Life SavingCommunity Development Credit Unions

Mick Brown, Pat Conaty and Ed MayoNew Economics Foundation, the National Association of Credit Union Workersand the National Consumer Council

The New Economics Foundation and the National Association of Credit Union Workersgratefully 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 NationalAssociation of Credit Union Workers is in no way connected to the National Consumer Councilwhich has only contributed to the text of this report

Acknowledgements 2

Foreword by Ruth Kelly 3

Preface 4

Executive Summary 5

Lifeline Services 6

A Brief History of Credit Unions 7The Dance with the StateDevelopment Dilemmas

Community Development Credit Unions in the USA 10New York State of MindCompeting with Predatory Lenders

British Credit Unions – Growth Pains and Game Plans 171. Southwark Credit Union, London2. Northern Oak Credit Union, North Tyneside3. Enterprise Credit Union, Knowsley4. Riverside Credit Union, Liverpool5. Robert Owen Credit Union, Wales6. South East Birmingham Community Credit UnionCommunity 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 32First …DefinitionsCDCU Development FrameworkRecommendations

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 the National Consumer Council 43

References 45

Notes 47

Contents

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The New Economics Foundation and theNational Association of Credit Union Workerswould like, first and foremost, to thank theCommunity Development Banking Unit at TheRoyal Bank of Scotland and NatWest for theirstrategic and financial support of this researchproject. The authors alone are responsible forthe contents and any views expressed. Incoming to the interpretation of the findingsand in framing the recommendations we havebeen ably guided by a strong and experiencedAdvisory Group who we wish to thank for theirpractical experience and wisdom. Themembers were:

� Andrew Robinson, Royal Bank of Scotland and NatWest

� Matthew Pike, Home Office� Geron Walker, Lloyds TSB� Jim Dearlove, Birmingham Credit

Union Development Agency� Lucy Aldous, Community Development

Finance Association� Bob Brennan, Department of Trade

and Industry Small Business Service andPhoenix Fund

� Fiona Price, Department of Trade and Industry

� Chris Stoddart, Financial Services Authority� Will Paxton, Institute for Public

Policy Research� Niall Cooper, Church Action on Poverty

and Debt on Our Doorstep Campaign� Lesley Bird, Wales Co-operative Centre� Glynis Sharpe, Community Wealth

Credit Union Ltd, Doncaster� Elaine Kempson, Personal Finance

Research Centre, University of Bristol� Gina Hocking, Oxfam UK

We would additionally like to thank over 100 US and British credit union practitionersthat we interviewed or had contact with during the course of the six-month project. In particular, we owe a deep debt of gratitudeto Cliff Rosenthal and his staff in New York atthe National Federation of CommunityDevelopment Credit Unions for organising ouritinerary and giving us bundles of time toanswer our questions. We also would like tothank Peter Bray of the New York CityFinancial Action Network Consortium foranswering questions patiently and taking timeout of his busy schedule to guide us throughthe New York subway networks, enabling us tointerview community development creditunions in the South Bronx and Harlem.Additionally we are grateful to Jack Lawson ofBushwick Co-operative Federal Credit Union.His help was invaluable in gaining anunderstanding from a grass roots expert onhow to start up a community developmentcredit union from scratch, get fuelled up, andmoving from 0 to 60, in less than a minute.

We would also like to thank all five BritishCredit Union trade associations and theirrepresentatives for their assistance, supportand participation in the 10 March 2003 Focus Group. Lastly a special thanks isneeded for the patient administrative, editingand design work of the artistic Lily Swan at New Economics Foundation who has putlots of heart and soul into this report to finishit off superbly.

Mick Brown, Pat Conaty and Ed Mayo July 2003

Acknowledgements

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Britain has one of the most competitive andsophisticated financial service sectors in theworld, but for many people, not least in myown constituency, access to financial servicesstill means cheque-cashing shops and loansharks. Access to basic financial services is avital part of bringing people back into themainstream of society. A job is not enough,freedom from crime is not enough, if you aremarginalised from the financial system andghettoised in a cash economy.

That is why this Government’s approach tosocial inclusion and asset-based welfareacknowledges the central importance ofimproving access to financial services. The complexity of the issues which make upfinancial exclusion call for joined-up solutions.Credit unions that aim to tackle financialexclusion are part of the solution — providingaccess to savings and affordable loans. In Ireland and in the USA they are able to playa key part in improving access to financialservices. We want to see strong growth in thecredit union sector in this country, capable ofmeeting a wide variety of needs. I hope thisreport on community development creditunions stimulates discussion and debateabout different approaches to developmentand how that growth might best be achieved.

Ruth KellyFinancial Secretary to the TreasuryMay 2003

Forewordby Ruth Kelly

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This report marks an important milestone.

15 years ago, when the National Federation of Community Development Credit Unions first received credit union visitors from theUnited Kingdom at our New York offices, theBritish movement was small and scattered,labouring under an impossibly restrictiveregime that all but foreclosed its growthpotential. Five years ago, when I commenceda series of visits to England and began toshare the community development creditunion (CDCU) story with Treasury officials,bankers, and credit union activists, there werehundreds more credit unions, growing publicinterest, but only a hypothetical andcontroversial strategy for applying the CDCUconcept to solving the problems of thefinancially excluded in the United Kingdom.In the past two years, I have observed thequickening pace of development of the creditunion movement, as well as that of thenascent community development financeindustry, of which CDCUs are an integral part in the US, though just beginning to be so in the UK. The National Federation’stransatlantic collaboration has deepenedthrough exchange visits and study tours withthe National Association of Credit UnionWorkers, the New Economics Foundation, the Community Development FinanceAssociation, the Scottish League of CreditUnions and credit unions from Birmingham,Wales, Yorkshire and elsewhere.

The "state of the art" in this cross-fertilizationis richly evidenced in this report. The authorshave studied and judiciously translated the US experience into the British context.More important: they have appraised a half-dozen credit union models operatingtoday in England, analyzing their strengths and vulnerabilities. Their assessments andrecommendations are not based onhypothesis or theoretical constructs,

but rooted in current practices. No singlecredit union in England may correspond to the Platonic ideal of a communitydevelopment credit union – but then, evenafter 30 years or more of experience, few if any do in the US. Reading this report, it seems clear to me that there are enoughcredit unions with sound, effective practices of various kinds to show the way forward forscores, if not hundreds, of others. The time is ripe for public and private sector resourcesto nourish these seedlings.

There is no more difficult, or vital, work in thefinancial-services sector than promotingsavings and providing legitimate, affordablecredit to the financially excluded. Theproblems of economic disenfranchisement indeveloped countries are increasingly global;some of the same institutions and predatorylending schemes to drain wealth from povertycommunities are found on both sides of theAtlantic – sometimes, under the sameownership. With the emergence of the CDCUmovement in Britain, we can say that theresponses to poverty and exclusion arebecoming global as well.

Clifford RosenthalExecutive DirectorNational Federation of CommunityDevelopment Credit Unions USA

Preface

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In the face of market uncertainty, long-termsavings have emerged as a major politicalconcern. But uncertain pensions are anobsession largely for the better off. For theless well-off, ranging from the traditional poorto the aspirant lower middle-classes, that areabove benefits, in work but far fromcomfortable in terms of access to housing orjob security, there is a different crisis — whichis short-term savings. Without savings andhaving typically to borrow at exorbitant rates,far higher than those charged to better-offBritain, the crisis in short-term savings is reallya new form of poverty and social exclusion.

The report examines the scope for creating alifeline banking service based on a new model of credit union, successful overseas.On current projections, credit union memberswill number half a million by the end of 2004.But the alternate tightening and loosening ofstate regulation has limited the sector. Themost recent changes, with the transfer ofregulatory powers to the Financial ServicesAuthority are likely to lead to closures amongthe weakest credit unions. While the attractionof the credit union model is that it is one ofthe few financial services institutions that isrelatively straightforward for a community tostart small, it is the very lack of scale that canprove problematic.

In the USA, around one in three of the 220‘community development credit unions’(CDCUs) have received public investmentpackages from the Federal Government andother sources. As a result, credit unions servingthe poorest Americans have grown dramatically,with increases in asset growth (in some casesup to 800 per cent), financial growth in networth (up to 1,200 per cent) and membershipgrowth (up to 500 per cent). Every year, in theUSA, credit unions assist over 600,000 peoplein need, who would otherwise be preyed uponby down-market lenders.

The report recommends that the Treasury, andthe devolved administrations in Scotland andWales, initiate a programme of investmentand support to develop a cluster of 100CDCUs in the UK.

The goals for a lifeline banking service inBritain are two fold. Firstly to encouragesavings among Britain’s low-incomehouseholds and thereby provide a localisedway and means for the promotion of assetbased welfare solutions including the Savings Gateway and financial literacy servicesto help reduce child poverty. Secondly to take 10 per cent market share from sub-prime lenders, the largest of which haveup to 1.6 million customers.

Winning this market share over a five yearperiod of assertive, direct competition wouldmake a significant impact on the life of alarge number of households. This reportprovides a quantitative estimate of theoutcome of such an initiative. It would:

� inject around £227 million of affordablecredit into many of the least well-offhouseholds in Britain;

� save an additional £36 million in interestpayments from hard-pressed budgets;

� bring a benefit to wider society and thetaxpayer from the capital invested directly in low cost loans, of £250,000 for an investment of £145,000 in eachcredit union.

The CDCU model represents a practical and positive development model for creditunions that wish to address financial exclusionand poverty. It also offers innovative policysolutions, and partnerships, to a governmentin search of ways to promote a more inclusive society.

Executive Summary

Lifeline Services

School uniforms, paying the gas bill,unexpected repairs can have the sameeffect on a low-income family as astock market crash on investors,hollowing out the few assets that theymay have – whether a NationalSavings Bank account or funeral planwith the Co-op. But, whereas the stockmarket can bounce back within 24 hours and investors recover theirground, the everyday shocks of life onlow income can fast becomequicksand, as poor families are suckedinto a vortex of debt.

This is why short-term savings andaccess to affordable credit (along witha safe place to deposit money, a wayto cash cheques and make paymentsto third parties, and access to moneyand budgeting advice) represent alifeline service, no less important thannurses or the local police. They reducevulnerability and help people to copewith the risks of life in modern society.

Without this, as research study afterresearch study has shown, people onlow-incomes have to turn to borrowingat exorbitant rates, far higher thanthose charged to better-off Britain. This is true not simply for thetraditional poor, out of luck and out ofwork, but also for Britain’s new workingpoor. These are the aspirant lowermiddle-classes, from nursery teachersto cleaners and manual workers, thatbear the brunt of economic risk –above benefit levels but caught in low-paid, ‘flexible’ and insecure jobs. Manyare tenants, but just as many aremodest home-owners, tied into long-

term debt, and yet routinely deniedaccess to consumer credit or, in theSouth East, priced out of housingaltogether, facing a daily commute ofthree hours and more.

It is a myth that loan sharks are theillegal operators, unlicensed by society,operating only at the roughest end oftown. Many of Britain’s flourishing‘sub-prime’ lenders generate hugeprofits by lending at margins that areessentially asset-stripping the poor andlow to moderate income households.They are Britain’s very own financialdisservices industry. Other countrieshave cracked down on exploitation or,as in Ireland and the USA, fosteredalternatives that can win market shareby competing for the business of thoseat risk.

This is the subject of this report. Weargue that the UK can develop aframework for low-income savings, bysupporting the spread across thecountry of a new type of credit union,dedicated, among other things, toserving those in need.

We call these ‘CDCUs’ – a term thatcan help distinguish and recognisecredit unions that have a particular,while not necessarily exclusive, focuson the needs of the poor. Not all creditunions will have this. Indeed theproportion of credit union memberswithout bank accounts is estimated bysome researchers in fact to be nodifferent to the adult population atlarge.1 But credit unions do have aunique legal status. In return for

abiding by some key principles, suchas a maximum interest rate forlending, they are exempt from many ofthe regulatory demands made ofbanks, meaning that they are the onlyorganisation of its type that ordinarypeople at local level could feasibly setup to provide affordable and locallyaccessible financial services.

The report draws on an extensiveset of national and internationalinterviews, and the findings of creditunion practitioners that visited CDCUs overseas.2 Our proposal for theuptake of CDCUs is, however, not forany one body to implement. Rather,the proposal is designed for commentand discussion.

It is for this reason that we publishedan earlier version of this report forconsultation as an ‘exposure draft’ inMay 2003. The credit union sector isstill young, has seen false dawns andits fair share of internal debate. Thereare other stakeholders too, such ascommunity regeneration organisations,central and local government, banksand ethical investors that could play arole, and whose views will matter.Community development credit unionscannot be imposed. But the potentialclearly exists for a wider constituencyof support to come behind the idea of a credible national framework,backing the efforts of people on low-income themselves to get out offinancial exclusion through access to a supportive local credit union, openfive days a week in a convenient, High Street location.

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A Brief History of Credit Unions

The first credit union in Britain was setup on 1 April 1964 by members of theWest Indian community in Wimbledon.It was set up as a company, open tomembers from the local parish. Two more credit unions soon followed,in Highgate, London, and in Hove,Sussex. As there was no specific legalmodel for credit unions, they adaptedexisting structures to suit theirpurpose.3 By 1979, when legislationwas passed, a further 51 credit unionshad got going.

The Credit Unions Act was passed in1979 as one of the last acts of the dying Labour Government. It wasthe direct result of work by the creditunions and the National ConsumerCouncil and followed a pattern set earlier in Northern Ireland byregulating the size of loans andshareholdings, the rate of interestpayable on loans and the dividendpayable on shares.4

The Dance with the StateThe first credit union to register underthe Act was Skelmersdale, withWimbledon registering soon after. Thenew credit unions included a numberof activists, particularly among theWest Indian population, who hadpreviously been involved with informalextended family groups who clubbedtogether to save and give each otherloans. This tension between formalityand informality and between thecapacity of members and the demandsof regulators has proved to be anenduring one since.

Smaller credit unions soon found theregistration fees a burden and arguedthat it prevented them from offeringdividends on their members’ savings.The need for an annual return and aprofessional audit also causedcomplaints of being ‘paperworked todeath’. In 1982, the regulator reportedon the subject:

“Some credit unions were formed and registered in a spirit of optimismengendered by the provision of a specific statutory framework.Inevitably, in some cases, the euphoriapresent at the launching of a newenterprise has given way to the moresober realisation that the day-to-dayresponsibility of running the enterpriseeffectively and prudently involves agreat deal of commitment andvoluntary effort by individuals.Regrettably, not all of those involvedhad appreciated the scope and depthof their responsibilities to take care ofthe funds their members placed withthem, or the time necessary todischarge them adequately.”

In the previous 12 years, 24 newcredit unions had started. But in thefollowing three, six were closed,leading the regulator to impose newrequirements. If credit unions weredealing with people’s money, many ofwho were not rich, then they had anentitlement to a reasonable degree ofprotection.5 It was only by 1994 thatregulation started to loosen up again,and in particular, accepted creditunions that aimed to serve aresidential ‘common bond’ of over

30,000 population. The first ruralcredit union, the Robert Owen inNewtown, Wales opened during 1995– the first eligible to residentsdispersed over hundreds of squaremiles. Further deregulation in 1996allowed credit unions to open out tomembers that worked in an area evenif they did not live locally. Of the 690or so credit unions now operating inBritain, more than half were firstregistered with a community commonbond – that is, designed to serve aneighbourhood rather than a workplace(the so-called ‘industrial’ creditunions). However, since 1996, it hasincreasingly become the norm toregister new credit unions with the ‘liveor work’ mixed common bond.

Development DilemmasThe credit union movement hasmatured in cycles of stronger andweaker growth. By 1998, after nearly20 years of formal life, credit unionshad recruited a quarter of a millionmembers. On current projections,credit union members may numberhalf a million by the end of 2004.

The alternate tightening and looseningof State concern has played a role.Regulation has tended to be one stepforward, one step back. For eachimprovement, other requirements havebeen imposed from elsewhere, suchas money laundering regulations.6 Themost recent changes, with the transferof regulatory powers from the Registryof Friendly Societies to the FinancialServices Authority, are likely to have a

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significant impact, with a number ofclosures expected among the weakestcommunity credit unions.7

However, whatever significanceregulation has in terms of barriers toentry, the growth of credit unions lookslike a classic ‘S’ curve of innovationand diffusion, whereby the earlyadopters start, but find it hard tospread as they suffer from lowinvestment or capacity. But aspioneers, they help win acceptance forthe concept of credit unions, making iteasier for the next generation inneighbouring areas to grow.

Community credit unions have beengrowing at a fast rate. In 1997 42 percent of members were within the 382community credit unions and 47 percent in industrial unions. By 2001those figures had changed to 38 percent and 41 per cent. Additionally,alongside this was the rapid growth ofcommunity credit unions with the newlive/work common bond. Over thesame four years, new registrations andchanges to existing common bondscreated some 135 credit unions in thisnew category, accounting for 13 percent of all new members by 2001.(see Table 2 below).

However, in the late 1990s, two researchreports warned of the unsustainability ofsome of the credit union developmentmodels. A Commitment to People andPlace: the case for CDCUs by the NewEconomics Foundation (NEF), for theNational Consumer Council, in 1997warned that at current rates of assetaccumulation, most community creditunions were far too weak to reach thepoint at which they could

fund even one full-time worker fromasset income. Written by two of theauthors of this report, Ed Mayo andPat Conaty, it called for a new focuson getting community credit unions toscale and sustainability and introducedthe idea of CDCUs to the UK.

Two years later a Liverpool JohnMoores study8 argued that for credit

unions to succeed, they had to secure better facilities and resources. Nolonger could they be expected tocompete for custom from the back of the church hall. Local authorityfunding and development models werecriticised as focused on organising and start-up work rather thansustainable growth.9 In fact this reportendorsed many of the proposals in the

Table 1: Credit Union growth in Great Britain, 1974-2000

800

700

600

500

400

300

200

100

0

74 80 86 88 90 92 94 96 98 00

Source: Registry of Friendly Societies

Table 2: Credit union models, 1997-2001

35,000

30,000

25,000

20,000

15,000

10,000

5,000

01997 1998 1999 2000 2001

� Community � Industrial � Live/Work

Source: Registry of Friendly Societies

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earlier New Economics Foundationreport, in respect of the need forstrategic investment to help creditunions acquire high street premises,paid staff and more expertise within their management teams – all vital ingredients needed to achievequicker growth.

The report spawned a ‘new model’approach to development, where highinitial subsidies are applied as theroute towards securing long-termsustainability. Recently established‘beacon’ credit unions are piloting this approach. While relevant as anapproach for any credit union, thesuccess indicators are largely based onpassing the breakeven point on thebalance sheet, so that socialobjectives do not form an explicitcomponent of the new model.

Here is the central issue. Does thereneed to be a trade-off betweenfinancial sustainability and socialobjectives? If there is, then creditunions that wish to grow financially, as a priority, will tend to targetmembers that are better off to startwith, while credit unions that do servea significant number of low-incomemembers might find themselvesunable to meet the extra costs,whether in terms of a lower asset baseor higher risk, that might occur. The arguments below show that atrade-off is neither inevitable nordesirable. In the next chapter, we lookat the evidence that exists fromoverseas, in the USA, where CDCUshave operated for many years andhave shown how to achieve a street-wise balance of both social justice andbusiness development goals.

Case Study - River Valley Credit Union

Manager Peter Kelly, describes the River Valley Credit Unionas unashamedly ‘old model’, with roots firmly in theircommunity. The credit union is 14 years old and boastsover 1500 adult members and 500 juniors. It covers a90,000 population area of Salford, Manchester and its sizein large part has resulted from a merger of three smallercredit unions. . They would also like to merge with thenearby employee credit union which would increase theirmembership significantly more again. The credit union isbased in an old NatWest bank, an imposing building, themost impressive in the area. The credit union isprofessionally run with 5 staff, £800,000 in assets andover 100% of their savings out on loan.

They have a third of their members on a direct depositbasis – including around 150 members on payrolldeductions and another 350 on standing orders. Howevertwo thirds of their members are on low incomes or onbenefits with the bulk of payments as weekly cash depositsmade over the counter. Some of the services that the creditunion offers are specifically aimed at those on lowerincome. For example they provide a debt consolidationservice linked with a local money advice agency and areprepared to take chances with some of their members,many of whom might be seen as too high a risk for otherlenders to consider. The credit union has a partnership witha local broker to provide car and home insurance. Theyalso offer a free cheque cashing facility to compete withmore expensive private companies.

Last year they gave a 3% dividend on savings which washigher than most of the high street competition andsomething that they promote heavily.

“We do not select members based on their potential to profit the creditunion. Rather, we seek those whomwe can benefit, whose lives we canenrich, and with whom we canstrengthen the broader community. We seek to build our members wealth– to help them escape poverty, toimprove their lives, and at the sametime, to lift up the communities inwhich we live …..inclusion is ourmission and our passion. Our goal isto leave no one behind.” National Federation of CommunityDevelopment Credit Unions

With its notorious lack of a welfarestate, the USA does not, ininternational terms, lead the way onpreventing domestic poverty, norindeed financial exclusion, but it doesoffer solid evidence of the positivelarge-scale role that credit unions canplay – and that they can serve low-income communities at scale and on asustainable basis. One of the buildingblocks for this has been a patient andenabling policy framework.

There are over 90 million credit unionmembers worldwide but three in fourare resident in the USA. MostAmerican credit unions were organisedaround the workplace and only a fewdeveloped from a community base.The first American credit union wasregistered in 1908 in Manchester, NewHampshire. The first community creditunions started during the GreatDepression – in the rural South, whereAfrican Americans were excluded frombanking services due to segregation,and in some major cities, especiallyNew York, where the numbers of urbanpoor had grown dramatically. Credit

unions played a role in PresidentJohnson’s ‘War on Poverty’ in the1960s, although the experienceconfirmed that government was betterplaced to play an enabling rather thana promotional role in buildingcommunity institutions.10

However, over the past 20 years, thelarger credit unions have operatedincreasingly like full service banks andthe average membership in most creditunions, as with UK building societies,has become middle class. To balancethe drift of credit unions upmarket, adedicated trade association for creditunions catering for the needs of lowand moderate income households wasfounded in 1974, the NationalFederation of Community DevelopmentCredit Unions (NFCDCU).

Around the same time, the new US federal regulator (National CreditUnion Administration) recognised that credit unions serving a low-incomemembership deserved extra regulatoryflexibility to achieve their aims. This came in the form of a change in the law to enable such credit unionsto accept savings from people that were outside of their targetedmembership constituency. This couldinclude charitable foundations, banks and ethical investors willing to put money in on preferable terms. To secure eligibility, credit unionsapplied to the regulator for ‘low-incomecredit union’ designation.

The origins of the National Federation ofCommunity Development Credit Unionslay in one of the many regulatory shiftsthat have characterised the creditunion movement. When a new share

protection insurance scheme (of up to$20,000) was set up, a 1971inspection by the regulator showed thatalmost 1,000 low-income credit unionsfailed to meet the strict standardsrequired to qualify. In 1972, though, acompromise was reached, whichcombined provisional insurancearrangements together with a concertedeffort, through the formation of whatbecame the National Federation ofCommunity Development Credit Unions,to upgrade the quality and capacity oflow-income credit unions.

The original name for the tradeassociation was the NationalFederation of Community CreditUnions. The grass roots organiserscould see the challenges involved insustaining the viability of communitycredit unions. As a result the word‘development’ was specifically addedto their incorporated name todistinguish their unique approach topromoting credit unions in low-incomecommunities. To spell out the natureand methods of this approach, thefounders of the National Federation ofCommunity Development CreditUnions, in January 1975, produced a‘master plan’ for the CDCU movement:The Community Development CreditUnion: a Proposal for Strengtheningand Expanding the Impact of thisEffective Low-Income CommunityAgent. From the colour of its cover, the plan became affectionately knownby activists, as the ‘Blue Book’. TheBlue Book indicates crucial ingredientsfor assisting low-income credit unionsto be enabled to grow and flourish. A national investment programme wascosted to achieve this with thefollowing development tools:

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Community Development Credit Unions in the USA

1. technical assistance to creditunions to help develop theirbusiness plans and systems;

2. training services of a high standard – especially in ways toreduce costs through dataprocessing capabilities;

3. strategic investment of depositcapital to enhance credit unionassets for lending;

4. time limited subsidies for operatingbudgets and staffing.

This programme won support from government, although not, overthe subsequent years, with fullconsistency. The Federal Governmentunder President Carter providedsupport in terms of the deposit capital and technical assistance.11

This though was short lived as theReagan administration dismantled the programme, closed the specialOffice of Community DevelopmentCredit Unions, set up by the regulatorin the Carter years, and withdrew all federal funding in 1981-82.12

After years of struggle with a tinybudget from membership dues, and little else, the National Federationof Community Development CreditUnions revived the tools of the Blue Book by securing support fromcharitable trusts and foundations. At last in 1989, the Ford Foundationfunded the National Federation of Community Development Credit Unions to develop a National CDCU Demonstration Project which for the first time providedcommunity credit unions a completepackage of support including both deposit capital and time limitedsubsidies for operating budgets and staffing.13

By 1992, NFCDCU membership hadreached 100 and in response to anelection pledge by Bill Clinton, creditunion and non-credit union providersof financial services to disadvantagedcommunities came together to formthe Community Development FinanceInstitutions Coalition in 1992. TheClinton administration reopened theOffice of Community DevelopmentCredit Unions at the National CreditUnion Administration and passed theCommunity Development FinanceInstitutions (CDFI) Act in September1994 to provide a wide range ofinvestment and financial support forthe full spectrum of Community Development Finance Institutions.To date, around one in three of the220 CDCUs have received publicinvestment packages from the CDFIFund managed by the US Treasury.

The tracking of success has showndramatic increases in asset growth (in some cases up to 800 per cent),financial growth in net worth (up to1,200 per cent) and membershipgrowth (up to 500 per cent).14 As aresult, CDCUs in the USA, over theyear 2002:

� mobilised savings from theirmembers of $2.29 billion;

� loaned $1.04 billion to theirmember borrowers;

� saved up to $300 million ininterest — otherwise payable topredatory lenders;

� recycled over $34 million in dividend income to low-income communities;

� assisted around 600,000 low-income households to acquireassets and build wealth.

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Figure 1: High Street vs Wall Street

0 20 40 60 80 100 120

� Value on 31.12.02 of $100 invested on 31.12.99

Source: National Federation of Community Development Credit Unions, Annual Report 2002/3

CDCUs

Dow JonesIndustrial Average

NASDAQ Index

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An example of a CDCU that hasbenefited from this patient support isone first set up to replace a closedbank branch in lower Manhattan, NewYork. The Lower East Side People’sFederal Credit Union (LESPFCU) cameout of a campaign by local residentsagainst the closure of the last localbank branch by Manufacturer’sHanover Trust. Under the terms of theUS Community Reinvestment Act,passed by President Carter in 1977,banks have an obligation, as part oftheir banking license, to meet thefinancial service needs of thecommunities where they havebranches. They can fulfil thisresponsibility to the banking regulatorsboth directly and indirectly, i.e. througha non-banking intermediary that theymay choose to support in a communitydelivery role. British and Europeanbanks have no such legislativeresponsibility, through such obligationshave been considered in reports bothto the British Treasury and theEuropean Commission.15

The Lower East Side campaign brought one of the earliest CommunityReinvestment Act test cases to positivefruition. In response to the CommunityReinvestment Act challenge, the bankagreed to lease their vacant bankbuilding to the Lower East SidePeople’s Federal Credit Union for twoyears at a peppercorn rent, to make asocial investment deposit in the creditunion of $100,000 and to providegrant support, for a limited period, for staffing.

In its first five years the Lower East SidePeople’s Federal Credit Union built up adeposit base of $2 million andreinvested more than $1.8 million tolow-income borrowers – mostly Hispanicand African-American. Today its assetsare over $9 million and its new loansissued are running at $1 million a year –some three times the volume in 1991.Its membership level is over 4000 and itis presently developing a second branchoffice to expand its membership.

Across New York is a second CDCUsuccess story. Bethex Federal CreditUnion was founded in the South Bronxby the Bethany Lutheran Church. Thecredit union grew steadily over its firsttwenty years, but in the late 1970s fellout with its church sponsor, ironicallybecause of the success of its workwith black single parents on welfare.The credit union had to move from itschurch base and struggled until, in1994, a housing association, MountHope Housing Company, provided anoffice in the basement of a multi-storey housing block. They charged apepper corn rent of $1 per year andhelped to introduce their tenants tothe services of the credit union.

Membership of the credit union rosefrom 700 in 1994 to almost 10,000at the end of 2002, with assets alsorising from $700,000 to $9 millionand a net worth, secured over thesame period, of £1 million. Through itsactive work with local schools, Bethexhas recently built up 1,800 children’ssaver accounts.16

Yet, CDCUs in New York have notsolved issues of financial exclusion.One in four New Yorkers (2 millionpeople) are unbanked citywide. In theten years to 1999, almost one in fourbank branches (22.3 per cent) have closed in New York City and thereare also more bank mergers on thecards. Consequently, cheque cashingfirms and sub-prime lenders areproliferating. In the past four years,pay-day loan outlets in the USA haveincreased from a low base to over10,000, offering long opening hours,widespread locations and quick access to cash.

Yet CDCUs have been able to takemarket share from predatory lenders in the neighbourhoods they arepresent in and so are now thinking bigin terms of reducing financial servicesexclusion in a significant way. To helpto do this collaboratively, CDCUregional networks are emerging, bothin New York City and in the ruralSouth. For example, five CDCUs,including both the Lower East SidePeople’s Federal Credit Union andBethex, have come together to form a partnership to spread CDCU servicesacross the city (described in AppendixB). The success of these strategicnetworks suggests that they will bevital to watch, as early achievementsare impressive.

New York State of Mind

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What a Community Development Credit Union Looks Like

It is hard to generalize about community developmentcredit unions as they vary in asset size from $100,000 to$700 million with corresponding membership ages asregistered credit unions from 1 year to 70 years.Membership sizes among community development creditunions also vary widely from 200 to 220,000. Not allcommon bonds are community based. Many have faithbased, associational, employee or mixed common bonds.All tend to be active partners with other organizationsconcerned with community development. This ranges fromthe active involvement in government-sponsored financialliteracy services designed to promote savings (the IndividualDevelopment Account programme) through to active co-operation with social housing providers.

The profile of a ‘typical’ community development creditunion might be:� Assets: $1.5 million� Average membership: 835 � Average staffing: 4� Member profile: 80 per cent low-income, 61 per cent

female and 78 per cent ethnic minority� Net Worth (Equity): $115,120 (9.77 per cent)� Delinquent loans/total loans: 3.75 per cent� Total operating revenue: $130,150� Return on average assets: 1.27 per cent� Non-member deposits/total deposits: 5 per cent� Average loan size: $3,500� Standard services: Savings, loans, checking/bill

payment, automated social security paymentstransfer, financial literacy and financial counselling,and Individual Development Accounts

� ATM machines: operated by 25 per cent ofcommunity development credit unions and growing

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

Stages of community development credit unionAssistance – Credit Path to Financial Inclusion

Transactor: for those with limited income or in debt,payment and money transmission services are eitherextraordinarily expensive or unavailable. Communitydevelopment credit unions need to develop affordablepayment and budgeting mechanisms to help overcomethis problem.

Saver: traditionally credit unions provide this as the first stage, but increasingly they cannot attract low-income members without first tackling the transactorproblem. Savings can be incentivised by specialprogrammes and by offering attractive rates of interest on even the smallest minimum account balances.

Borrower: most households need to borrow periodically if only to even out cash flow or to acquire assets. Also,effective borrowing skill builds up a credit rating andhelps households gain experience for large commitmentssuch as home purchase. Unlike conventional lenders thatrely on credit histories and electronic credit scoring,credit unions specialise in ‘character-based lending’where savings histories are focussed on. Credit unionsalso are unique in providing micro-loans that enablehouseholds to borrow sensibly and affordably at lowrates of interest.

Owner: evidence shows that asset ownership is important in helping move households out of poverty.Community development credit union specialisation inloans for enterprise development and for low-incomehome ownership and repairs contributes uniquely whereother lenders are unprepared to make credit available at low costs.

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Bill Myers, Founder and Manager ofAlternatives Federal Credit Union inIthaca, New York has developed aprocess model for helping low-incomehouseholds overcome disadvantageand the lure of moneylenders. He callsthis CDCU strategy the ‘Credit Path’,with four stages of development, asset out on page 13.

Both Bethex and the Lower East SidePeople’s Federal Credit Union havedeveloped membership services alongthese lines, helping to take membersfrom extreme vulnerability and theclutches of predatory lenders, to self-reliance. Their introductory services, forthe ‘transactor’, for example include:personal checking accounts; moneyorders (for one-off payments) andmoney transmission internationally;electronic welfare benefit and pensiontransfer into credit union accounts;and cash payment service monthly forenergy and telephone bills.17 Inrespect to money advice, Bethexprovides a financial budgeting advisoryservice through a partnership with acredit counselling agency, Balance – aservice that is free to members forinitial sessions.

Both credit unions have played asignificant role in assisting low-incomehouseholds in the shift, driven by theUS Treasury in recent years, frombenefits paid in cash to benefits paid electronically. New England andNew York States reached a deal with Citibank to handle state welfarepayments exclusively and to issue

an electronic benefits transfer card towelfare recipients. But cash machineswere not always accessible to low-income households, so subsequentlyCitibank moved to install such facilitieswith a number of CDCUs.

The CDCUs have demonstrated thatproviding financial services to the poorneed not require exorbitant chargingand interest rates. As they have grown,they have started to take on predatorylenders more aggressively. ASI FederalCredit Union in Louisiana, for example,has developed an emergency loanfacility. This popular ‘Stretch Plan’ is asix-week loan service for a $200 loanrepayable at only $222.15 – or onefifth the cost of predatory lenders. In the past two years, it has advanced2,390 such loans for an average sumof $300 each. Out of $700,000 inloan advances in the initial period ofoperation, only 27 loans have beenwritten off for a net loss of some$4,000 (or 0.56 per cent of the fundsadvanced). This loan service includesone-to-one financial counselling andefforts to help people to break awayfrom pay-day lenders. In Cleveland,Ohio, the Faith Community UnitedCredit Union has developed a similar,‘Grace Loan’. They make no creditcheck, offer loans at an APR of 17 percent and have faced only marginallosses to date.

North Side Community Federal CreditUnion in Chicago began work on ananti-predatory loan system in 1995. Its‘Hot Funds and Cold Cash’ service

provides $500 loans at 16.5 per cent.Since 1995 it has advanced 1,800such micro-loans. Initially, the loansrequired credit union membership forat least a year, but, thanks to aguarantee fund, grant-aided byNorthern Trust Bank, this restrictionhas been waived.

The new Payday Alternative Loan isavailable with no waiting period orsavings requirements. In the first ninemonths of lending from April 2002,440 people with very low credit ratingshave received loans, including 70people with a prior bankruptcy. Todate, nine per cent of those borrowersare slow payers, but given the high riskof the market serviced, this is belowexpectations and overall over nine inten of the loans are performing and upto date. Loan product models likethese are now being rolled out acrossUSA, through the PRIDE (PredatoryRelief and Intervention Deposits)programme launched by the NationalFederation of Community DevelopmentCredit Unions in 2002.18

Yet, it is also true that some servicesare more expensive to provide.Community development credit unionshave been reluctant to providecheque-cashing services, since suchservices offer no incentive for peopleto open savings accounts. Moneyusually goes in and out pretty rapidlyand thus they are both labour intensiveand expensive to service. Bethex inNew York therefore concluded thatthey were not going to compete with

Competing with Predatory Lenders

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commercial cheque cashers, but ascheque cashers do not provide savingsfacilities or make loans, they would gointo partnership with them. Anexperimental scheme launched in2001 with two cheque cashers in theBronx was controversial at the start,but so far is proving successful,allowing the CDCU to reach more ofthe most disadvantaged households in the Bronx.19

The lessons of the US experiencesuggest that countries affected by apolarisation between rich and poor willattract exploitative ‘predatory lending’.Community development credit unionsdo not offer a complete answer, asthey don’t exist in every neighbourhoodand they take time to develop. But with patient and proactive supportfrom banks, the state and voluntarysector, CDCUs can achieve anoutstanding track record, not simply indealing with the deep-seatedcomplexities of individual poverty andfinancial exclusion, but in developingas sustainable ‘social enterprises’serving the poor on a continuousbasis. To that extent, they offer thevery best route to choice for low-income consumers, by competingdirectly with predatory lenders but onaffordable rates alone, at a fraction of the cost.

But while CDCUs can boast widerpositive returns, in terms of benefits toboth the individuals served and thetaxpayer in reducing the wider costs ofpoverty, they do require a degree of

Good Partners: Community Development CreditUnions and Banks

The first ever partnership between a commercial bank anda community development credit union was the one forgedunder the Community Reinvestment Act with theManufacturers Hanover Trust Bank and the Lower East SidePeople’s Federal Credit Union in New York in the mid-1980s. Since then many more partnerships have followed.

Under agreements struck, banks have made redundantpremises available at pepper corn rent levels, have soldATM machines at discounted prices and offered technicalknow-how. But there are two main ways in which bankshave helped. Either they make grants or they make sub-market investments. What works depends on the age andneeds of the community development credit union. So fornew or young community development credit unions in startup mode during their first five years of trading, banks haveassisted by providing grants for operating expenses andstaff salaries and also contributed non-member deposits atrates varying from 0-1%. As community development creditunions grow, because they can not issue ordinary shares,they can run into liquidity problems and insufficient levelsof reserves. So for fast growing or more establishedcommunity development credit unions this increasedcapitalisation by banks is hugely important. This is oftencomplemented with further secondary capital levered inthrough Community Development Finance Institutions suchas the National Federation of Community DevelopmentCredit Unions and the National Capital Investment Fund(NCIF). This arrives as ‘deeply subordinated debt’ and atlow margins of 1% or so for terms of up to ten years.

American banks win regulatory credit for such actions underthe US Community Reinvestment Act and even public subsidyunder the innovative Bank Enterprise Award scheme. Thepublic support is important, but the business case for supportalso stems from the fact that partnerships have developed atrack record for delivering not just a better reputation for thebanks but market share, as consumers graduate fromcommunity development credit unions with a credit historyand turn to mainstream finance.

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support and subsidy to grow,particularly at the outset.

In the next chapter, we test thesefindings from abroad against the verypractical experience of six creditunions in the UK.

A Rural CDCU in Vermont State:“We don’t say no. We say when.”

Vermont CDCU is a relatively new credit union, establishedonly in 1989 and initially restricted by the regulator to onlytaking savings and deposits for their first three years. Now with 10,000 members, 22 staff and over $20 millionin assets they have won many awards in their short history.They have around 150 non-member depositors rangingfrom the Shaw bank and churches to Ben and Jerry’s IceCream Company. These make up over 50 per cent of theassets allowing them to lend around $16 million in‘mortgages’ such as for mobile home loans, the main formof 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 oflending and targeted planning with their members, many ofwhom arrive with an “un-bankable” status. For these theyhave created a 'tracker loan' to first help them build a positive credit history.

Of the 10,000 loans they made last year, the most popularwere for car purchases, an essential commodity in a regionwith little public transport. They build partnerships only withlocal second-hand dealers who will guarantee the safetyand quality of the cars sold to their members.

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There has been an active searchunderway in Britain over recent years formore effective ways for credit unions togrow. With less than one per cent ofBritish households in membership,there is a recognised need for bettermodels. The Association of British CreditUnions Ltd (ABCUL) has, for example,led the call for a far more business-likeapproach. As Shaun Spiers, their chiefexecutive has, on occasion, put theneed for business focus to hismembers, “if you do not believe in[financial] discipline, discipline willquickly believe in you!”

As one would expect, the research we have completed in England andWales suggests not just one but manypathways for individual credit unions to grow, depending on localcircumstances.20 But the findings alsoreveal that there are many credit unionswith no particular pathway in mind atall. For a good many community creditunions, and probably the majority, thesheer pressure of running the creditunion, motivating the volunteers, andcomplying with the Financial ServicesAuthority strictures and reportingrequirements leaves little if no time tolook ahead and figure out what ‘shouldbe done’ to expand the business.

Indeed, the smaller community creditunions, some several hundred, whichare run by volunteers with no paid staffmay be happy just to survive.Discussing the future with a number ofthem, they report that they worry allthe time about carrying on. Many saythat they would welcome merger togain strength from others like them, to cope better with growing pressuressuch as regulation. But for many, thereare no local credit unions nearby to

merge with: this is particularly the casefor credit unions in small towns, ruralareas, or those on many outlyinghousing estates.

The six credit unions set out below haveoperated with more conscious ambition.Some are striving to win financially andothers are determined to succeedsocially. They illustrate the diversity ofcredit union growth, but also the realchallenges that face a CDCUdevelopment path premised on bothbusiness growth and social impact.

1. Southwark Credit Union, London Southwark Credit Union was foundedin 1982 as an employees' credit unionfor Southwark Council. Growth wasslow for the first 13 years until it tookon a full-time manager in 1995,Lakshman Chandraskera, a formercomputer analyst and programmer withthe Prudential who had been maderedundant. When Chandraskera joinedthe CU had 400 members and£700,000 in assets. He developed amarketing strategy and promoted thecredit union every month at differentcanteen sites for Council staff. He also used a prize draw, privatelottery to attract interest. This strategyalone gained 1000 new members. To further develop the credit union henegotiated a merger with the KingsCollege Hospital Employees creditunion in 1996 and then a subsequentmerger was pursued successfully with the Borough and BermondseyCredit Union (a community creditunion) in 1999.

High street premises were acquired in1995 through the purchase, from theCouncil, of a derelict shop front with

additional offices above. The creditunion used its own assets to financethe purchase of the property on amortgage and raised a grant from theCouncil for the refurbishment work.

The Camberwell Credit Union, the maincommunity credit union in Southwark,had been established in the early1970s before the Credit Unions Act1979 but in 2000 had becomeinsolvent. Southwark Credit Union wasencouraged to come to the rescue.However, of the £100,000 that theCouncil and other bodies strove toraise, to pay for the take-over, theycould raise only £45,000. Duediligence work revealed a loss of£155,000 due to poor record keeping,non-collection of debts and generalmismanagement for many years. Intaking over Camberwell Credit Union in2001, Southwark had to use itsreserves to pay for the acquisition ofshare capital of members of £650,000but at the cost of £110,000. The keyreason for the action was principallythat of reputation risk to the creditunion movement in Southwark shouldthe credit union be allowed to fail andlocal people lose so much of theirmoney. Southwark has seen itsreserves, as a result, drop to only fourper cent of its share capital base andwas not able to pay any dividend tomembers in 2001-2002.

Southwark Credit Union today has totalassets of £3.6 million – including threeshops (the main one in Camberwell,one in Peckham and one inBermondsey), two of which are openfive days a week and the Bermondseyone is open two days. Share capital inthe past eight years has grown to £3.2million – about 75 per cent of which is

British Credit UnionsGrowth Pains and Game Plans

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lent out. Seven in ten members are onpayroll deduction from either theCouncil or Kings Hospital, about 16 percent pay in by bank standing order ordirect debit and 9 per cent pay cashthrough the shops. The cash payers areprimarily the former members of thetwo community credit unions. A recentpartnership to begin to widen access tothose on low income, has been formedwith London & Quadrant HousingAssociation under the CommunityDevelopment Finance Institutioninitiative Change. This seeks to attractlow and moderate income tenants tojoin Southwark Credit Union.

Chandraskera and his team of sevenfull-time staff have worked hard to builda very successful credit union thatdespite the challenging rescue ofCamberwell Credit Union has continuedto grow strongly. Systems are fullycomputerised, internet and telephonebanking services have been developedand a good range of financial servicesare provided including car loans, homeimprovement loans and householdinsurance services.

Staff have been well trained, up toNVQ level 3, and are good at multi-tasking. However Chandraskera is wellaware of the difficulty of lending tolow-income households without bank

accounts. Without the advice and thesupport to do this, as in a CDCUmodel, Southwark Credit Union isunlikely to have a significant impact onfinancial exclusion.

2. Northern Oak Credit Union, North TynesideDavid Hodgson runs a charteredaccountancy practice in the centre ofNorth Shields, a few minutes walkfrom the Tyne. He is also a Director ofthe Mercantile Building Society whichmoved its head office from NorthShields to Wallsend a few years ago.Hodgson came to learn about creditunions by doing audit work for theNorthumbria Police Credit Union. In1999, he joined a study group whichwas successful in forming the NorthShields Credit Union. The NorthTyneside area had a good number ofvery small community credit unionsand the North Shields Credit Uniongroup have developed a strategy tobuild a community based credit unionby collaborative mergers with othersmaller, volunteer run, communitycredit unions. This strategy is currentlyunder implementation.

To prepare for this, Hodgson and the North Shields Credit Union haveraised funding of £300,000 to

resource their business plan strategywhich they have begun to deploy at arate of £100,000 a year for two full-time staff (a full-time Chief Officerand Development Worker and anAdministrator), office and equipment,and development of a high street shopfront. They have also successfullyrecruited a full-time volunteer.

The shop in the centre of NorthShields has been fitted out andopened in Spring 2003. Funding hasbeen secured from the Tyne & WearCommunity Fund and the NationalNeighbourhood Renewal Fund. The merger strategy has been agreedwith the other community credit unions in the area and when completethey will have a share capital base of £300,000 and a membership base of 800.

Beyond these mergers, the businessplan strategy is ambitious with targetsset of achieving, by 2006, a ten-foldincrease of assets to £3 million and a four and a half fold increase ofmembers to 6,000. To do this,Northern Oak Credit Union (the namechosen for the new, merged creditunion) has developed a marketing planbased on outreach through 10 weeklycollection points each with a weekly 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 theunbanked. Community Reinvestment Trusts are the brain child of Bob Paterson, former chief executive of Portsmouth HousingAssociation. The first was Portsmouth Area Regeneration Trust (PART). PART was set up in July 2000 and it employs seven staffplus 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 onenterprise lending rather than in tackling household credit needs and financial exclusion.

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a week. The credit union has enteredinto a partnership with Churches ActingTogether (which organises furniture forthe unemployed and a prison linkservice for families). The business planseeks to develop membership for thepoorest in North Tyneside and isimpressive in its focus and nononsense approach to the business.All the numbers add up, look realisticand if these targets can be secured,then the asset base can be developed.

Northern Oak Credit Union is one ofthe only credit unions in the countrywhich has successfully applied to thePhoenix Fund to become a ‘communitydevelopment financial institution’. Theyinitially applied for £500,000 but inthe end were awarded just over halfthis sum — £250,000 in loan capitalplus revenue funding for officeoverheads of £20,000. The way thearrangement works is interesting. Thecapital can be drawn down in quarterlyadvance amounts of £25,000 andmore can be drawn down beyond thisso long as the first sums have beenloaned to the self-employed andmicro-enterprises.

Whatever funds are repaid, NorthernOak Credit Union can keep this as itsown capital. Average small businessloan sizes are projected to be £2,500and there are no savings required, apartfrom the initial membership fee of £2.Hodgson is confident that they canattract the target number of 150 newbusiness customers over the next fewyears. From his decades of expertiseadvising family size businesses as anaccountant, he has already developed asimple business start up course for thelocal Business Link, which connects theCredit Union loan service directly to the

work of enterprise agency advisors onNorth Tyneside.

The rigour of business planning andthe marketing strategy of Northern Oakis hugely impressive. The benefit of theleadership of a talented accountantlike Hodgson with the ability to raisefunding on the strength of a credibleset of numbers and targets highlightsthe skills based and hard headedapproach that community based creditunions can benefit from.

Hodgson has resisted pursuing growthvia payroll deduction pathways as hehas not pursued the potential scope fora merger yet with the North TynesideEmployees Credit Union which hasassets of over £300,000 and has alarger common bond area of 120,000(including all of North Tyneside). InHodgson’s view, this mergerprematurely would have held back thecommunity based strategy that he feelscredit unions concerned withcommunity development need to focuson. Later on, a merger on CommunityDevelopment Finance Institution termswith the employee credit union can bedone he hopes. But for now until hecan secure a self-financing capital baseof a cool £3 million in share capital,Hodgson and his community creditunion board are biding their sweettime.

3.Enterprise Credit Union, KnowsleyEnterprise Credit Union was foundedoriginally as Huyton Central CreditUnion in 1988 – a community creditunion with a small common bond ofonly 10,000 people. In 1996, thecredit union board were successful inraising regeneration funding and at thesame time applied to re-register the

credit union with the Registry ofFriendly Societies as ‘live or work’common bond. This took 18 months toget approval for.

They employed a co-ordinator, in1998, to manage the development ofthe Credit Union: Karen Bennett, whois from a retail background and was anactive credit union volunteer. Whenshe took on the job, the credit unionhad 500 members on its books butonly 150 accounts were active. Turnover was low and there were onlytwo collection points. Funding from the Single Regeneration Budget andEuropean Regional DevelopmentFund of £325,000 enabled the creditunion to buy a building and renovateit, to create a shop front andconference centre, along with threeupstairs offices.

In 1999, the credit union recruited afull-time administrator and, in 2000,a full-time fundraiser and developmentworker. The credit union is now openfive days a week – including one lateevening. In addition, a further sevencollection points in the community are run by volunteers weekly and thecommon bond area has beenextended to a population of 46,000.Membership has been built up to1,900 adults and 800 juniors. Theoutreach and promotional work to thejunior schools has been wonderful. Asthe co-ordinator explained:

“The minimum deposit we set for thekids was 10p and the first promotionwe did we walked out with threecarrier bags full of small change. This savings scheme is so popular withthe schools, but you need themanpower to deal with it”

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The credit union offers a range ofservices from standard savings andloans to insurance services, a budgetaccount and a money managementcourse. Enterprise Credit Union hasmade links with credit unions in Dublinand they have helped to develop aMoney Advice & Budgeting Service(MABS), which is the first such serviceto get underway nationally. The EsmeeFairbairn Charitable Trust and NorthHuyton New Deal for Communitieshave funded a pilot over the past year,which finishes in Summer 2003. Todate 120 people with money worrieshave been seen, there are 30 enrolledon the special budget account schemeand all have been helped with moneyand debt advice.

The pilot is supported by a £10,000loan guarantee fund, made possible bythe Health Action Zone which enablessmall loans to be advanced to those indebt, to help them avoid returning tomoney lenders and doorstep creditors.In a mirror image to Southwark CreditUnion, 80 per cent of Enterprise CreditUnion members pay in by cash andonly 20 per cent pay by standing order.The minority of non-cash membersalone though pay in collectively£12,000 per month. Enterprise plansto establish a payroll deduction serviceand target some of the largeremployers in the area but, givenscarce resources, the additionaldevelopment work needed to achievethis is a challenge.

Share capital of the credit union hasgrown six-fold in the past five yearsfrom £45,000 in 1998 to £275,000today. At present, £180,000 is out on

loan. Enterprise CU has advanced andgrown by a friendly merger with oneother community credit union inKnowsley. This merger will increaseassets by £45,000 and total creditunion membership by an extra 500. As a tribute to their rapid year on yeargrowth from a low base, the LiverpoolDaily Post and Echo awarded HuytonCredit Union the ‘Social Enterprise ofthe Year’ against stiff competition. As a result, the former Huyton CreditUnion has changed its name toEnterprise Credit Union. It’s clear allinvolved have earned it!

4. Riverside Credit Union, LiverpoolSpeke in South Liverpool is one of thepoorest wards in Britain. The SpekeCredit Union was formed in 1989,grew slowly in the first five yearsand by the mid-1990s encounteredproblems with slow payers anddelinquent loans of almost 30 percent. The board of the credit uniontook tough action and in the end had ‘to take some people to court’ andalso ‘use debt collectors’ to bring bad down to levels under three percent. This experience strengthened the credit union management groupand the credit union has grown wellsince then.

In 2000 the credit union changed itscommon bond to a larger ‘live or work’area including both Speke and Garston.It also changed its name to theRiverside Credit Union and attractedregeneration funding for staff and todevelop a shop front in an ex-TSBbranch in Speke. With the investmentfor staff and premises, growth has been

very positive indeed, with membershipgrowth of 25 per cent a year since1999. Current membership is 3,500and assets in shares have grown from £181,000 four years ago to over£750,000 today.

Loan demand is constant with over100 per cent of savings lent out atChristmas and over 90 per cent out onloan normally. The Co-op Bankprovides an overdraft facility to assistwith seasonal demand peaks. Membersavings levels are low and for thisreason Riverside Credit Union strugglesto pay a dividend as it needs to buildreserves. Its current level of reserves is3.5 per cent.

In addition to savings and loans,Riverside Credit Union provideshousehold insurance and car insurance.It is constantly looking to develop newservices to increase membership inways to benefit its local community. Forexample, in partnership with the HealthService it has developed ‘The BabyBarrel’ service for young mums on theestate. It bulk buys goods for maternityneeds and sells them at a discount. Afull baby barrel includes £200 ofgoods for £150 loan and includeswhatever goods needed from ‘prams tocarrycots to pushchairs and clothes’. Inthe credit union shop an online serviceis being installed so families canoperate on a ‘you choose and thecredit union will purchase’ for youbasis. According to the RiversideManager, Colin Strickland: ‘In less thanone year, we have handled over£25,000 in bulk purchased goods,and this is only the beginning!’

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To take the service development foryoung families further and to helpdevelop savings by direct deduction,Riverside Credit Union has negotiatedwith the Benefits Agency for ChildBenefit to be paid directly into creditunion accounts. Beyond this initiativeit aims to have other benefits paiddirectly into the credit union. AsStrickland explained:

“What the credit union can do best isto capture local money and recycle itover and over again. We get fed upthough with the wasted funds thatleave the area. We have seen foryears millions of quid in regeneration

money spent on consultants andother professionals and very little of it

directly invested to improve the lives of our members.”

In their latest development project,Riverside has succeeded in its socialenterprise bid to the Home Officebacked Adventure Capital Fund for aproject to develop new social businessopportunities. A local skills register ofthe credit union has shown manymembers in the building trades. The project will establish an approvedbuilders list based on checks forqualifications, insurance, and licenses.Home improvement loans will be madeavailable and jobs carried out for fencing, minor repairs, decoratingwork, security systems installation andother odd jobs. Jobs will be checkedbefore the loan disbursement is made.Riverside has secured £100,000 for thisproject on an investment basis as a tenyear loan with a three year paymentholiday and then repayments at one percent a year over seven years.

The credit union is seeking to relocateits shop next year to the new shoppingcentre development in Speke near theMorrison superstore. Discussions areunderway about a merger with the EarlLawrence Credit Union in theWavertree area of Liverpool. Shouldthis be agreed, as looks likely, thewider common bond area would bemore than 100,000 population andencompass more affluent areas ofSouth Liverpool as well.

5. Robert Owen Credit Union, WalesThe Robert Owen credit union wasfounded in 1995 and was the firstrural credit union in Britain. It originallyserviced a 25,000 population livingwithin the 200 square mile areaaround Newtown, a small market townin mid-Wales. The district council hasprovided, for a low rent, a small shopfront located in the main shoppingarea and adjacent to a busy market.The credit union business plan wasinformed by the advice andencouragement of Michelstown creditunion in County Cork, Eire, with whichRobert Owen Credit Union has'twinned'. This expert guidance ensuredthat from day one the Robert Owenopened with a high street shop, rancomputerised accounts and hadrecruited a good management team.

By the year 2000 the credit unionBoard were aware that there was awider rural demand and need for creditunion services beyond their restrictedboundaries. They therefore started tolook at how they could cover thecounty district of Montgomeryshire, an 800 square mile area, with six

market towns including the historicallyindependent and culturally differentcommunities of Welshpool, Llanidloesand Machynllyth. The population hereis sparse (one person per 10 acres)and totalling only 56,000.

The Board were faced with a dilemma.Extending a common bond is acomparatively easy process but withdispersed and impoverishedcommunities, running costs are highand can easily erode profitability. Thecredit union was not interested inexpanding unless these deeper ruralareas where the greatest need residedcould genuinely be serviced. Yet equallythey were not prepared to take on theliability of having to service regions thatwere financially non-viable. Thechallenge was therefore to design anew model that ensured profitability andwhich could justify expansion.

The approach was an innovative one.With a credit union developmentworker, three local study groups wererecruited and trained over an 18month period. They were given targetsand deadlines to work towards. Thecentral team had identified a specificnumber of ‘tests’ that would need tobe met if ‘convergence’ was to bepossible. If the conditions for thesewere achieved, all the groups wouldthen have the option of converging intoa new large credit union. Otherwisethey would each have the alternativechoice of registering as a separatecredit union of their own.

The tests were met and a new creditunion formed in 2001, which hasnearly doubled in size, approaching

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1,200 members with around 400junior savers recruited mainly from fivelocal schools. Assets are currentlyaround £200,000 with over 70 percent of savings out on loan. The creditunion has two new offices in the othermain market towns, as well as part-time collection points in two of thepoorest wards in Wales. OnMaesyrhandir estate they have built apartnership with the HousingAssociation Tenancy Officer andestablished good links with the localschool recruiting many new membersthrough that route. Once credit unionstaff have established a new collectionthey encourage local participation andvolunteers to take over and run it inkeeping with their bottom-up attitudeto growth. They also have linked intothe local Sure Start Initiative, inpartnership with National Children’sHomes to work with young mothersand single parents.

A high percentage of their loans are forbusiness purposes. Around 20 percent of stall holders in one of the localmarkets have loans from the creditunion. These are mainly around the£1,000 to £2,000 level to assist thebusinesses to buy stock, for transportor other equipment. A member whoruns an ethnic stall, for example,borrowed for a trip to India to buy newstock. For many stallholders the creditunion offers short term loans belowthe threshold of what is possible orcompetitive at the bank. The market isthe lifeblood of the town and the creditunion offers valuable hidden financial

support to this vulnerable commercialsector in mid Wales.

On Oldford Estate in Welshpool,identified as being eligible forCommunity First support, some of thecredit union volunteers have chosen toundertake door to door promotion,feeling it is the best way to competewith the increasing presence ofProvident Financial. One of the Providentcollectors has even joined the creditunion, encouraging her customers tojoin as well. The manager comments, “We instinctively went down this roadas that is where our services areneeded most. It is hard work in ruralareas and things usually take longer.People need time to trust and feelconfident in what are often much moreunfamiliar initiatives. However we arenot trying to establish services andfacilities that are at the expense ofmore middle class/income members aswe don’t want to be viewed as a ‘poorperson’s’ bank either. In rural markettowns every person counts and youhave to aim for a variety of sectors.”

6. South East BirminghamCommunity Credit UnionCredit unions are co-operatives and oneof the guiding principles set down formutual organisations like it is that of “co-operation among co-operatives”.Birmingham is the site of efforts to putthis into practice. The city boasts 30credit unions – three workplace, threeassociational and 24 community based.Total membership citywide is over

20,000 and total assets over £19million. The three workplace creditunions cover separately city employees,the police and the fire service. All havepaid staff and have grown rapidly sincetheir formation. The community creditunions are run by over 400 volunteersand together account for over 7,000members and about £3 million in assets.

A Birmingham-wide survey of over 400community credit union members in1999 indicated that their primaryfinancial service interests were: � special savings accounts for

Christmas and clothing;� insurance services;� budget and bill payment accounts;� money and debt advice.

Members also wanted longer openinghours and larger loans. A citywidestrategy was developed that has led to community credit unionsclustering into six groups of four tofive, in order to work together andprovide common services. To reducecosts for all community credit unions,a central back office administrationcentre has been established tocomputerise all credit unions and offercentral account servicing through the Birmingham Credit UnionDevelopment Agency.

In 2002, in line with this strategy, thefirst cluster group merged to form theSouth East Birmingham CommunityCredit Union (SEBCCU) and the first oftwo credit union shops for the networkwas established. The second cluster

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

Credit Unions

Informal learning Formal training Reducing isolation

Accredited training

Developing skillsCaring

neighbourhoods

Linking withcommunity initiatives

Building trust

Administration centre

Savings and loans

Clusters

Shops Financial literacy

Businessdevelopment

Added valueprojects

Money Advice and

Budgeting Service -

Factor Four

�24

group in North Birmingham is nowapplying to the Financial ServicesAuthority for merger and the secondcredit union shop has just opened toprovide local services. The third clustergroup in Handsworth (serving NorthWest Birmingham) is moving forwardand the third shop will be opened laterthis year. The full plan is for five to sixshop fronts – one for each mergedcluster group and all with commonbranding for citywide marketing on thebuses and through local radio andregional media.

Like many other credit unions, SouthEast Birmingham Community CreditUnion identifies with a communitydevelopment mission and has set itssights on becoming the first CDCU inBritain. Norma Maynard the creditunion President made theannouncement in a keynote speech at the National Association of CreditUnion Workers conference inNovember 2002. She described theSEBCCU ambition in this way.

“Credit unions have always been partof my life since a child in St. Kitts. In the West Indies before credit unionswere established in the 1960s, therewas ‘the partner system’ of rotationaland group savings. My grandmotherwas the local manager of the system.I have been involved for years in theSparkbrook Credit Union but I am busywith my daytime job. This meansapproving loans in the evening, doingbooks at weekends and being worriedabout everything to keep the FinancialServices Authority happy all the time.

‘We need investment to overcome thisproblem. We desperately need a CDCUin this poorest ward in Birmingham. Ihave seen the work of CDCUs in NewYork first hand, in Harlem in the Bronxand on the Lower East side. This is thecommunity banking system we needwith shop fronts, staff, bill payment,money advice, financial education,benefit transfer and other services forinner city people in Birmingham. WhenI saw Lower East Side Peoples CreditUnion in action last year, I saidimmediately: ‘This is it, we need to getCDCUs going in Birmingham!’Sparkbrook credit union is now part ofSouth East Birmingham CommunityCredit Union and we are going tobecome the first CDCU in Britain!”

As a result of the merger of the threecredit unions, assets of South EastBirmingham Community Credit Unionare near to £500,000 and membershipis about 800. To achieve the CDCUgoal, a joint bid by Maynard and theBirmingham Credit Union DevelopmentAgency has recently attracted fundingfrom the innovative Home Office pilotinvestment scheme for growing socialenterprise organisations, the AdventureCapital Fund.

The other five Birmingham clustergroups range in size from 900members to 1,700 and from assets,when aggregated, of £270,000 to£800,000. South East BirminghamCommunity Credit Union and two otherof the Birmingham clusters withsupport from the Birmingham CreditUnion Development Agency will launch

the “Factor Four” service this yearwhich includes bill payment, energyadvice, debt rescheduling, and thetake up of energy insulation grants. Inpractice, Factor Four is a CDCU basedextension of the Irish MABS system.

Jim Dearlove, Co-ordinator of theBirmingham Credit Union DevelopmentAgency, sums up the way in whichBirmingham is developing co-operationamong credit unions.

“Credit unions lose the ‘people plot’when they aspire to become banks.Banking seeks to save costs ruthlesslyand as a result rigorously separatesthe economic and the social becausethe latter is costly. Joining back up thetwo and managing the tensionbetween building reserves and payingdividends to credit union members onthe one hand while being committedto service the unmet needs of theunbanked is extremely difficult. We are determined to manage this art by pioneering CDCUs in the West Midlands.”

25�

All the credit unions highlighted abovehave walked something of a tightrope,in terms of running a business whiledeveloping its membership anddiversifying services. While theattraction of the credit union model isthat it is one of the few financialservices institutions that is relativelystraightforward for a community tostart small, it is the very lack of scalethat can prove problematic.

One way to address issues of under-capitalisation is through merger withother credit unions. This can reduceoperating costs and make broadermarketing more achievable. Examplessuch as Northern Oak Credit Unionshow how carefully-prepared andintelligent mergers can promisesignificant synergies, opening the wayto a CDCU-style model of financialinclusion on a sustainable basis. InBirmingham, mergers have emergedfrom “clustering success”, and havebeen inspired directly by the examplesof CDCUs in the USA.21 But as thecase of South East BirminghamCommunity Credit Union suggests, theaspirations of merger need to bematched with development resources,if it is to move forward.

The example of Southwark CreditUnion illustrates an element of adifferent approach – the “BeaconCredit Union” model promoted by theAssociation of British Credit UnionsLimited, in which an employee basedcredit union absorbs community creditunions in order to create bigger scaleand to secure a citywide or sub-

regional size credit union. In the caseof Southwark, the benefit to thecommunity credit union, which was atrisk of failing, was immediate. But atthe same time, the case of Southwarkalso offers a warning that growth alonewill do little to ensure that a creditunion targets people in need, anessential element of the CDCU model.

The pure business model of creditunion development, by its nature,moves away from high transaction costservices. High transaction costsincrease overheads, reduce profitabilityand hold back the build up of reserves.Yet high transaction costs often gowith the territory of low-incomecommunities. In many areas of thecountry, large areas of cities, entiretowns and ex-mining regions are poor.The majority of people living in suchareas are poor or moderate incomeand credit unions such as EnterpriseCredit Union and Riverside CreditUnion simply need to get on with thejob. For them the “poor person’s bank”is nothing to be apologetic about butall the same, extremely difficult to do.

At the same time, the “beacon”approach, which is operatingsuccessfully in places such asRochdale, Leeds, Tower Hamlets andPortsmouth, does confirm an importantdevelopment lesson from CDCUs in theUSA, which is the need for adequateearly-stage subsidy. The PortsmouthCity Savers credit union, for example,took four years to register but hasstarted with the equivalent of two full-time members of staff and high street

city centre premises funded over fiveyears from the Council andregeneration funding. The Leeds CreditUnion has had similar large-scalefunding for a “beacon” model, andmore recently has stressed its effortsto promote financial inclusion, alongthe lines of CDCUs.

Subsidy can play a positive role.Riverside Credit Union left on its ownwith a mere volunteer base would nothave achieved 3,500 members withoutfunding for both staffing and premisesto take them up to this strongerfinancial state. But while there is needfor subsidy to get to a point of scaleand sustainability, it makes sense totie subsidy to some clear commitmentof social purpose. In the North West,elements of the CDCU approach havebeen deployed to great effect, buthave often not won the same level ofstrategic support and investment fromthe public sector that some otherapproaches have.

Paul Jones, Liverpool John Moore’sUniversity Researcher and developer ofthe “new model” and the “Beacon”approach, has since visiting the USAsteadily become more comfortablewith the scope for CDCUs in Britain.He used his own Moneyspinner CreditUnion as an example of the need forsuch a solution — in particular in poorsub-regions nationally.

“My own credit union was set up in1989 in Hattersley – an overspillestate of Manchester in Tameside. Likemany other community credit unions in

Community Development Conclusions

�26

poor areas, there are no richer localareas to extend to easily. Hattersley is aplace where those who get a decentpaying job leave and the area has beenlosing population as a result for years. Itis hard to see an easy way of expandingour common bond beyond the level of10,000. We have since 1999 benefitedfrom external subsidy from a SingleRegeneration Budget grant. This haspaid for two staff, an attractive shopfront and the membership has doubledin a few years and we are doing all thethings for our local members you wouldwant from a community credit union —and 70 per cent are on benefit. But thepopulation here is not diverse and weare not going to be self-financing in lessthan three years when the subsidy runsout. We will need to attract additionalgrant aid to keep up levels of servicethe local community deserves.Community development credit unionsare impressive and because of whatthey have achieved, one can justifysubsidy to grow and expand. The casecan be made in Britain in places likeEast Manchester but we need to avoiddependency on the whims of anexternal funder. This is the challenge.”

Jones commented that theMoneyspinner Credit Union and itsneeds for careful investment andsubsidy were the same as those forother similar community credit unionsin Manchester such as River ValleyCredit Union, Wythenshaw Credit Unionand East Manchester Credit Union. Buthe observed from his visits to CDCUsin the USA that money needed to gohand and hand with high quality staffand management.

“What is clear from all my visits toCDCUs in America is that their successrests heavily on professionalmanagement, not just non-memberdeposits and secondary capital. EdJacob, the manager at Northside creditunion in Chicago [who developed thealternative Payday loan] and PabloDeFillipi the manager of Lower EastSide People’s credit union in New Yorkare exceptionally skilled and are noteasy to find.”

The credit union sector will probablyalways be hard to classify. Its diversityreflects not just the need to respondto the differences of place, culture,ethnicity and circumstance, butadditionally mirrors the value of tryingthings out and learning what works inan open and evolutionary way. This atleast can be said though: there areclearly the seeds of a more ambitiousapproach to financial inclusion inBritain, and signs that elements of theUS CDCU best practice – thoughclearly not yet all the elements broughttogether – are around us.

If so, this raises the strategic question.If some credit unions in Britain coulddevelop along the successful lines ofCDCUs, could they win market sharefrom the high-cost lenders of the sub-prime market and make a significantcontribution in doing so to tacklingpoverty and contemporary socialexclusion?

27�

In theory then, British communitycredit unions and the “new model”variants that have developed on alive/work common bond are wellplaced to develop and serve peoplethat are financially excluded. Theyunderstand their members, and thecommunity and local business base.They are able to call on voluntary inputand support – after all, setting up acredit union is an arduous process, sothat the driving motive is typically oneof fairness and a desire to transformthe community. They are wellpositioned to make risk assessmentsthat “outsiders” would find difficult.Many individuals whom the banksavoid as being “higher risk” oftenprove themselves to be no more thanaverage risk within a credit union.

The crunch question is whether, withthe right enabling framework, they yethave the capacity, professionalism andsupport to grow large and sustainablesocial enterprises to serve low–incomemembers. An analysis of the mostrecent Financial Services Authorityfigures, for 2001, on the 460registered community credit unionssuggest a positive answer for themajority. Many though are still toosmall for this role — either throughstructural weakness or immaturity.Over one third of these businesses areless than five years old. Nonetheless,even amongst this youthful sectionthere are some rising stars that haveattained sufficient capacity already.

Taking the 100 largest communitycredit unions by way of assets, there is a strong correlation with age,suggesting that with time, these

businesses find their route to growth.However with additional resourcesmany of the younger and weaker creditunions can be nurtured up to aposition where they too have thecapacity to take on some of theinitiatives identified in this report.

Regardless of age, the ability ofcommunity credit unions to makequality assessments on their lending isborne out by the statistics. Despiteoperating in what are classed ashigher risk categories, the return on their lending is impressive and this

alone raises questions about othercommercial lenders to low-incomehouseholds, who try to justify muchhigher interest rates as compensationfor supposed, disparate levels of risk.Even mainstream banks typically runhigher bad debt figures on unsecuredlending than the top 100 creditunions, which will achieve around a 99per cent repayment rate, despite thegreater selectivity and security theydemand. Even less experiencedcommunity credit unions that arearound five years old achieve betterthan 2-3 per cent bad debt.

Winning Market Share Against Predatory Lenders

What a British Community Credit Union Looks Like As with the American community development credit unions, it is also hard togeneralize about what a typical British community credit union looks like. Britishcommunity development credit unions vary hugely depending upon age, thelevels of investment and the development support that may have been available.There are approximately 460 of them in Britain ranging from Dalmuir with over£5 million in assets and 5000 members to the new starters with just a handfulof members and a few thousand of savings in their company accounts. Withsuch a broad spectrum it is perhaps more helpful to look at the largest 100community credit unions in terms of assets and compare these against the mostyouthful sector – the 100 youngest credit unions that are at least 5 years old.

The profiles of these ‘typical’ Community Credit Unions from the latest data reveals:

ASSETS: (5 yr min) LARGEST 100 YOUNGEST

Average assets: £400,000 £100,000Average paid staffing 1 noneTotal out on Loan £300,000 £65,000Average loan size: £750 £500Loans as % of Assets 70% 60%Bad debt ratio: 1% 1.7%Annual Surplus (profit) £15,000 £3,000Dividend 2% 0%Total annual income £50,000 £12,000Annual expenditure £35,000 £9,000Grant income average £12,000 £3,500

Source: Financial Services Authority

�28

Counter to allegations sometimesmade, community credit unions do notappear heavily grant-dependent, fromFinancial Services Authority data andthe fieldwork interviews conducted forthis research. Certainly, as a group,the 150 newest credit unions receivearound 40 per cent of their income asgrants. Even new industrial creditunions with significantly lowertransaction costs attract 20 per centgrant support. But once they areestablished, community credit unionsare far less dependent upon externalsources. Community credit unions thatare more than five years old generate80 per cent – 90 per cent of theirincome through their core businesses,according to data available.

If we assumed that there are at least250 community credit unions in Britainthat had the capacity and the desire toserve the lowest income sector, andthat a supportive developmentframework was in place, whatcollective impact could they make?

One goal would be to take 10 per centmarket share from sub-prime lenderssuch as Provident Financial, whicheven considered alone as the largestdoorstep creditor has 1.6 millioncustomers. Winning this market share

over a five year period of assertive,direct competition would make asignificant impact on the life of a largenumber of households. Capturing over16,000 new members in the first year,and 54,000 by year five would redirect£227 million of credit away from sub-prime lenders. This would earn manyof the poorest households in Britain anextra £75 million, representing thesavings to them in excessive interestcharges. The growth figures for such acampaign are set out in Appendix C.These are indicative sums only andexclude the development supportcritically required to build capacity forCDCUs in Britain. But if half thecurrent number of community creditunions were involved, it would presenteach with an additional average 650members and provide an added grossincome of over £100,000 during thefirst five years. Once captured, thisadditional market share would createincome generation of £500,000 over aten year period, positioning the creditunion into sustainability

These figures alone fully justifyinvestment into the community creditunions to initiate and support such atargeted campaign. The returns over a10 year period are even moreconvincing. If this market share is

retained the overall saving to Britain’spoorest households would accumulateto £200 million. This additionalincome within the pockets of thissector would impact significantly withinthe economies of their communities,contributing much towardsregeneration and asset building.

As argued elsewhere in this report, thedelivery of essential financial productsto this sector is expensive. Such acampaign requires an externalprovision of capital, which could begovernment or ethical investors. A £12million per annum support for thisprogramme over a five year periodwould represent a 350 per cent returnon this investment after 10 years, andleave a vibrant network of strongcommunity businesses that cancontinue to compete with and eat intothe market share of sub-prime lenders.

All this suggests that there is a strongsocial and economic case for CDCUsin Britain to be able to play the kind ofrole that has been seen to achievescale in the past ten years, especiallyin the USA. It suggests that thebusiness model for CDCUs can stackup in Britain, if they reach a sufficientpoint of capacity to innovate and servetheir local market. But simply

Coventry Financial Exclusion InitiativeThe local Credit Union Development Agency has initiated a number of projects across the city aimed specifically at memberson low incomes and to those otherwise excluded from traditional financial services. They believe that the problem for manyfamilies is not so much the amount of money coming into the household, or rather lack of it, but often the difficulty manypeople 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 unionsorts 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 termsof costs and the complexity of administration. At present there is a disincentive for users of this service to take overresponsibility for organising their debts, foisting this chore onto the credit union.

29�

identifying point B does not tell youhow to get there from point A. The realquestion is whether community creditunions will want to or be able to godown the CDCU route, and whether, asin the USA, there will be a concerteddevelopment framework available tohelp them do that.

The new regulatory regime for creditunions has brought home the need toincrease efficiency and sound businesspractices. While change is slow and ashake-up is right, most are cominggood and should be better placed ifthey were to choose to serve moredemanding sectors. However, there aredangers in this process of change.Unthinking mergers and consolidationcould lose local knowledge that is keyto the strength of a credit union. If themood inspired by regulatory change isthat “to survive you need to be big”,there is a danger that potentiallystrong, community based businessesare then steam-rollered into giving uptheir autonomy. As the US experienceshows, the introduction of shareprotection and closer regulatoryscrutiny is a turning point that needsto go hand in hand with an activeprogramme of support for credit unionsthat serve poor communities and wantto professionalise.

If credit unions are to help address the needs of Britain’s worse off forlifeline financial services, a developmentframework for CDCUs is essential.First, however, it is important to askwhether such a framework issomething government should back, or just leave to credit union membersthemselves, perhaps with the backing of banks and the widervoluntary sector.

The ‘Predatory Loan Scheme’This initiative is targeted at customers of sub-prime lendingcompanies, such as the Provident Financial in a particulararea of Coventry, although the service is accessible to othercredit unions throughout the city. Money Advice Projectworkers refer potential recipients onto the credit union, whichbuys out the debt from the company. A small initial fund of£18,000 has been established through monies from SureStart, a Community Business Economic Development grant, achurch charity, a bequest, and a donation from a localresidents group. This non-members fund underwrites theloans, thereby protecting members’ savings.

This initiative recognises that many people have difficulty incalculating the real costs of interest rates and credit charges.This makes them more vulnerable to misleading orsophisticated promotional techniques. The credit union paysoff the debt of the referred individual who then becomes amember of the credit union from which they borrow theequivalent sum. The new loan may be re-scheduled, but inany case will be at a much lower weekly repayment sum. Thenew member recognises this as being of an immediate costsaving benefit. The new repayment figure also includes asurplus that is swept into their new savings account. Thisrepresents the secondary benefit or incentive, and starts theprocess of helping the new member appreciate the benefits ofa habit of regular savings.

Insurance Services and Health PlanAnother service that the Coventry credit unions haveintroduced for those on low incomes is a ‘Health Plan’. Thishas been set up in partnership with the Local Authority andWestfield Insurance Company. Whilst those who are in receiptof benefit are entitled to free dental and eye care, many whoare marginally above this threshold find the costs of treatmentprohibitive. Through the credit union they are able to payweekly premiums of below £2.00 to receive a minimum coverservice. The City Council deals with the administration side ofthe Plan to reduce the costs to the credit union.

Although in theory this is an admirable initiative that shouldprove popular, take up has been slow. Partly the cause for thishas been insufficient funding available for adequate marketresearch to be undertaken. With additional resources thecommunity credit unions in Coventry feel they would be ableto identify where demand might lie and target appropriatepromotional resources for the scheme to take off.

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The present government has settargets for reducing child poverty andneighbourhood disadvantage. In bothcases, there are few quick fixes. Theseare endemic problems, forged overgenerations, and not likely to be solvedin a sustainable way through singleinitiatives or services. In both cases,financial exclusion plays a significantrole, so that, in principle, there is apublic policy case for considering what if anything could be done tosupport CDCUs.

The landmark report on financialexclusion was published by theTreasury in 1999 (the Social ExclusionUnit’s Policy Action Team 14).22 Sincethen, though a number of policyinitiatives have been taken forward, inthe past four years, support for creditunions to tackle financial exclusion,beyond regulatory change, has simplystalled. The most effective changesecured is that the Government, inconsultation with trade bodies, hasupdated and modernised credit unionlegislation, so that now, in fact, creditunions have more legal powers thanever before. Half the barriers todevelopment have therefore beenremoved. But there is still anidentifiable opportunity to investstrategically in community based creditunion development nationally todemonstrate what really can be donewith the right package of support andmethods to widen access to affordablefinancial services. The failure of the1999 Policy Action Team 14recommendations on credit unions tobe fully implemented means that it isnow in urgent need of review.

But there are now good additionalreasons to explore the wider roll-out ofCDCUs. Firstly, the Government isintroducing several changes in 2003which will impact in diverse ways onlow-income households – somepositive but others potentially negative.The main change is the shift from cashbook payments of pensions and socialsecurity to low-income households toAutomated Credit Transfer into Basic Bank accounts. The experiencein the USA of this changeover in thelate 1990s to automated paymentsystems threw up many problems and in some instances in New York and elsewhere led to increasedfinancial exclusion as cash points were unavailable in many poorneighbourhoods. Through the UniversalBanking Service, this particularproblem will not arise in the UK.

However a related problem could wellarise as recent press reports haveraised concern about as in the USA,the poor opted in the main for aplastic card like the Post Office CardAccount rather than for a Basic BankAccount.23 CDCUs, with their ability torespond to the changing needs of thecommunities they served, were wellplaced in America to play a positiverole in this change-over and in doingso offered a third alternative, a creditunion style “lifeline account” providingcredit as well as bill payment facilitiesand access to cash. Thus CDCUs inoffering small affordable loans as wellare potentially superior providers offinancial services to many of thepoorest households intimidated bybanks and by default opting into the

Post Office Card Account with limitedfunctionality. A partnership betweenbanks, the Post Office network andCDCUs could as, in the USA, help limit the attraction of the Post OfficeCard Account over time and saveGovernment money in doing so in due course.

Second, the Treasury are also pilotingthe Savings Gateway to encouragelow-income households to save withincentivised matched funds based onthe innovative American IndividualDevelopment Accounts (IDAs). As many analysts have commented, to date attempts by Labour to reachlow-income households with affordablefinancial services have struggled toachieve this objective in majorprogrammes from Individual SavingsAccounts to stakeholder pensions.24

But here too according to researchfindings by Michigan State Universityand the Ford Foundation, US CDCUs have been arguably the best deliverypartners for Individual DevelopmentAccounts and for devising relevantfinancial literacy programmes whichare vital to secure optimum outcomesvia such specialist savings accounts.25

Thirdly, CDCUs would assist widergovernmental efforts to engender aninclusive and entrepreneurial culture indisadvantaged areas. In recent years,the Government has supported thedevelopment of CommunityDevelopment Financial Institutions(CDFIs) to widen access to financialservices, but to date, since theDepartment of Trade and IndustryPhoenix Fund was launched in 2000,

Should Government Back Community Development Credit Unions?

31�

only those CDFIs providing businessfinance have been assisted. Given thatthe principle remit is regeneration andthe provision of such CommunityDevelopment Finance Institutionfunding is through the Department ofTrade and Industry Small BusinessService, this focus is not surprising.However both the concept andpractice of Community DevelopmentFinance Institutions is an Americanone and in fact in the USA when theCommunity Development FinanceInstitution coalition was formed in theearly 1990s in New York, communitybased credit unions providing accessto both consumer finance and micro-credit for the self-employed were atthe forefront of the US CDFImovement.26 Indeed the NationalFederation of Community DevelopmentCredit Unions currently chairs the CDFICoalition. Community developmentcredit unions in the USA in many areasare excellent providers of micro-enterprise loans and in rural areas inparticular as the Vermont DevelopmentCredit Union shows, they are simplythe best delivery CommunityDevelopment Finance Institutionvehicle as they are so flexible.

Of course there are dangers ingovernment getting involved in abureaucratic way with activities thatare essentially about participation and social entrepreneurship. In reality,government is already supporting creditunion growth through an average of£12,000 of regeneration fundingamong the largest 100 communitycredit unions according to dataavailable from the Financial Services

Authority. To date this funding and itsimpact has not been independentlyevaluated but as such funding iscoming from several diverseGovernmental programmes, it iscertainly clear that such funds are notbeing deployed in a strategic orcoordinated way, which builds on andlearns from successes. By contrastwith enterprise finance and CommunityDevelopment Finance Institutions, theTreasury has ensured in working withthe Department of Trade and Industrya clear and coherent strategy withjoined up thinking. The failure to fullyimplement Policy Action Team 14 inthe same way that Policy Action Team3 was fully implemented is an issuethat needs urgent examination by theChancellor and his team.

The fact that CDCUs appear to offer aneffective approach to financial inclusion,with its overlapping challenges ofoutreach, education and affordableservices, does not mean thatgovernment alone is best placed toprovide support. As with CommunityDevelopment Finance Institutions forenterprise, there is a key role for apartnership approach involving otherstakeholders such as housingassociations, charitable funders andbanks — all of which should additionallybe involved. Indeed this research showsclearly how they have providedadditional investment, grant funding andexpertise so productively in the USA tofast track CDCU development.

For example, already here in Britain,Lloyds TSB has announced its supportfor a “credit union growth fund”27 to

support CDCUs. The concept here isthat private sector support would beintended initially as catalytic and actprincipally as a forerunner to moresignificant public sector backing.

At the least, it is clear that, if there is a support role that government isbest placed to fill, then there arestrong arguments for a degree ofpublic investment to do so. Communitydevelopment credit unions are adynamic and flexible group ofCommunity Development FinanceInstitutions (able to deliver both personalfinance and some micro-enterprisefinance as well) that the British statehas not taken notice of properly thus far.Such an oversight is unfortunate fromthe findings here marshalled.

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There is growing recognition in Britainabout the huge potential for CDCUs todevelop, as they have done in theUSA, to tackle financial exclusion. Allfive national credit union associationsare impressed with the achievementsof CDCUs and are interested in howthey may work over here. Issues ofdemarcation though are sensitivebecause in Britain, unlike the USA,most credit unions have formed initiallyaround a community common bondrather than an employment one.

There is no strict definition in the USA ofa CDCU. The Community DevelopmentFinance Institutions Act in the USA,passed by the Clinton Administration in1994, recognises CommunityDevelopment Finance Institutions andamong these, CDCUs are acknowledgedas a specialist credit union targeting low-income households to widen access tosavings and credit for personal, housingand enterprise needs.

“A low-income credit union” under USlegislation is defined as a credit unionwhere over 50 per cent of its membershave income less than 80 per cent ofthe national median.28 In the USA ,low-income and low pay is generallyregarded as less than 80 per cent ofthe local area median, and in the UKas 60 per cent of national median. Butit must be remembered thatAmericans have to pay for health careprivately, so in effect given the highcost of health insurance in the USA,the American levels are relatively lowerthan they appear.

Community Development Credit Unionsare defined and acknowledged in otherways too. This is both by the regulator29,and also by the National Federation ofCommunity Development Credit Unionswhich defines them as “credit unionswhose primary mission is to serve low-income people and communities”.

In this report, we have focused on themission of CDCUs, which is arguablyno different to that of manycommunity credit unions, and theorganising strategies (such as theCredit Path to Financial Inclusion),some of which are being developed onan ad hoc basis in the UK, butnowhere brought together yet

as part of an integrated strategy totackle financial exclusion on a moreambitious level. In the UK therefore,there might be four different ways ofclassifying CDCUs.

The first level would see the label ofCDCU applied in the same way thatthe phrase “social entrepreneur” hasemerged, as something that peopleidentify with and self-select as howthey wish to describe their work. Thesecond level would supplement this, byreserving the status of CDCU for creditunions that wished to operate asCDCUs and had completed training orother development processes relevantto CDCU activities.

First… Definitions

Recommendations - A Lifeline Banking Service Through Community Development Credit Unions

Figure 3: Pyramid of Definitional Levels

government recognition

institutional definition

accreditation

self-identification

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The third level would have a harderedge to it, by setting out clear,empirical criteria required for a creditunion to be considered as a CDCU.These would include a socio-economicprofile of members, such as thenumbers in employment or incomelevels. As a low-income designationwould be based, as it is in the USA, on an area's low-income profile, thiswould suggest that CDCUs are likely to be distinct from the generally large city wide common bonds. Thus such an approach wouldnaturally, from demographic data, rule in more localised areas or smallsub regions like South EastBirmingham, Newham, West Newcastle,rural mid-Wales or Rotherham.

The final level would apply ifgovernment recognised, CDCUs as adistinct class of credit unions, forexample by opening up powers to suchcredit unions such as the scope toraise non-member deposits.

CDCU Development FrameworkAll credit unions require the followingbuilding blocks to develop and thrive:

� active leadership by a strong boardof unpaid Directors;

� a strong and quite large group ofcommitted volunteers (the sweatequity element);

� good business sense along withbusiness planning, product pricingand marketing nous;

� efficient IT and managementinformation systems;

� high quality and reliable services plus an attractive range of products;

� a strong sponsor body (e.g. an employer, church, localdevelopment agency, trade unionor non-profit organization).

Employer based credit unions have by definition a strong sponsor and in such circumstances also benefitfrom contributions to the credit union leadership – not infrequently byallowances of paid time off toemployees to enable the credit union toboth operate and develop. Employerbased credit unions also have marginaltransaction costs on the savings and loanoperations thanks to payroll deductionand assistance from the employer’saccounts department. Marketing, foremployee-based credit unions, isclearly targeted and not diffuse as it isfor a community based credit union.

Community credit unions as a rule, by stark contrast, find all the buildingblocks harder to secure and nothingcan be taken for granted. Costs areenormously higher and the more sowhen a community credit unionchooses to target low-incomecustomers without bank accounts and seeking local paying in points forcash transactions. Such communitycredit unions to thrive and developneed shop front facilities andcollection points. Even where a strong

and committed group of volunteerscan be found, supporting, managingand training such volunteers requiresan enormous investment of time bythe community credit union leadershipgroup and securing the support of astrong sponsoring body is easier saidthan done.

In its 1997 report on CDCUs, ACommitment to People and Place, theNew Economics Foundation looked atBirmingham and showed that with theinherent economies that all employee-based credit unions benefit from andwith a reasonable business planning andgood internal promotional work,employing staff, initially part-time andthereafter full-time, can readily beachieved within two years. This has beenthe experience in fact with Birmingham’sthree employee based credit unions: thelocal authority credit union, the policecredit union and the fire service creditunion. On the other hand, Birminghamcommunity based credit unions, like thevast majority nationally, have not beenable to readily achieve this. Paid staff onat least a part-time basis are crucial forsignificant credit union development tobe secured and an ambitious businessplan to be achieved.

The New Economics Foundationassessed from the empirical evidenceavailable in 1997 that, at presentrates of share capital accumulation,community credit unions could take 40 to 50 years to reach £1 million ofassets, a level at which a small team

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of paid staff could be affordedsustainably. This delay, now as then, is a non-starter if community creditunions are to play a significant role inaddressing financial exclusion. Thus aswith other Community DevelopmentFinance Institutions, the NewEconomics Foundation concluded sixyears ago that strategic investment byGovernment with assistance frombanks and other financial institutionswas vital for community based creditunions to graduate from “low-incomecredit unions” to CDCUs. The call then for a National Development Fundfor CDCUs is thus even stronger nowas a clear need.30 The legislativemodernization achieved since 1997provides the necessary framework forCDCUs to develop and this was alsocalled for in the first New EconomicsFoundation report. So how mightprogress on enabling CDCUs toemerge be achieved?

As with the development of theDepartment of Trade and IndustryPhoenix Fund, there are four key thingsto be done:

1. piloting CDCUs through a national challenge fund toestablish pathfinders;

2. establishing a specialist trainingprogramme for practitioners to learnCDCU techniques;

3. evaluation of performance and the development of accreditation systems;

4. legislative changes to allow keydevelopment tools such as nonmember deposits and secondarycapital for CDCUs to access.

The US experience provides backing forthe importance of each of these. Withthre decades of American experiencein developing and refining a training,finance and support infrastructure forlow-income and community basedcredit unions to grow and thrive, theUK will benefit from learning from theeffective framework developed in theUSA by the National Federation ofCommunity Development CreditUnions. This is based on fourprinciples: programmes, advocacy,capitalisation, and education (“PACE”)

Programmes: specialised supportsystems and investment systemstailored to develop low-income creditunions to become strong and self-reliant institutions;

Advocacy: dedicated support from aspecialist CDCU trade association tochange legislation, Government policyand bank behaviour to support thereduction of financial exclusion throughcommunity banking services to reachthe unbanked and service the needs ofdisadvantaged communities in welltargeted ways;

Capitalisation: a wide range offinancing instruments to meet in flexibleand dynamic ways the requirements ofCDCUs for different forms of capital –from seed capital, sponsorship fundsand guarantee funds, to lines of credit, ethical investment from non-members, secondary capital andpolicy related investment;

Education: to train CDCU staff andboard members beyond NVQs alone,

to degree level and post graduate level master credits. Communitydevelopment credit union work is farharder than City Fund managementwork with risk management skills thatrequire intensive investment in training and skill development in abroad range of areas including settingup an office, negotiating a lease,business planning, regulatorycompliance, effective marketing andmedia work, selecting and developingIT and management informationsystems, portfolio tracking and muchmore. Supplemental to first levelknowledge bases are other productdevelopment specialisms from micro-credit and small business lending toreal estate and property loans. Otherareas like alternative financingmechanisms to deliver cost effectivealternatives to payday loans andpredatory finance organisations aremore complex still.

An example of how this model isapplied in the USA is set out inAppendix D. With strong support from NFCDCU staff, Bushwick Co-operative Federal Credit Union in Brooklyn, New York was launched in December 2000. Within two years of trading,membership reached 1,067 and total member savings $627,021.Compared to the slow and uncertaingrowth of many, credit unions in the UK, Bushwick shows how toescalate the path to financialsustainability without resort to reliance on a majority of better paid members and payroll deductionstrategies to achieve growth.

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At the end of the day, you get whatyou pay for. Critical to CDCU successin the USA has been properinvestment strategies that do notwaste scarce tax payers or charitablefunds on the one hand, nor are “pennywise and pound foolish”. As in thecase of all social enterprises orbusinesses, undercapitalisation andunderinvestment invite slow, paltrygrowth and, more often than not, poorperformance and early failure. Gettingproper “PACE” on the ball, as theNational Federation of CommunityDevelopment Credit Unions haveproven, is crucial to success.

In the UK, CDCUs will only grow ifcredit unions emerge that see thepotential to address financial exclusionon a sustainable basis, and theyreceive the support they require tofulfil this social business mission. Theinvolvement of a range of stakeholdersis needed to support CDCUs. It seemsclear that the public sector is the onlyone that is strategically placed toresource the development frameworkrequired for CDCUs to play a significantrole in promoting savings andaddressing financial exclusion, whilstsimultaneously meeting a range ofpublic policy goals.

In the USA, CDCUs have been verygood delivery vehicles for Governmentsupported programmes such asIndividual Development Accounts,(which in xxxxxx savings xxxxx low-income households effectively), and financial literacy services thatassist with the take up of the Earned Income Tax Credit. Both these programmes are similar to the UK Savings Gateway andWorking Tax Credit – aimed to secure the Labour goal of reducingheavily child poverty.

The recommendations below cover the development of the CDCU sector.They do not talk to wider issues orcurrent Department of Trade andIndustry Consumer Credit Act reviewconsiderations for improving theregulation of sub-prime lending andreducing consumer exploitation in thelicensed credit sector more widely.

Appendix F outlines a specific andcomplementary set of recommendationson these, drawing on The NewEconomics Foundation’s widerprogramme of work on predatory lendingand on social enterprise.

Drawing on our research findings of therelevance and timeliness of the CDCUapproach for the UK, we recommendthe development of a lifeline bankingservice with two main goals: a) topromote savings and financial literacyand b) to provide affordable credit as apractical local alternative to high costloan sharks and sub-prime creditors.This should be achieved through thefollowing actions:

1. The Treasury should establish anational challenge fund for CDCUdevelopment with lessons drawnfrom the Phoenix Fund process forsetting up Community DevelopmentFinance Institutions for enterprise.The CDCU development should bephased with the first Phase seekingto fund a first round of 25pathfinder CDCUs in Britain througha bidding process and a secondPhase to roll out a 100 CDCUsnationally based on best modelsdeveloped in Phase One for thediverse local circumstances ofcommunity credit unions — rangingfrom densely populated inner cityneighbourhoods to dispersed ruralareas. As part of any future roundof legislative change, such asthrough a deregulation order, thegovernment should introduce legal

Recommendations

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changes to enable CDCUs,appropriately defined, to securenon-member deposits and to clarifypowers for credit unions to acceptsecondary capital. Additionally thisreview should seek to explore theimpact of raising the interest ratecredit unions can charge to a newceiling of 18 per cent APR (as inthe USA) to facilitate both higherrisk lending to small businessesand for refinancing high costmoneylender type loans.

2. Government should establish themechanisms alongside itsinvestment in CDCUs to reviewprogress, including an inter-departmental review to assessactivity since its PAT report in 1999on financial exclusion.

3. Charitable foundations that havepioneered models of “programmerelated investment” to supportenterprise-oriented activity in thepublic interest should experiment toassist credit union growth with non-member deposits, or theirequivalent, in the form of patient,concessionary secondary capital.

4. The Treasury should explore thepotential for a Bank EnterpriseAward Scheme, based on the USmodel, to provide public recognitionand financial support for banks thatprovide the most effective supportand investment in CDCUs andwider enterprise lending.

5. A wider Community DevelopmentFinance Institution Coalition shouldcome together to support thedevelopment of CDCUs — includingthe five credit union networks and the Community DevelopmentFinance Association, jointconsideration should be given toother helpful reforms such as aVISTA style programme to supportCDCUs and other CommunityDevelopment Finance Institutionswith secondments and postgraduateplacements.

Drawing on US data for thedevelopment of CDCUs, such asBushwick (Appendix D), each CDCUwould require operating revenue support of around £125,000 a year, for three years, which indicates £37.5million.in subsidy required. In additionto this is the need for seed capitalgrants for reserves, equipment as well as training and programmedevelopment. This suggests a totalprogramme of around £60 million overfive years, or £12 million per annum.

This investment would bring a broadspectrum of benefits. It would retain£400,000 of loan repayments withinthe immediate community of eachcredit union. These returns wouldcome specifically to those on low-incomes, to the credit unionsthemselves, and to the initial providerof capital, which could be governmentor ethical investors.

The lifeline banking service we proposeis a complement to mainstreamfinancial providers and the insurance

role of the welfare state. It will bedifferent to each of these in that itspurpose is to enable non-profit, value-based social enterprises to competewith sub-prime lenders and drawpeople out of social exclusion and avortex of personal debt. Such a servicewould represent an authentic attemptto tackle one defining set of issuesunderpinning contemporary povertyand to promote life-saving alternatives.

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United States

� Bethex Credit Union � Union Settlement Federal Credit Union � Lower East Side People’s Federal Credit Union � Citizens East Community Development Credit Union � Vermont Development Credit Union � Northside Federal Credit Union � Alternatives Federal Credit Union � Bushwick Co-operative Federal Credit Union

Further information was obtained from the NationalFederation of Community Development Credit Unions’ seniormanagers and their published reports. During the US fieldtrip, the techniques for developing CDCUs and their coreservices were learned about in considerable detail throughattendance on three intensive days of training at the CDCUInstitute at the University of South New Hampshire.

Specialist methods to tackle predatory lending and todevelop affordable financing products was learned aboutthrough contact with managers of Northside Federal CreditUnion, ASI Federal Credit Union (New Orleans, Louisiana),Self-Help Credit Union (Durham, North Carolina) and FaithCommunity United Credit Union (Cleveland, Ohio). Additionalinformation on pioneering services to promote long termsavings and financial literacy was obtained from Santa CruzCommunity Credit Union (California), and ProgressiveNeighbourhood Federal Credit Union (Rochester, New York).

England and Wales

� Burnley Area Community Credit Union � Rotherham Credit Union Network � Enterprise Credit Union, Merseyside � South East Birmingham Community Credit Union � Morecombe Bay Credit Union � Coventry Credit Union Network� Community Wealth Credit Union Ltd, Doncaster� Cornish Credit Union Development Project � Financial Inclusion Newcastle

(four Community credit unions in West Newcastle)� Robert Owen Montgomeryshire Credit Union � River Valley Credit Union � Northern Oak Credit Union � Southwark Credit Union � Builth & Llanwrtyd Credit Union� Redditch Credit Union � Moneyspinner Credit Union � Riverside Credit Union � Portsmouth Area Regeneration Trust

Appendix A List of Research Interview Sample and Case Profiles

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The New York City Financial Network Action Consortium is anovel network of four CDCUs with a fifth CDCU, to join inJuly 2003. The Birmingham administration centre forCommunity Credit Unions is moving in this direction, butwithout comparable levels of investment. New York CityFinancial Network Action Consortium, alongside the NationalFederation of Community Development Credit Unions andthe North Carolina Minority Support Centre, has achievedrecognition from the US Treasury as one of the firstspecialist Community Development Finance Institutionintermediaries in the USA. The network is owned anddemocratically governed by Union Settlement Federal CreditUnion, Bethex, the Lower East Side People’s Federal CreditUnion and Homesteaders Credit Union. Bushwick FederalCredit Union will become the fifth member in summer2003. In practice the network consortium acts as asecondary co-operative system with six strategic objectives,to:

� create economies of scale thereby saving costs;� develop new opportunities to generate more revenue;� undertake research and development related to new

products and services;� co-ordinate marketing activity;� define and move toward a unified vision of affordable

financial services;� finance their fixed asset needs so they can reach more

of the target “low-income” client group.

In its first three years of operation, the New York CityFinancial Network Action Consortium has already deliveredthrough the partnership consortium, the following results:

Branch Development and Improvement: branchconstruction and renovation projects have been carried outfor three CDCUs with funds raised thus far of $1.3 million.$400,000 of grants was secured from diverse programmesto open a fifth Bethex Branch in 2001. Design workcompleted and shop fittings done on the Lower East SidePeople’s Federal Credit Union second branch. Over$600,000 has been raised and invested in the UnionSettlement refurbishment project to double the size of itsprevious, inaccessible office branch and to establish withthe investment in a store front branch.

ATM Network Development: special discounts on goodquality, nearly new, ATM (cash) machines have beennegotiated at a savings of $15,000 per machine (i.e. at$20,000 rather than $35,000 each) and a strategy drawnup for locating these in each of the four CDCU areas of NewYork at their new branches and in major places ofemployment. Installation work for the Lower East SidePeople’s Federal Credit Union has been completed and workwith other CDCUs is underway.

Partnership with Community Based Organisations (CBOs):initiatives are now in operation to work with organisationsspecialising in financial literacy, money management trainingand debt advice. Community Based Organisation trainersand advisor experts in these fields deliver surgeries at creditunion branches linked to specialist accounts, such as theIndividual Development Account for home purchase orrepair, business start up or financial education.

Shared Small Business Lender: Lending to the self-employed and small businesses is a challenge for CDCUswithout specialist business lending expertise. This is aconundrum because until the volume of lending can begenerated by an individual CDCU, hiring specialist staff isnot viable. To tackle this for all CDCUs in the consortium,funding has been raised for a small business lender toservice the needs of NYCfNAC members. In addition toundertaking credit analysis for small businesses, the sharedlender will facilitate the participation of loans between theCDCUs to mitigate risk and permit them to make largerloans. Strategic partnerships are being developed with microenterprise lenders to secure loan referrals and with anational CDFI to access a government guaranteed loanprogram, which provides an 85 per cent loan guarantee.The programme will assume a significant share of theCDCUs' marketing activities for small business loans.

Integrated Financial Services: a full-time Director ofProduct Development and Marketing is now working for thefour credit unions. Additionally work has commenced onexamining the achievable economies of scale between thefour CDCUs and other New York CDCUs that will be invitedto join the New York City Financial Network ActionConsortium at a later stage, once the integrated model is

Appendix BThe New York City Financial Network Action Consortium

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fully operational. Areas under development include:insurance services, central back office facilities, commondata processing, joint marketing, common branding, inter-lending facilities, collaborative policy development, sharedrecruitment and training programmes and improvements tothe Electronic Benefit Transfer system for welfare andpension payments.

Earned Income Tax Credit Education Project: a financialliteracy project which seeks to inform 50,000 low-incomehouseholds about their eligibility for tax credits, to promotethe use of free tax preparation services and encourage themto become CDCU members to widen access to affordablefinancial services and specialist savings accounts likeIndividual Development Accounts.

The vision and commitment of CDCUs in New York areimpressive 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 increasinginequality will enable them to make a significant futureimpact on the lives of poor people in the city.

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Table 1. Capture rate of new members, and income generated within each CDCU

Years 1 2 3 4 5 TOTALS

Capture rate/members 16,330 22,094 29,894 40,446 54,724 163,489

Accumulated members 16,330 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 1 2 3 4 5 TOTALS

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

Appendix CMarketing Campaign for Community Development Credit Unions in Britain to Tackle Financial Exclusion

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Bushwick in Brooklyn is one of the poorest New York cityneighbourhoods. Similarities with Salford are strong. 38 percent of the population live below the poverty line of 60 percent median national income. The local population is 103,000and there are only two bank branches for this large area. Ingeneral as in many parts of Salford, conventional financialservices are invisible and in short supply. Small business loansfrom banks are almost unheard of. Down market lenders arerife. In the late 1990s, local affordable housing organisationsand local politicians sought to develop a CDCU and a local,community based housing organisation, Ridgewood BushwickSenior Citizens Council agreed to become a sponsor andprovide senior management time to foster and incubate acredit union, with a well-planned strategy, to meet the needsof local people.

The stages of Bushwick’s history highlight how a strongsponsor supported by a National Federation of CommunityDevelopment Credit Unions style “PACE” based approachcan quickly yield strong CDCU growth. There is no escapingthe need for adequate resourcing at each stage.

Stage One – Organising pre-registration: with release of afull-time member of staff with community development nousand with business planning skills, the pre-registration workof the credit union was done intensively over 18 months.Grants were raised to resource the market feasibility work of$32,000 from the New York Community Trust and the linkedbusiness plan of $12,500 from Chase Manhattan Bank. Alarge market survey was carried out among 1,317 low andmoderate income local residents. Of those surveyed, 827pledged to become CDCU members. Investmentcommitments from the survey of $193,455 were made andaverage savings per week indicated from the pledge formreturns was $30 per member.

Stage Two – Year One and Investment Resource Base: as aresult of the comprehensive market study carried out andthe business plan completed, promotional work to funderswas successful in raising funding for five years to support afour person staff team including:

� Manager and Development Officer� Loan Officer and Financial Literacy Programme Worker� Office assistant manager (chief cashier)� Cashier� Marketing Officer

An additional relief cashier was funded on a one day a weekbasis initially, increasing to full time as membership levelsincreased. The Marketing officer was funded by the VISTAprogramme of the US Government. A grant based operatingbudget of $193,500 based on a 30 page business plan wassecured to pay for both staff and shop front lease costs. Fundingfor the operating budget was apportioned well with one thirdcoming from three major banks (Citibank, JP Morgan, andFleetBoston), one third coming from state and FederalGovernment sources (Empire State Development, Fannie Maeand New York City Council) and one third from charitablefoundations such as the New York Community Trust. The fundingwas scheduled to gradually taper yearly in a conservative wayagainst business plan forecasts for income growth.

The shop front lease was carefully selected from marketanalysis work to be in a prominent, high street location withgood footfall and near to the New York public transport stops.Concentration was not on direct deposit and payroll deductioncustomers but on the unbanked and reaching them throughan outreach and financial literacy programme strategy.

Capitalisation was secured by attracting the aggregate levelin the box below of non-member deposits by the end of thefirst year of trading.

It is important to note here that the Municipal Credit Union isa city employee credit union which is investing in the CDCU tofoster development. It is also interesting to note that GreenPoint CDC is a non-profit affordable housing organisation inBushwick – the equivalent of a British housing association.Both the housing body and the public employees credit unionare investing long term at no financial return at all. Mightlarge employee based credit unions in the UK and RegisteredSocial Landlords do the same?

Brunswick Co-operative FCU - Non member Deposits (Year 1 Achievments)European American Bank $100,000 @ 2%Fuji Bank $75,000 @ 1%Independence Community bank $50,000 @ 0%Municipal Credit Union $50,000 @ 0%US Trust Company of New York $50,000 @ 2%Greenpoint Community $40,000 @ 0%Development Corporation

TOTAL $365,000

Appendix DBushwick Co-operative Federal Credit Union

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Stage Three – Year Two Outcome: over the first twenty fourmonths membership and savings growth has beenimpressive. On 31 December 2002 at the end of Year Twoof trading, membership had reached 1,067 and totalmember savings of $627,021 were almost double non-member deposits raised in the first year. New membersjoining are now signing up at the rate of 45 per month andthe average savings level per member was at the end ofyear two, $588. Of the members recruited, the financialliteracy outreach work and the marketing strategy morebroadly was hitting target with 40 per cent of membersjoining not having a savings account before and 75 per centnever having had a bank loan before.

On the loan side at the end of Year Two, 341 loans hadbeen made totalling $518,162. The average loan size was$1,520 and the approval rate for new loans was 91 percent. The two most common needs for loans were to buyhousehold durables (fridges, washing machines, and secondhand cars) or to refinance debt in a more affordable way.Delinquency and slow payment on loans was $3,663 inaggregate – a slow payment percentage of only 1.16 percent. It should be noted that 26 per cent of customers areon public assistance, the equivalent of Income Support.

The proactive financial literacy work at the end of thesecond year of trading had attracted over half themembership to participate – 531 people. The workshops inthe programme included:

(i) Building family budgets and strategies for savings;(ii) Understanding credit and improving creditworthiness;

Understanding financial institutions (from check cashersand pawnshops to credit unions and banks);

(iii) Avoiding predatory lenders;(iv) Income tax issues, including claiming tax credits

and skills in completing returns;(v) Preparing for homeownership.

Bushwick Co-operative Federal Credit Union is now after twoyears of trading already a $1.7 million CommunityDevelopment Finance Institution showing transparently howto deliver financial service affordably and sustainably in oneof New York’s poorest and ethnically mixed neighbourhoods.

Most noteworthy, the balance sheet showing net worth is14.28 per cent, which has been aided by grantcontributions to reach this level to allow expansion andrapid growth from a strong base.

All services are also provided bi-lingually, in English andSpanish. They have initially concentrated on basic budgetaccounts, deposit accounts, higher interest savingsaccounts, consumer loans and organisational accounts aswell for local tenant and community groups. Checkingaccounts have more recently been introduced. Withstrategic investment, by Government programmes, thebanks and charitable foundations, Bushwick Co-operativeFederal Credit Union have assembled “four legs to form aproper chair” to work from. As Bushwick Co-operativeFederal Credit Union founder and manager, Jack Lawsonsummed up the vital requirement for the necessary strategicinvestment that needs to be mobilised to do communitybanking “for Real”:

"You cannot do this type of work well with only a half start.The poor, just like anyone else, will not place their hard-earned savings in a rundown storefront with oneoverstressed manager, an under-qualified cashier andsomeone's old computer. The ability to put into place a solidoperation — hire really good staff and bring in high qualitycomputer hardware and software — was probably the singlebest reason for our success."

There are no CDCU blueprints. However Bushwick FederalCredit Union indicates well the scope for fast tracking creditunion development to reach the financially excluded in theUK with a similar combination of dedicated and highlyskilled staff, resourced by the right level of investment, tomake the business plan implementation hum and moveforward deliberately, rather than splutter and die like aclapped out car.

43�

New Economics FoundationIn 1997 New Economics Foundation (NEF) produced, A Commitment to People and Place, its first policy report onCommunity Development Financial Institutions. This reportauthored by Pat Conaty and Ed Mayo was the UK’s firstreport on Community Development Credit Unions (CDCUs)and was commissioned by the National Consumer Councilwith funding from the Joseph Rowntree Foundation andadditional sponsorship from Nat West Bank. A year later theNew Economics Foundation report, Small is Bankable,launched by Patricia Hewitt MP proved seminal for thecreation of the Community Development Finance Institutionmovement in the UK and provided strategic guidance for theUK Social Investment Task Force report which establishedthe Phoenix Fund.

The 2003 New Economics Foundation report, Profiting fromPoverty, highlights a range of ways that Predatory Lendingcan be tackled proactively in the UK. Here in particular keylessons from the work of both CDCUs in the USA and theMoney Advice Budgeting Service (MABS) in Ireland shouldand can practically be taken on board. Both theseapproaches have benefited from strategic support by theAmerican and Irish Governments and from their respectiveregulatory agencies as well.

A more detailed New Economics Foundation report, EndingFuel Poverty and Financial Exclusion, set out in March 2002a business plan to show how in Britain both CDCUs andMABS can be developed from lessons drawn from boththese American and Irish models but also from emerging UKexperience in the credit union movement here.

National Association of Credit Union WorkersFormed in 1992 the National Association of Credit UnionWorkers (NACUW) remains the voice of credit union workersthroughout Britain. The activity of NACUW reflects theassociation’s membership representing all sectors of themovement. Such a “broad church” enables The NationalAssociation of Credit Union Workers to be at the forefront ofmany initiatives that encourage the growth and developmentof credit unions. The National Association of Credit UnionWorkers has designed and run the only accredited trainingwidely available in credit union. Its members have beenresponsible for the training and support given to the majorityof credit unions in Britain and to their volunteers.

The National Association of Credit Union Workers were jointauthors of Growing the Credit Union Movement published inOctober 2002. The Report identified areas where better co-operation between the movement’s main stakeholders wasadvantageous. One of its key recommendations was for themovement to be allowed to develop models of structure andservices that recognised the diversity of the British creditunion movement and which supported the autonomy ofindividual Credit Unions.

The CDCU research project was launched at the NationalAssociation of Credit Union Workers’ Annual Conference inNovember 2002. Research of this kind is central to the coreactivity of NACUW. Representing members who areemployed directly by Credit Unions who are striving to tacklesocial and financial exclusion “head on”, NACUW provideopportunities for those at the forefront of developing theBritish movement to discuss appropriate models and thedesign of resources to achieve successful delivery.

Appendix EWork of the New Economics Foundation, the National Association of Credit Unions Workers and the National Consumer Council

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National Consumer CouncilThe National Consumer Council (NCC) is the independentconsumer policy expert, championing the consumer interestto bring about change for the benefit of all consumers.

We do this by working with people and organisations that can make change happen – governments, regulators,businesses and people and organisations who speak on behalf of consumers – and by conducting rigorousresearch and policy analysis. The NCC works in an open and collaborative way, publishing research findings, andcampaigning for change to advance the consumer cause.The issues of poverty and disadvantage are at the heart of the NCC’s work, as often the most vulnerablepeople find it hardest to be heard.

The NCC played a significant role in the development ofcredit unions in the UK, including the promotion of credit unions in the 1970s, and preparatory work for the1979 Credit Union Act. By the late 1980s, the NCC hadinitiated several projects to try and address the issue of the growth needed for a mass movement. The NCC’s1994 report, Saving For Credit, was the product of a working party the NCC convened to bring together theplayers in the credit union movement to address the keyissues. The report concluded that credit unions should playa vital part in promoting savings and effective moneymanagement, as well as contribute to community activity.Its recommendations were partly addressed in the resulting1996 Deregulation Order.

In 1996, the NCC launched a resource pack, Credit UnionDevelopment: a new platform - raising the profile of localcredit unions, and in 1997 commissioned the first researchon Community Development Credit Unions by Pat Conatyand Ed Mayo.

As part of its ongoing work in this area, the NCC hasrecently held seminars on ‘Financial Futures’ and ‘MeetingBasic Financial Needs’ – examining solutions to providingbasic financial services for all consumers. As part of its‘Everyday Essentials’ project, the NCC published a reportanalysing the government’s Universal Banking and SavingsGateway initiatives. The NCC has also contributed to theDepartment of Trade and Industry’s review of the ConsumerCredit Act, 1974, and the draft Consumer Credit Directive,calling for government to support ways to address the credit needs of people on low-incomes, including businessfunding for community credit unions.

45�

� ACE Credit Union Services, Association of IndependentCredit Unions, National Association of Credit Union Workersand the Scottish League of Credit Unions (2002), Growingthe Credit Union Movement, Joint Report funded under theOxfam UK Poverty Programme.� Association of British Credit Unions, Association ofIndependent Credit Unions, National Association of CreditUnion Workers, and The Scottish League of Credit Unions,(1997), Common Ground – National Goals for Improving theLaws Governing Credit Unions, a report from the CreditUnion Movement in Great Britain.� Birmingham Credit Union Development Agency (1999),People, Communities and Credit Unions, report of theBirmingham Credit Union Research Project.� Birmingham Credit Union Development Agency, AnnualReport 2001-2002� Bushwick Cooperative Federal Credit Union, ‘RevisedBusiness Plan’ submitted to National Credit UnionAdministration in 2001.� Cohen, R. (2000), Enterprising Communities: WealthBeyond Welfare, report of the Social Investment Task Forceto the Chancellor of the Exchequer, UK Social InvestmentForum, London.� Community Development Finance Association, (2002)‘The Power of Association’ prospectus for the CommunityDevelopment Finance Institution trade association.� Conaty, P. and Bendle S. (2002), Ending Fuel Povertyand Financial Exclusion – a Social Enterprise Business Plan,joint New Economics Foundation and National Energy Actionreport completed under the Ofgem Social Action Plan withan analysis of ways and means to develop both AmericanCDCUs and Irish Money Advice Budgeting Services in Britainfor Factor Four pilots involving money, debt, energy adviceand credit union bill payment systems – the initial pilot inBirmingham to begin Summer 2003.� Conaty, P. and Mayo, E., (1997) A Commitment toPeople and Place – the Case for Community DevelopmentCredit Unions, policy report by New Economics Foundationfor National Consumer Council with funding from the JosephRowntree Foundation.� Debt on Our Doorstep, ‘Credit Unions and CommunityFinance’, Briefing No. 2, 5 March 2001.� Flutter, C. and Paxton, W., (2002) ‘Asset-Based WelfarePolicies and Debt’, discussion paper for seminar in August2002, Institute for Public Policy Research.

� Fuller, D., Affleck, A. and Dodds, L., (2001) ‘AdvancingFinancial Inclusion in Newcastle upon Tyne’, marketfeasibility study for Financial Inclusion Newcastle (FIN),August 2001.� HM Treasury (1999), Access to Financial Services, reportof Policy Action Team 14 to the Social Exclusion Unit, June1999.� HM Treasury (1999), Credit Unions of the Future, reportof Sir Fred Goodwin’s Taskforce to the Government on creditunion legislative reform and policies for future development,July 1999.� Jacob, K., Bush M., and Immergluck, D.†(2002),Rhetoric and Reality: An Analysis of Mainstream CreditUnion's Record of Serving Low Income People, WoodstockInstitute, Chicago. A research report that reveals thatconventional employee based credit unions in the USA farelittle better than American banks in reaching low-incomehouseholds and reducing financial exclusion.� Jones, Paul (1999), Towards Sustainable Credit UnionDevelopment, research report for the Association of BritishCredit Unions.� Jones, Paul (2001), Access to Credit on a Low Income,The Co-operative Bank.� Jones, Paul (2002), ‘Getting the low-down on the Lower East Side Credit Unions’, the Association of BritishCredit Unions feature story on CDCUs in Credit Union News,March 2003.� Kober, C. and Paxton, W. (2002), Asset-Based Welfareand Poverty, Institute for Public Policy Research.� Landor Conferences (2003), ‘Building Sustainable NewCommunity Financial Institutions to Combat FinancialExclusion’ proceedings from the Third Annual Finance for theLocal Community Conference with Keynote speakers, RuthKelly MP and Ed Jacob, Northside Federal Credit Union inChicago (USA), 22 January 2003 in London.� National Consumer Council (2003), Everyday Essentials:meeting basic financial needs, policy response to theGovernment’s Universal Banking Services and SavingsGateway services.� National Federation of Community Development CreditUnions (1999), Worldview – the National Federation ofCommunity Development Credit Unions @25, 25thAnniversary Journal with full NFCDCU historical analysis -specially produced for June 1999 annual conference at theWorld Trade Centre, New York City.

References

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� National Federation of Community Development CreditUnions (2002), ‘Report to the Membership 2001-2002’.� National Federation of Community Development CreditUnions (2002), Building Community Assets – Annual Report2000-2001.� National Federation of Community Development CreditUnions (2002), Each one, Teach many, a Train-the-TrainerFinancial Literacy Program for Credit Unions Serving Lowand Moderate Income Communities.� New York City Financial Network Action Consortium,‘Organizational Overview’, April 2003, unpublishedexplanatory document of secondary co-operative servicesestablished (to date since May 2000) for four New YorkCDCUs to enhance efficiencies, scale and impact in tacklingfinancial exclusion.� NorthSide Community Federal Credit Union, AnnualReport 2001.� Office of Fair Trading (1999), Vunerable Consumers andFinancial Services, the report of the Director Generals Inquiry.� Palmer, H. with Conaty, P. (2002), Profiting from Poverty– Why Debt is Big Business in Britain, The New EconomicsFoundation Pocketbook 8, New Economics Foundation.� Palmer, Henry, ‘Shark Alert’, New Start, 19 April 2002.Paxton, Will, ‘Don’t Let This Savings Plan Get Away’, NewStart, 21 June 2002.� Reifner, U., Lynch, M., and Granger, B. (1997), TheSocial Responsibility of Credit Institutions in the EU, Institutfür Finanzdienstleistungen e.V., Hamburg. Report producedfor European Commission DG XXIII on the scope for aEuropean Community Reinvestment Law.� Rosenthal, C. and Levy, L. (1995), Organizing CreditUnions – A Manual a handbook for CDCU developers, NationalFederation of Community Development Credit Unions.� Rosenthal, Cliff (1989), ‘The Community DevelopmentCredit Union Demonstration Project’, report on nationaldevelopment initiative for CDCU exemplar models in NorthCarolina, New York, Philadelphia and Chicago and funded bythe Ford Foundation.� Rosenthal, Cliff (2002), ‘Money, Management andMission’, Keynote speech on CDCUs to the CommunityDevelopment Finance Association’s Third Annual Conferencein Glasgow on 20 June 2002.

� Rosenthal, Cliff (2003), ‘Community Development CreditUnions in the US: Lessons and Perspectives’, presentationmade to the five British Credit Union Trade Associations, HMTreasury and the Financial Services Authority on 10 March2003 in London.� South East Birmingham Community Credit Union andBirmingham Credit Union Development Agency, ‘FirstOpportunities and Second Chances - BirminghamCommunity Development Credit Union Venture’, bid to theAdventure Capital Fund, January 2003.� Spiers, S. (2003) ‘CDCUs for Britain?’, editorial by theAssociation of British Credit Unions in Credit Union News,March 2003.� Williams, M. and Wiles, M. (1998), On the Move: ananalysis of low-income credit unions 1990-1996,Woodstock Institute, Chicago, Illinois.� Williams, M (2002), Critical Capital: How SecondaryCapital Investments Help Low Income Credit Unions HitTheir Stride, Woodstock Institute (2001).� Williams, M and Smolik, K. ‘Affordable Alternatives toPayDay Loans – Examples from Community DevelopmentCredit Unions’, in Reinvestment Alert, Number 16, March2001, Woodstock Institute, Chicago, Illinois.

1 Charles Ferguson & Donald McKillop (1997), The StrategicDevelopment of Credit Unions, John Wiley and Sons Ltd.

2 Research centred on selective in depth interviews in the USA and inEngland and Wales with community based credit union practitioners.Just under 30 in depth interviews were undertaken — during October2002 in the USA and from November 2002 through March 2003 inEngland and Wales. The framework to help support the pilotcommunity development credit union experiment was developed withthe assistance of a Focus Group consultation in London on 10 March2003. This event involved 16 participants from all the British creditunion associations and the Community Development FinanceAssociation, from banks, from the Department of Trade and IndustryPhoenix Fund and from debt advice and poverty groups.

3 Prior to the Credit Union Act of 1979 credit unions could exist inone of three ways, all of which presented obstacles to theirdevelopment. They could register under the Industrial and ProvidentSocieties legislation that was designed to regulate small co-operativeventures. But this prohibited lending except on ‘the security of real orpersonal property’. Members were therefore unable to borrow abovethe level of their own savings, unless another member could befound to guarantee the loan on the security of his or her savings. Thelevel of lending was limited by the number of guarantors who wereprepared both to put their own savings at risk and to forego theopportunity to take out a loan themselves.

Another route they could take was to set themselves up as alimited company. This imposed few controls to ensure thatmembers’ savings were properly administered, but a union had tohave permanent officials who would be liable for the debt of thecompany. The registration fees were large in relation to the turnoverof these co-operative ventures and none of these requirementswere compatible with a voluntary organisation. The final option wasfor a credit union to remain as an unincorporated association. Thisleft them in a legal limbo, unable to sue or be sued. There was alack of any safeguards or supervision and it did little to promoteconfidence among potential members.

4 No member could hold more than £2,000 in shares. Themaximum dividend was set at eight per cent. No more than oneper cent per month could be charged in interest on loans. A creditunion could ask for 60 days notice before shares could bewithdrawn. The Registry of Friendly Societies was given powers torequire all credit unions to be registered. Qualifying for this involveddemonstrating an appropriate common bond, the usual objects ofa credit union and a set of acceptable rules. The Registrymonitored credit unions by requiring them to submit an annualreturn. It could appoint an inspector to investigate the affairs of acredit union or suspend it from accepting savings or making loans.It could also cancel a credit union’s registration or wind it up bycourt order.

5 There was a new obligation for submitting quarterly as well asannual returns. Sufficient information was required prior toregistration to prove adequate basic management capacity andsystems of control. The Registry was also concerned to establishthe ‘reality’ of the proposed common bond and required proposedcredit unions to submit detailed information especially thosewishing to register a residential common bond. Overall there was avery restrictive approach to residential common bonds, and itsemphasis on moral suasion was interpreted as requiring small tightknit communities.

6 Other legislative reforms that have affected the way credit unionsoperate include: Statutory Instruments Act 1946; Mental Health Act1959 (Part VIII); Trustee Investments Act 1961; Income andCorporation Taxes Act 1970, Section 30; Insurance Companies Act1974; Criminal Law Act 1977; Banking Act 1979; The ConsumerCredit Act 1979; The Data Protection Act 1998; The Companies Acts.

7 Many of the changes are welcome in improving internal controls,reporting and accountability. A major benefit has been theintroduction of the share protection scheme that will underwritemembers’ savings for the first time. This has been collectivelycalled for by all sectors in the movement (see Common Ground –National Goals for Improving the Laws Governing Credit Unions. Areport from the Credit Union Movement in Great Britain, 15December 1997), and will increase public confidence in investingin their credit unions. Recent market research commissioned inNorth Nottinghamshire also reveals that the public are respondingmore positively to credit unions with the new status that FinancialServices Authority supervision bestows. But some of the newdemands are rigorous and may be problematic. A number ofcommunity credit unions are concerned that the vetting andapproval process for all officers performing ‘controlled functions’ isbeginning to deter volunteers, who are required to submit a 23page application form of personal data to the regulators.

Following an influential 2002 Oxfam UK report, Growing the CreditUnion Movement, that called for better co-operation between thevarious credit union stakeholders, a new National LiaisonCommittee has been formed to better represent the interests of allsectors within the movement. A specialist legislation group has alsobeen established out of this, with the intention to consult and lobbyto improve further credit union legislation.

8 Towards Sustainable Credit Unions, March 1999

9 While critical of public sector backing, the report provideddocumented evidence to back demands and applications forgreater levels of investment. As a result, over recent years, credit unions and in particular community based ones have been more successful at securing subsidies towards achievingfinancial viability.

Notes

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10 The first money for low-income credit unions came from thecredit union association CUNA. They had invested $50,000 to funda pilot project for developing credit unions for low income, ethnicminority communities in Chicago, New York, Washington DC,Wilmington (Delaware) and San Juan (Puerto Rico). The FederalGovernment formed a partnership to develop this initiative underthe War on Poverty and from 1965-73 over 400 community creditunions were registered. Only a very small number of the creditunions founded received direct subsidy, most were helped withdonated office space or in kind support.

The vast majority of these credit unions failed once the War onPoverty programme ended. They failed for a variety of reasonsincluding:

� many were not organised properly and failed to take root;� loan policies and collection points were inadequate – leading tolosses quickly;� members were given Government emergency grants and loansat the same time and confused the two;� the common bond areas of the credit unions were both smalland restrictive – leading to an inability to include moderate incomemembers as well in the credit unions.

The failure of this Government based approach led to acrimony andCUNA decided in late 1970 to wind up its involvement as soon aspossible. In retrospect, while funding provided was ofteninappropriate in how it was used, the problem was not itself aninvestment one (National Federation of Community DevelopmentCredit Unions, 1999). In fact, the vast majority of these lowincome credit unions received no investment directly at all. Whatwas really missing was a viable long term support structure andeffective training services.

11 A sum of $6 million was provide for a Revolving Loan Fund tomake five year loans of about $200,000 each at a rate of two percent interest and quarterly repayments. To qualify for theseinvestments, community development credit unions nationally hadto prepare community needs plans and comprehensive businessplans. The National Federation of Community Development CreditUnions received funds to help members with technical assistanceand capacity building.

12 The National Federation of Community Development CreditUnions had to close its national office and make staff redundant asits annual budget was cut back from $500,000 to only $5,000.The Revolving Loan Fund was kept in existence but the interest rateon loans was raised to 7.5 per cent, in effect making it a liabilityrather than an asset.

13 The Demonstration Project centred on assisting communitydevelopment credit unions in New York City, Chicago, Philadelphia

and North Carolina. Also from 1986 onwards, with a $500,000investment from the MacArthur Foundation, the National Federationof Community Development Credit Unions began attracting majorfunds from trusts and foundations of zero or very low interest fundsfor its Capitalisation Programme. These then invested strategicallyin member development as the Blue Book called for. By 1990, theNational Federation of Community Development Credit Unions had$2.3 million of such funds under management and was able toplace non-member deposits of $50,000 to $100,000 to assist itscommunity development credit union members develop. Alongsidedirect grants, other assistance has come in the form of low couponinvestments, discounted loans, secondary capital and socialinvestment deposits.

14 To assist community development credit unions with staffing,the National Federation of Community Development Credit Unionswas also able to negotiate with AmeriCorps VISTA to enablegraduates to be placed with community development credit unionsfor a year and assist as staff for business, product and otherfinancial services development. Graduates are paid a wage by theUS Government, administered by the National Federation ofCommunity Development Credit Unions.

Subsequent support during the Clinton years included the openingup of community development credit unions to small businesslending opportunities with support from the Small BusinessAdministration and the Presidential Micro-lending Awards. Somehave qualified for access to small business lending guaranteeprogrammes. The National Federation of Community DevelopmentCredit Unions’ own Capitalisation Programme has increased by over350 per cent in the past five years to a fund of over $25 millionunder management which places over $5 million a year of newmoney with its members – including $3.5 million in non-memberdeposits, over $1 million in secondary capital to build net worthand reserves, and over $330,000 in equity grants.

15 Evers, J. and Reifner, U, (1997) The Social Responsibility ofCredit Institutions in the EU, Institut für Finanzdienstleistungen,Hamburg, 1998. Also, Cohen, R. (2000), EnterprisingCommunities: Wealth Beyond Welfare, report of the SocialInvestment Task Force to the Chancellor of the Exchequer, UKSocial Investment Forum, London.

16 Bethex has also recently merged with four smaller low-incomecredit unions in the Bronx. As a result through one of thesemergers and a community regeneration partnership with the HuntsPoint Economic Development Corporation, it has expanded itsbranch network to four offices.

17 Among its 4000 members, the Lower East Side People’sFederal Credit Union has 400 (11.5 per cent) on the cash paymentservice and 700 (20 per cent) on the chequing account. For those

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with only one bill to pay, money orders are cheaper than thechequing account and credit union staff advise members on themost cost effective system. For the cash payment service,commission income to the credit unions from Consolidated Edison(for electricity) is 60 cents a transaction. Cash withdrawal can beobtained at the branch offices and through a steadily growing rangeof cash machines being developed by Bethex and the Lower EastSide People’s Federal Credit Union.

Chequing account services that Bethex operates are $5 per monthfor unlimited cheques, but members need to have a minimumsavings level of $100. LESPFCU requires a minimum saving level of$250 with 10 checks free per month. The minimum saving level isset to limit households from bouncing checks which cost $20 toprocess. LESPFCU members with saving of over $750 either intheir saving or their chequing account (i.e. the combined total ofboth accounts) pay no chequing account monthly fee. The saverstage is thus an important critical one for community developmentcredit union financial health and member well-being asaccumulated saving balances assist the member in three mainways: (a) to avoid transmission charges for payment services; (b) toqualify for loans; and (c) to build up assets.

18 This national finance mechanism provides a partial loanguarantee to encourage community development credit unions toprovide short term loan facilities to counter predatory lendingpractices in the ways the ASI Federal Credit Union (and, inCleveland, Ohio, the Faith Community Credit Union) have shownfeasible. By the end of 2002 the National Federation of CommunityDevelopment Credit Unions had committed $450,000 in PRIDEs.

19 The cheque cashers agreed to accept savings payments intoBethex accounts, to withdraw funds, and to cash a Bethex chequefor free, with Bethex paying the fee.

20 Fuller and Jonas have previously argued for a more diverseapproach to local development. See Fuller, D. and Jonas, A. E. G.(2002) Institutionalising Future Geographies of Financial Inclusion:national legitimacy versus local autonomy in the British CreditUnion Movement, Antipode, 34: 1, 85-110.

21 A similar strategy has evolved in the past two years inNewcastle upon Tyne. Duncan Fuller and Mary Mellor of theUniversity of Northumbria were invited to carry out somecommunity based research with locally hired researchers on councilestates in West Newcastle. The focus of the brief was to find outwhat financial services were required. The research involvedconsultation with old people, young families, teenagers and a widerange of ethnic minorities. Out of this work, a project calledFinancial Inclusion Newcastle (FIN) has emerged, bringing togethermoney advice, debt help and credit unions in a collaborative way.Both the local Citizens Advice Bureau and the local credit unions in

West Newcastle have joined FIN to make it work. Services availablethrough FIN include:

� money advice and debt counselling;� basic Bank Accounts in partnership with the high street banks;� insurance;� business advice and micro-enterprise loans.

FIN has raised funds from the New Deal for Communities to fundthe equivalent of 2.5 staff for the credit unions to operate frontoffice provision and additional funds for a shared debt counsellorservice through the CAB, a business advisor for all the credit unionsto deliver small business loans and a shared administrator.Additionally funding has provided three of the community creditunions with shop front premises in good locations. Lloyds TSB hasalso provided a capital grant for a loan guarantee fund to helprefinance high cost loans from doorstep creditors.

22 The Social Exclusion Unit’s Policy Action Team 14 report,published in 1999, recognised the role that community creditunions could potentially provide in Britain in reducing financialexclusion. Following the recommendations of this report, theGovernment has taken action to reduce financial exclusion inseveral ways:

� requiring the introduction of basic banking accounts by allmajor banks and building societies;

� furthering the development of the Universal Banking Service toensure that the Post Office network can operate more in futureas a provider of financial services to all households;

� modernizing credit union legislation to enable faster growth inareas of disadvantage;

� ensuring, through the Housing Corporation and the LocalGovernment Association, that Registered Social Landlords workwith the insurance industry to promote low-cost householdinsurance that is integrated with rent payments;

� developing financial education and literacy initiatives: throughschools, the Financial Services Authority and through theCommunity Finance and Learning Initiative;

� supporting through the Social Investment Task Forcerecommendations and the Department of Trade and IndustryPhoenix Fund, the growth of Community Development Financial Institutions.

23 This is likely to be the case here as well in the UK – anoutcome which will be financially costly for the Government oncethe subsidies from the banking industry for the Universal BankingService expire after four years. The British Treasury have studiedthis experience but it has not been noted to date how communitybased credit unions in the USA have been helpful in tackling manyof the problems with lack of cash machines in low income areas inmany American cities and isolated rural towns. Quite literally, they

49�

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could provide in Britain a third and different way than either theBasic Bank Account or the costly Post Office Card Account.

24 The Financial Services Authority has also reviewed theexperience to date with Basic Bank Accounts which have operatednow for the past two years and the empirical evidence shows thatthese no frills accounts are being taken up but not reaching themost financially excluded very well.

25 Again the Treasury pilots are exploring the financial literacyaspects but have not closely examined the striking success of thecommunity development credit unions with Individual DevelopmentAccounts as independently evaluated by Michigan State University.The Ford Foundation has funded community development creditunions to further develop these financial literacy programmes thatuniquely reach the poorest American households.

26 The new Community Development Finance Association (CDFA)set up in April 2002 seeks to support the development of thefollowing 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 CommunityDevelopment Finance Association during its incubation period overthe past four years has long recognised the potential forcommunity development credit unions to emerge and develop herein the UK.

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

28 Targeting only low income members would not work forcommunity development credit union development as averagesavings levels would be too low and transaction costsunsustainable without ongoing subsidy or high charges tocustomers.

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

of low income designation. Community development credit unionmanagers are certainly not required to monitor and means testtheir members but the regulator could require this if cause to do sowas found.

29 The regulator has from time to time set up a special Office ofCommunity Development Credit Unions to further communitydevelopment credit union growth.

30 As with any enterprise, to grow fast, they will need adequatelevels of capitalisation and start up investment. Unlike with CDFIs,(the investment agencies supported by the Department of Tradeand Industry’s Phoenix Fund for business lending), because creditunions can take deposits, the investment requirement is less forloan capital and more for ‘people power’, IT and other forms oflong-term and quasi-equity or secondary capital.

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

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

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

The New Economics Foundation (NEF) is an independent think tank, with anunparalleled record of social innovation. NEF exists to promote a "new” economy -one which is people-centred, delivers quality of life and respects environmentallimits. It has taken a lead in establishing initiatives such as the Jubilee 2000 debtcampaign, the Ethical Trading Initiative and the UK Social Investment Forum. NEFwas 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 NationalConsumer Council 2003.

The New Economics Foundation and the National Association of Credit Union Workers gratefullyacknowledge 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 NationalAssociation of Credit Union Workers is in no way connected to the National Consumer Councilwhich has only contributed to the text of this report