Approximately two years ago, it came to the attention of the Essex Law Clinics’ Consumer Welfare Law project team lead by Dr Anastasia Karatzia and Dr Andrea Fejos that credit unions in the UK are succeeding to a lesser extent than the traditional high-street banks; both in terms of members and capital. They found this to be rather peculiar, and so we embarked on a research on the barriers to development that credit unions are facing in contrast with the benefits that these credit unions provide.
In the report written by us, student researchers, Miss Natalie Noiyasoong Karlsson and Miss Swandhinta Rai, titled ‘Barriers to the Successful Development of UK Credit Unions’ which we produced for the benefit of the Colchester Credit Union, we identified and explored barriers that hinder success for credit unions, whilst also drawing comparisons with the practice of successful credit unions in the UK and Ireland. Whilst some barriers derived from the current state of the law, the most significant ones were mostly in relation to tech-advancements and promotional tools. The latter in particular concerns consumers’ awareness of the benefits of credit unions. The overall objective of the research was to explain the role of credit unions and how they benefit the local community and society at large.
You may be wondering: what are credit unions? Whilst banks are for-profit institutions, credit unions are not. They have the exact same function as a bank, subject to restrictions depending on the size of the credit union. Also, whilst banks and credit unions provide similar banking services, credit unions function for the mutual benefit of the members by accumulation of their savings, thus the capital that a credit union bears is held under a common bond. In this sense, credit unions are owned and controlled by their members. Think of it as members having a share in a company. The interest paid is given back to the members in the credit unions, for instance by expanding banking tech and providing low-interest loans.
Credit unions exist not only for the benefit of its members and also for the local community including citizens who are facing financial difficulties. Through ‘banking’ with a credit union, members are contributing to building a financially prospering community where low-income members are given a chance to access financial services that they could not have otherwise accessed.
Mr David Norman, office manager of Colchester Credit Union said: ‘The general aims of Credit Unions are to encourage its members’ to save regularly, and also to provide loans at affordable rates of interest ; the latter is especially useful to people who have limited access to High Street banks .’
However, the major issue that credit unions face for successful development is heavily dependent on the consumers’ awareness of the accessibility and benefits of credit unions, or otherwise called the ‘demographic imbalance’. Given that credit unions are dependent on a big member base, they must be capable of attracting members from all income categories. To exemplify, given that credit unions provide low-interest alternatives, they attract a pool of members who are largely low-income individuals or individuals facing financial difficulties who are more likely to default on their loans. Due to this, credit unions must implement minimum-income thresholds that must be satisfied by the member requesting a loan.
Credit unions are legal financial bodies that provide financial services to the same capacity that banks do. Some may not, however, have the same tech advancements like for instance the mobile services that banks offer. The reason behind the lack of such advancements is once again due to lack of members. By looking at some foreign jurisdictions, we found that credit unions thrive in terms of financial services available in countries where credit unions are more popular. Given the growth in member base, financial services such as low-interest loans, better financial supervision and advice for the member base etc. are available to credit union members in these foreign countries. In the UK however, credit unions are still rather unknown alternatives to high street banks among the general population.
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