Stagnant credit unions ‘at risk of going bust’

An increasing number of the country’s credit unions could face “serious viability issues” within three years unless they significantly improve their business models, an expert has warned.

Anne Marie McKiernan, registrar of credit unions at the Central Bank, said that falling investment income and minimal growth in new lending could jeopardise the future of some credit unions. She said that these risks highlighted the “urgent need” to address the business model challenges faced by the sector.

“The biggest challenge is how to grow core loan income and volumes responsibly, following falls of over 40 per cent in both since 2008,” she said.

“Net lending is only marginally recovering after seven years of decline. Investment income, which helped offset some of the declining loan income for a number of years, is also falling in the low yield environment while cost-to-income ratios are increasing. All of these factors put pressure on long-term viability.”

Earlier this week a number of credit union representative bodies complained that stringent regulation imposed upon them by the Central Bank was putting them in a straitjacket. Brian McCrory, president of the Irish League of Credit Unions (ILCU), said that lending restrictions had constrained its members’ ability to compete for business with mainstream lenders.

Under Central Bank regulations credit unions can lend up to 30 per cent of their balance sheet in loans with a five-year term limit and up to 10 per cent in loans with a ten-year term limit. Credit Unions can also apply to the Central Bank for an extension to their longer-term lending limits up to 40 per cent of their loan book over five years and up to 15 per cent over ten years. As of last summer, 11 credit unions had been allowed to do this.

Representatives said that more accommodative lending restrictions coupled with tiered legislation for credit unions of different sizes were among their priorities.

Appearing before the Oireachtas finance committee, Ms McKiernan disputed the claim that the Central Bank was holding back the development of credit unions. She said that higher standards were expected of larger, more complex credit unions, but simpler requirements were placed on smaller entities. She added that the level of regulatory compliance among credit unions was “well below” acceptable standards.

“We are still seeing an unacceptable number of credit unions failing to display strategic understanding and good governance,” she said.

“In several cases, we have encountered limited financial skill sets and weak management; poor systems of control; weak risk, compliance and internal audit functioning; and weaknesses in credit practices.”

Ms McKiernan said, however, that the Central Bank was willing to consider amending the long-term lending limits imposed on credit unions.