the computer hardware and software — was probably the single membership to participate – 531 people. The workshops in best reason for our success." the programme included: There are no CDCU blueprints. However Bushwick Federal (i) Building family budgets and strategies for savings; Credit Union indicates well the scope for fast tracking credit (ii) Understanding credit and improving creditworthiness; union development to reach the financially excluded in the Understanding financial institutions (from check cashers UK with a similar combination of dedicated and highly and pawnshops to credit unions and banks); skilled staff, resourced by the right level of investment, to (iii) Avoiding predatory lenders; make the business plan implementation hum and move (iv) Income tax issues, including claiming tax credits forward deliberately, rather than splutter and die like a and skills in completing returns; clapped out car. (v) Preparing for homeownership.

Bushwick Co-operative Federal Credit Union is now after two years of trading already a $1.7 million Community Development Finance Institution showing transparently how to deliver financial service affordably and sustainably in one of New York’s poorest and ethnically mixed neighbourhoods.

42 Appendix E Work of the New Economics Foundation, the National Association of Credit Unions Workers and the National Consumer Council

New Economics Foundation National Association of Credit Union Workers In 1997 New Economics Foundation (NEF) produced, Formed in 1992 the National Association of Credit Union A Commitment to People and Place, its first policy report on Workers (NACUW) remains the voice of credit union workers Community Development Financial Institutions. This report throughout Britain. The activity of NACUW reflects the authored by Pat Conaty and Ed Mayo was the UK’s first association’s membership representing all sectors of the report on Community Development Credit Unions (CDCUs) movement. Such a “broad church” enables The National and was commissioned by the National Consumer Council Association of Credit Union Workers to be at the forefront of with funding from the Joseph Rowntree Foundation and many initiatives that encourage the growth and development additional sponsorship from Nat West Bank. A year later the of credit unions. The National Association of Credit Union New Economics Foundation report, Small is Bankable, Workers has designed and run the only accredited training launched by Patricia Hewitt MP proved seminal for the widely available in credit union. Its members have been creation of the Community Development Finance Institution responsible for the training and support given to the majority movement in the UK and provided strategic guidance for the of credit unions in Britain and to their volunteers. UK Social Investment Task Force report which established the Phoenix Fund. The National Association of Credit Union Workers were joint authors of Growing the Credit Union Movement published in The 2003 New Economics Foundation report, Profiting from October 2002. The Report identified areas where better co- Poverty, highlights a range of ways that Predatory Lending operation between the movement’s main stakeholders was can be tackled proactively in the UK. Here in particular key advantageous. One of its key recommendations was for the lessons from the work of both CDCUs in the USA and the movement to be allowed to develop models of structure and Money Advice Budgeting Service (MABS) in Ireland should services that recognised the diversity of the British credit and can practically be taken on board. Both these union movement and which supported the autonomy of approaches have benefited from strategic support by the individual Credit Unions. American and Irish Governments and from their respective regulatory agencies as well. The CDCU research project was launched at the National Association of Credit Union Workers’ Annual Conference in A more detailed New Economics Foundation report, Ending November 2002. Research of this kind is central to the core Fuel Poverty and Financial Exclusion, set out in March 2002 activity of NACUW. Representing members who are a business plan to show how in Britain both CDCUs and employed directly by Credit Unions who are striving to tackle MABS can be developed from lessons drawn from both social and financial exclusion “head on”, NACUW provide these American and Irish models but also from emerging UK opportunities for those at the forefront of developing the experience in the credit union movement here. British movement to discuss appropriate models and the design of resources to achieve successful delivery.

43 National Consumer Council The National Consumer Council (NCC) is the independent In 1996, the NCC launched a resource pack, Credit Union consumer policy expert, championing the consumer interest Development: a new platform - raising the profile of local to bring about change for the benefit of all consumers. credit unions, and in 1997 commissioned the first research on Community Development Credit Unions by Pat Conaty We do this by working with people and organisations and Ed Mayo. that can make change happen – governments, regulators, businesses and people and organisations who speak As part of its ongoing work in this area, the NCC has on behalf of consumers – and by conducting rigorous recently held seminars on ‘Financial Futures’ and ‘Meeting research and policy analysis. The NCC works in an open Basic Financial Needs’ – examining solutions to providing and collaborative way, publishing research findings, and basic financial services for all consumers. As part of its campaigning for change to advance the consumer cause. ‘Everyday Essentials’ project, the NCC published a report The issues of poverty and disadvantage are at the analysing the government’s Universal Banking and Savings heart of the NCC’s work, as often the most vulnerable Gateway initiatives. The NCC has also contributed to the people find it hardest to be heard. Department of Trade and Industry’s review of the Consumer Credit Act, 1974, and the draft Consumer Credit Directive, The NCC played a significant role in the development of calling for government to support ways to address the credit unions in the UK, including the promotion of credit needs of people on low-incomes, including business credit unions in the 1970s, and preparatory work for the funding for community credit unions. 1979 Credit Union Act. By the late 1980s, the NCC had initiated several projects to try and address the issue of the growth needed for a mass movement. The NCC’s 1994 report, Saving For Credit, was the product of a working party the NCC convened to bring together the players in the credit union movement to address the key issues. The report concluded that credit unions should play a vital part in promoting savings and effective money management, as well as contribute to community activity. Its recommendations were partly addressed in the resulting 1996 Deregulation Order.

44 References

ACE Credit Union Services, Association of Independent Fuller, D., Affleck, A. and Dodds, L., (2001) ‘Advancing Credit Unions, National Association of Credit Union Workers Financial Inclusion in Newcastle upon Tyne’, market and the Scottish League of Credit Unions (2002), Growing feasibility study for Financial Inclusion Newcastle (FIN), the Credit Union Movement, Joint Report funded under the August 2001. Oxfam UK Poverty Programme. HM Treasury (1999), Access to Financial Services, report Association of British Credit Unions, Association of of Policy Action Team 14 to the Social Exclusion Unit, June Independent Credit Unions, National Association of Credit 1999. Union Workers, and The Scottish League of Credit Unions, HM Treasury (1999), Credit Unions of the Future, report (1997), Common Ground – National Goals for Improving the of Sir Fred Goodwin’s Taskforce to the Government on credit Laws Governing Credit Unions, a report from the Credit union legislative reform and policies for future development, Union Movement in Great Britain. July 1999. Birmingham Credit Union Development Agency (1999), Jacob, K., Bush M., and Immergluck, D.†(2002), People, Communities and Credit Unions, report of the Rhetoric and Reality: An Analysis of Mainstream Credit Birmingham Credit Union Research Project. Union's Record of Serving Low Income People, Woodstock Birmingham Credit Union Development Agency, Annual Institute, Chicago. A research report that reveals that Report 2001-2002 conventional employee based credit unions in the USA fare Bushwick Cooperative Federal Credit Union, ‘Revised little better than American banks in reaching low-income Business Plan’ submitted to National Credit Union households and reducing financial exclusion. Administration in 2001. Jones, Paul (1999), Towards Sustainable Credit Union Cohen, R. (2000), Enterprising Communities: Wealth Development, research report for the Association of British Beyond Welfare, report of the Social Investment Task Force Credit Unions. to the Chancellor of the Exchequer, UK Social Investment Jones, Paul (2001), Access to Credit on a Low Income, Forum, London. The Co-operative Bank. Community Development Finance Association, (2002) Jones, Paul (2002), ‘Getting the low-down on the ‘The Power of Association’ prospectus for the Community Lower East Side Credit Unions’, the Association of British Development Finance Institution trade association. Credit Unions feature story on CDCUs in Credit Union News, Conaty, P. and Bendle S. (2002), Ending Fuel Poverty March 2003. and Financial Exclusion – a Social Enterprise Business Plan, Kober, C. and Paxton, W. (2002), Asset-Based Welfare joint New Economics Foundation and National Energy Action and Poverty, Institute for Public Policy Research. report completed under the Ofgem Social Action Plan with Landor Conferences (2003), ‘Building Sustainable New an analysis of ways and means to develop both American Community Financial Institutions to Combat Financial CDCUs and Irish Money Advice Budgeting Services in Britain Exclusion’ proceedings from the Third Annual Finance for the for Factor Four pilots involving money, debt, energy advice Local Community Conference with Keynote speakers, Ruth and credit union bill payment systems – the initial pilot in Kelly MP and Ed Jacob, Northside Federal Credit Union in Birmingham to begin Summer 2003. Chicago (USA), 22 January 2003 in London. Conaty, P. and Mayo, E., (1997) A Commitment to National Consumer Council (2003), Everyday Essentials: People and Place – the Case for Community Development meeting basic financial needs, policy response to the Credit Unions, policy report by New Economics Foundation Government’s Universal Banking Services and Savings for National Consumer Council with funding from the Joseph Gateway services. Rowntree Foundation. National Federation of Community Development Credit Debt on Our Doorstep, ‘Credit Unions and Community Unions (1999), Worldview – the National Federation of Finance’, Briefing No. 2, 5 March 2001. Community Development Credit Unions @25, 25th Flutter, C. and Paxton, W., (2002) ‘Asset-Based Welfare Anniversary Journal with full NFCDCU historical analysis - Policies and Debt’, discussion paper for seminar in August specially produced for June 1999 annual conference at the 2002, Institute for Public Policy Research. World Trade Centre, New York City.

45 National Federation of Community Development Credit Rosenthal, Cliff (2003), ‘Community Development Credit Unions (2002), ‘Report to the Membership 2001-2002’. Unions in the US: Lessons and Perspectives’, presentation National Federation of Community Development Credit made to the five British Credit Union Trade Associations, HM Unions (2002), Building Community Assets – Annual Report Treasury and the Financial Services Authority on 10 March 2000-2001. 2003 in London. National Federation of Community Development Credit South East Birmingham Community Credit Union and Unions (2002), Each one, Teach many, a Train-the-Trainer Birmingham Credit Union Development Agency, ‘First Financial Literacy Program for Credit Unions Serving Low Opportunities and Second Chances - Birmingham and Moderate Income Communities. Community Development Credit Union Venture’, bid to the New York City Financial Network Action Consortium, Adventure Capital Fund, January 2003. ‘Organizational Overview’, April 2003, unpublished Spiers, S. (2003) ‘CDCUs for Britain?’, editorial by the explanatory document of secondary co-operative services Association of British Credit Unions in Credit Union News, established (to date since May 2000) for four New York March 2003. CDCUs to enhance efficiencies, scale and impact in tackling Williams, M. and Wiles, M. (1998), On the Move: an financial exclusion. analysis of low-income credit unions 1990-1996, NorthSide Community Federal Credit Union, Annual Woodstock Institute, Chicago, Illinois. Report 2001. Williams, M (2002), Critical Capital: How Secondary Office of Fair Trading (1999), Vunerable Consumers and Capital Investments Help Low Income Credit Unions Hit Financial Services, the report of the Director Generals Inquiry. Their Stride, Woodstock Institute (2001). Palmer, H. with Conaty, P. (2002), Profiting from Poverty Williams, M and Smolik, K. ‘Affordable Alternatives to – Why Debt is Big Business in Britain, The New Economics PayDay Loans – Examples from Community Development Foundation Pocketbook 8, New Economics Foundation. Credit Unions’, in Reinvestment Alert, Number 16, March Palmer, Henry, ‘Shark Alert’, New Start, 19 April 2002. 2001, Woodstock Institute, Chicago, Illinois. Paxton, Will, ‘Don’t Let This Savings Plan Get Away’, New Start, 21 June 2002. Reifner, U., Lynch, M., and Granger, B. (1997), The Social Responsibility of Credit Institutions in the EU, Institut für Finanzdienstleistungen e.V., Hamburg. Report produced for European Commission DG XXIII on the scope for a European Community Reinvestment Law. Rosenthal, C. and Levy, L. (1995), Organizing Credit Unions – A Manual a handbook for CDCU developers, National Federation of Community Development Credit Unions. Rosenthal, Cliff (1989), ‘The Community Development Credit Union Demonstration Project’, report on national development initiative for CDCU exemplar models in North Carolina, New York, Philadelphia and Chicago and funded by the Ford Foundation. Rosenthal, Cliff (2002), ‘Money, Management and Mission’, Keynote speech on CDCUs to the Community Development Finance Association’s Third Annual Conference in Glasgow on 20 June 2002.

46 Notes

1 Charles Ferguson & Donald McKillop (1997), The Strategic 5 There was a new obligation for submitting quarterly as well as Development of Credit Unions, John Wiley and Sons Ltd. annual returns. Sufficient information was required prior to registration to prove adequate basic management capacity and 2 Research centred on selective in depth interviews in the USA and in systems of control. The Registry was also concerned to establish England and Wales with community based credit union practitioners. the ‘reality’ of the proposed common bond and required proposed Just under 30 in depth interviews were undertaken — during October credit unions to submit detailed information especially those 2002 in the USA and from November 2002 through March 2003 in wishing to register a residential common bond. Overall there was a England and Wales. The framework to help support the pilot very restrictive approach to residential common bonds, and its community development credit union experiment was developed with emphasis on moral suasion was interpreted as requiring small tight the assistance of a Focus Group consultation in London on 10 March knit communities. 2003. This event involved 16 participants from all the British credit union associations and the Community Development Finance 6 Other legislative reforms that have affected the way credit unions Association, from banks, from the Department of Trade and Industry operate include: Statutory Instruments Act 1946; Mental Health Act Phoenix Fund and from debt advice and poverty groups. 1959 (Part VIII); Trustee Investments Act 1961; Income and Corporation Taxes Act 1970, Section 30; Insurance Companies Act 3 Prior to the Credit Union Act of 1979 credit unions could exist in 1974; Criminal Law Act 1977; Banking Act 1979; The Consumer one of three ways, all of which presented obstacles to their Credit Act 1979; The Data Protection Act 1998; The Companies Acts. development. They could register under the Industrial and Provident Societies legislation that was designed to regulate small co-operative 7 Many of the changes are welcome in improving internal controls, ventures. But this prohibited lending except on ‘the security of real or reporting and accountability. A major benefit has been the personal property’. Members were therefore unable to borrow above introduction of the share protection scheme that will underwrite the level of their own savings, unless another member could be members’ savings for the first time. This has been collectively found to guarantee the loan on the security of his or her savings. The called for by all sectors in the movement (see Common Ground – level of lending was limited by the number of guarantors who were National Goals for Improving the Laws Governing Credit Unions. A prepared both to put their own savings at risk and to forego the report from the Credit Union Movement in Great Britain, 15 opportunity to take out a loan themselves. December 1997), and will increase public confidence in investing in their credit unions. Recent market research commissioned in Another route they could take was to set themselves up as a North Nottinghamshire also reveals that the public are responding limited company. This imposed few controls to ensure that more positively to credit unions with the new status that Financial members’ savings were properly administered, but a union had to Services Authority supervision bestows. But some of the new have permanent officials who would be liable for the debt of the demands are rigorous and may be problematic. A number of company. The registration fees were large in relation to the turnover community credit unions are concerned that the vetting and of these co-operative ventures and none of these requirements approval process for all officers performing ‘controlled functions’ is were compatible with a voluntary organisation. The final option was beginning to deter volunteers, who are required to submit a 23 for a credit union to remain as an unincorporated association. This page application form of personal data to the regulators. left them in a legal limbo, unable to sue or be sued. There was a lack of any safeguards or supervision and it did little to promote Following an influential 2002 Oxfam UK report, Growing the Credit confidence among potential members. Union Movement, that called for better co-operation between the various credit union stakeholders, a new National Liaison 4 No member could hold more than £2,000 in shares. The Committee has been formed to better represent the interests of all maximum dividend was set at eight per cent. No more than one sectors within the movement. A specialist legislation group has also per cent per month could be charged in interest on loans. A credit been established out of this, with the intention to consult and lobby union could ask for 60 days notice before shares could be to improve further credit union legislation. withdrawn. The Registry of Friendly Societies was given powers to require all credit unions to be registered. Qualifying for this involved 8 Towards Sustainable Credit Unions, March 1999 demonstrating an appropriate common bond, the usual objects of a credit union and a set of acceptable rules. The Registry 9 While critical of public sector backing, the report provided monitored credit unions by requiring them to submit an annual documented evidence to back demands and applications for return. It could appoint an inspector to investigate the affairs of a greater levels of investment. As a result, over recent years, credit union or suspend it from accepting savings or making loans. credit unions and in particular community based ones have It could also cancel a credit union’s registration or wind it up by been more successful at securing subsidies towards achieving court order. financial viability.

47 10 The first money for low-income credit unions came from the and North Carolina. Also from 1986 onwards, with a $500,000 credit union association CUNA. They had invested $50,000 to fund investment from the MacArthur Foundation, the National Federation a pilot project for developing credit unions for low income, ethnic of Community Development Credit Unions began attracting major minority communities in Chicago, New York, Washington DC, funds from trusts and foundations of zero or very low interest funds Wilmington (Delaware) and San Juan (Puerto Rico). The Federal for its Capitalisation Programme. These then invested strategically Government formed a partnership to develop this initiative under in member development as the Blue Book called for. By 1990, the the War on Poverty and from 1965-73 over 400 community credit National Federation of Community Development Credit Unions had unions were registered. Only a very small number of the credit $2.3 million of such funds under management and was able to unions founded received direct subsidy, most were helped with place non-member deposits of $50,000 to $100,000 to assist its donated office space or in kind support. community development credit union members develop. Alongside direct grants, other assistance has come in the form of low coupon The vast majority of these credit unions failed once the War on investments, discounted loans, secondary capital and social Poverty programme ended. They failed for a variety of reasons investment deposits. including: 14 To assist community development credit unions with staffing, many were not organised properly and failed to take root; the National Federation of Community Development Credit Unions loan policies and collection points were inadequate – leading to was also able to negotiate with AmeriCorps VISTA to enable losses quickly; graduates to be placed with community development credit unions members were given Government emergency grants and loans for a year and assist as staff for business, product and other at the same time and confused the two; financial services development. Graduates are paid a wage by the the common bond areas of the credit unions were both small US Government, administered by the National Federation of and restrictive – leading to an inability to include moderate income Community Development Credit Unions. members as well in the credit unions. Subsequent support during the Clinton years included the opening The failure of this Government based approach led to acrimony and up of community development credit unions to small business CUNA decided in late 1970 to wind up its involvement as soon as lending opportunities with support from the Small Business possible. In retrospect, while funding provided was often Administration and the Presidential Micro-lending Awards. Some inappropriate in how it was used, the problem was not itself an have qualified for access to small business lending guarantee investment one (National Federation of Community Development programmes. The National Federation of Community Development Credit Unions, 1999). In fact, the vast majority of these low Credit Unions’ own Capitalisation Programme has increased by over income credit unions received no investment directly at all. What 350 per cent in the past five years to a fund of over $25 million was really missing was a viable long term support structure and under management which places over $5 million a year of new effective training services. money with its members – including $3.5 million in non-member deposits, over $1 million in secondary capital to build net worth 11 A sum of $6 million was provide for a Revolving Loan Fund to and reserves, and over $330,000 in equity grants. make five year loans of about $200,000 each at a rate of two per cent interest and quarterly repayments. To qualify for these 15 Evers, J. and Reifner, U, (1997) The Social Responsibility of investments, community development credit unions nationally had Credit Institutions in the EU, Institut für Finanzdienstleistungen, to prepare community needs plans and comprehensive business Hamburg, 1998. Also, Cohen, R. (2000), Enterprising plans. The National Federation of Community Development Credit Communities: Wealth Beyond Welfare, report of the Social Unions received funds to help members with technical assistance Investment Task Force to the Chancellor of the Exchequer, UK and capacity building. Social Investment Forum, London.

12 The National Federation of Community Development Credit 16 Bethex has also recently merged with four smaller low-income Unions had to close its national office and make staff redundant as credit unions in the Bronx. As a result through one of these its annual budget was cut back from $500,000 to only $5,000. mergers and a community regeneration partnership with the Hunts The Revolving Loan Fund was kept in existence but the interest rate Point Economic Development Corporation, it has expanded its on loans was raised to 7.5 per cent, in effect making it a liability branch network to four offices. rather than an asset. 17 Among its 4000 members, the Lower East Side People’s 13 The Demonstration Project centred on assisting community Federal Credit Union has 400 (11.5 per cent) on the cash payment development credit unions in New York City, Chicago, Philadelphia service and 700 (20 per cent) on the chequing account. For those

48 with only one bill to pay, money orders are cheaper than the West Newcastle have joined FIN to make it work. Services available chequing account and credit union staff advise members on the through FIN include: most cost effective system. For the cash payment service, commission income to the credit unions from Consolidated Edison money advice and debt counselling; (for electricity) is 60 cents a transaction. Cash withdrawal can be basic Bank Accounts in partnership with the high street banks; obtained at the branch offices and through a steadily growing range insurance; of cash machines being developed by Bethex and the Lower East business advice and micro-enterprise loans. Side People’s Federal Credit Union. FIN has raised funds from the New Deal for Communities to fund Chequing account services that Bethex operates are $5 per month the equivalent of 2.5 staff for the credit unions to operate front for unlimited cheques, but members need to have a minimum office provision and additional funds for a shared debt counsellor savings level of $100. LESPFCU requires a minimum saving level of service through the CAB, a business advisor for all the credit unions $250 with 10 checks free per month. The minimum saving level is to deliver small business loans and a shared administrator. set to limit households from bouncing checks which cost $20 to Additionally funding has provided three of the community credit process. LESPFCU members with saving of over $750 either in unions with shop front premises in good locations. Lloyds TSB has their saving or their chequing account (i.e. the combined total of also provided a capital grant for a loan guarantee fund to help both accounts) pay no chequing account monthly fee. The saver refinance high cost loans from doorstep creditors. stage is thus an important critical one for community development credit union financial health and member well-being as 22 The Social Exclusion Unit’s Policy Action Team 14 report, accumulated saving balances assist the member in three main published in 1999, recognised the role that community credit ways: (a) to avoid transmission charges for payment services; (b) to unions could potentially provide in Britain in reducing financial qualify for loans; and (c) to build up assets. exclusion. Following the recommendations of this report, the Government has taken action to reduce financial exclusion in 18 This national finance mechanism provides a partial loan several ways: guarantee to encourage community development credit unions to provide short term loan facilities to counter predatory lending requiring the introduction of basic banking accounts by all practices in the ways the ASI Federal Credit Union (and, in major banks and building societies; Cleveland, Ohio, the Faith Community Credit Union) have shown furthering the development of the Universal Banking Service to feasible. By the end of 2002 the National Federation of Community ensure that the Post Office network can operate more in future Development Credit Unions had committed $450,000 in PRIDEs. as a provider of financial services to all households; modernizing credit union legislation to enable faster growth in 19 The cheque cashers agreed to accept savings payments into areas of disadvantage; Bethex accounts, to withdraw funds, and to cash a Bethex cheque ensuring, through the Housing Corporation and the Local for free, with Bethex paying the fee. Government Association, that Registered Social Landlords work with the insurance industry to promote low-cost household 20 Fuller and Jonas have previously argued for a more diverse insurance that is integrated with rent payments; approach to local development. See Fuller, D. and Jonas, A. E. G. developing financial education and literacy initiatives: through (2002) Institutionalising Future Geographies of Financial Inclusion: schools, the Financial Services Authority and through the national legitimacy versus local autonomy in the British Credit Community Finance and Learning Initiative; Union Movement, Antipode, 34: 1, 85-110. supporting through the Social Investment Task Force recommendations and the Department of Trade and Industry 21 A similar strategy has evolved in the past two years in Phoenix Fund, the growth of Community Development Newcastle upon Tyne. Duncan Fuller and Mary Mellor of the Financial Institutions. University of Northumbria were invited to carry out some community based research with locally hired researchers on council 23 This is likely to be the case here as well in the UK – an estates in West Newcastle. The focus of the brief was to find out outcome which will be financially costly for the Government once what financial services were required. The research involved the subsidies from the banking industry for the Universal Banking consultation with old people, young families, teenagers and a wide Service expire after four years. The British Treasury have studied range of ethnic minorities. Out of this work, a project called this experience but it has not been noted to date how community Financial Inclusion Newcastle (FIN) has emerged, bringing together based credit unions in the USA have been helpful in tackling many money advice, debt help and credit unions in a collaborative way. of the problems with lack of cash machines in low income areas in Both the local Citizens Advice Bureau and the local credit unions in many American cities and isolated rural towns. Quite literally, they

49 could provide in Britain a third and different way than either the of low income designation. Community development credit union Basic Bank Account or the costly Post Office Card Account. managers are certainly not required to monitor and means test their members but the regulator could require this if cause to do so 24 The Financial Services Authority has also reviewed the was found. experience to date with Basic Bank Accounts which have operated now for the past two years and the empirical evidence shows that 29 The regulator has from time to time set up a special Office of these no frills accounts are being taken up but not reaching the Community Development Credit Unions to further community most financially excluded very well. development credit union growth.

25 Again the Treasury pilots are exploring the financial literacy 30 As with any enterprise, to grow fast, they will need adequate aspects but have not closely examined the striking success of the levels of capitalisation and start up investment. Unlike with CDFIs, community development credit unions with Individual Development (the investment agencies supported by the Department of Trade Accounts as independently evaluated by Michigan State University. and Industry’s Phoenix Fund for business lending), because credit The Ford Foundation has funded community development credit unions can take deposits, the investment requirement is less for unions to further develop these financial literacy programmes that loan capital and more for ‘people power’, IT and other forms of uniquely reach the poorest American households. long-term and quasi-equity or secondary capital.

26 The new Community Development Finance Association (CDFA) set up in April 2002 seeks to support the development of the following CDFIs including, because of their success in the USA, community development credit unions:

Community Development Loan Funds; Micro-Finance Funds; Community Development Venture Funds; Community Development Banks and Social Banks; Community Development Credit Unions.

So in fact from a strategic perspective, the Community Development Finance Association during its incubation period over the past four years has long recognised the potential for community development credit unions to emerge and develop here in the UK.

27 This was a key recommendation of the 1997 NEF report for the National Consumer Council, A Commitment to People and Place.

28 Targeting only low income members would not work for community development credit union development as average savings levels would be too low and transaction costs unsustainable without ongoing subsidy or high charges to customers.

The regulator, the National Credit Union Administration, bases the ‘low income designation’ on data in the community development credit union business plan and public census data for the geographical area of the common bond. Employee based credit unions do not readily qualify in most circumstances for low income designation. There is no application form and the regulator decision is formed more on the area’s median income level generally and the types of products and services offered. Thus if cash payers are not targeted, this would be an adverse factor limiting the chances

50

Mick Brown is the Special Projects Manager of the National Association of Credit Union Workers. He has also organised several credit unions in rural Wales.

Pat Conaty is a Senior Associate of the New Economics Foundation and was founder of the Birmingham Credit Union Development Agency.

Ed Mayo is Chief Executive of the National Consumer Council. From 1992 - 2003 he was the Executive Director of the New Economics Foundation.

The New Economics Foundation (NEF) is an independent think tank, with an unparalleled record of social innovation. NEF exists to promote a "new” economy - one which is people-centred, delivers quality of life and respects environmental limits. It has taken a lead in establishing initiatives such as the Jubilee 2000 debt campaign, the Ethical Trading Initiative and the UK Social Investment Forum. NEF was voted ‘think tank of the year 2002/3’ by Prospect Magazine.

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© New Economics Foundation, National Association of Credit Union Workers and National Consumer Council 2003.

The New Economics Foundation and the National Association of Credit Union Workers gratefully acknowledge the support of Royal Bank of Scotland and NatWest.

The grant from Royal Bank of Scotland and NatWest that has been used to fund this publication, and associated events, and the direct work of the New Economics Foundation and National Association of Credit Union Workers is in no way connected to the National Consumer Council which has only contributed to the text of this report