New interest in credit unions

The Times (28 Aug o8) reports:

Credit unions, which offer savings and loans to local communities, are to be reformed next year to encourage more people to use them. 

The Government wants to make it easier for low-income households, particularly those on benefits and with bad credit records, to obtain loans so that people are not forced to turn to expensive credit cards or even loan sharks.

Credit unions are financial cooperatives owned and controlled by their members. The members are joined by a “common bond” - they may live in the same area or go to the same church. Though most unions offer good-value loans, as well as current accounts and free life insurance, they have, until now, been unable to pay any interest on savings.

Now the Government wants to scrap the “common bond” aspect of membership and allow more disparate groups to join together to form a union. It also wants to allow unions to pay interest on savings, allowing them to compete directly with banks and building societies. The proposals are due to come into effect in October next year.

There are more than 400 credit unions in Britain, providing financial services to about 400,000 members. The unions are regulated by the Financial Services Authority and covered by the Financial Services Compensation Scheme, which guarantees the first £35,000 of a member's savings if a union go bust.

A key aim of credit unions is to foster financial inclusion, by providing financial services to people who may be refused loans, or even current accounts, by mainstream providers. However, there is nothing to stop people with perfect credit records from taking advantage of a union's good deals and flexibility.

Lakshman Chandrasekera, chief executive of Southwark Credit Union, says: “Increasingly, banks are unwilling to do business with unprofitable customers. A person on benefits might not generate any income for banks and will find it hard to get a current account. Consequently, many people simply withdraw their benefits in cash and spend the money. For a charge of 95p a week to cover our costs, we give members a current account and a debit card, which allows them greater choice and control of how they spend their money.”

To find out about your local credit union, go to http://www.abcul.coop.

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