Damien English (Meath West, Fine Gael)
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I welcome from the Irish League of Credit Unions Mr. David Matthews, business unit manager, and Mr. Kieron Brennan, CEO. From the Credit Union Development Association I welcome Mr. Kevin Johnson, CEO, and Ms Elaine Larke, head of legal affairs and compliance. From the Credit Union Managers Association I welcome Mr. Sean Murray, training director and CEO of Naas Credit Union, and Mr. Gerard McConville, CEO of Dundrum Credit Union. The delegates are present to discuss the issue of access to finance for SMEs.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I thank the delegates for facilitating us in changing the date of the meeting. There is a clash between this meeting and the taking of questions to the Minister for Jobs, Enterprise and Innovation on the floor of the Dáil. The spokespersons of Fianna Fáil and Sinn Féin are tied up in the Dáil, but they might pop in if they get a chance. They have sent their apologies.
This is part of a discussion we have been having on SMEs in the past couple of months and we are to finish our report in July. All members will be reviewing what is discussed today. They might miss the presentations, but they will certainly be able to read the transcripts. They might contact the delegates with questions afterwards, if that is acceptable.
We will begin with the presentation of Mr. Matthews who is to be followed by Mr. Johnson and Mr. Murray.

Mr. Kieron Brennan:

Let me make a brief interjection. I thank the Chairman for the invitation to speak to the committee. We will start by giving some general background information on credit unions, the league and the services credit unions offer to the SME sector. We will then discuss some of the reasons lending to SMEs comprises such a small part of our current lending portfolio. Some of these reasons are internal to credit unions and some are external. We will set out two possible solutions that we have identified that could help credit unions to become more involved in providing finance for what is a vital sector in the future economic prosperity of the country.

Mr. David Matthews:

Mr. Brennan and I work for the Irish League of Credit Unions, the largest trade and representative body for credit unions in Ireland. We have 376 affiliated credit unions in the Republic, all of which are regulated by the Central Bank of Ireland. We have approximately 100 more in Northern Ireland. Credit unions in general have approximately 3 million members on the island. This is the largest rate of penetration of credit union members anywhere in the world. We have assets of approximately €12.8 billion, of which only approximately €3.8 billion are represented by loans. This is a figure we would like to increase substantially. When we factor in liquidity and prudential requirements for credit unions, we estimate that we have roughly €5 billion of funds that are currently invested, mainly in deposit accounts in banks, that we would like to see put to better use, particularly in lending. Lending to the SME sector could be a significant aspect. Our long-term viability depends on achieving significant or reasonable loan growth in the medium to longer term. We want to and need to lend and have funds to do so.

It is fair to state our primary market in both savings and loans is the personal market. However, SMEs can be members of credit unions and, as a consequence, borrow from their local credit union. This applies, irrespective of whether the SME is a small sole trader or a more complex organisation such as company. Credit unions have always lent into this sector to some extent. However, we estimate that no more than approximately 5% of our total loan book is with the SME sector. Given our community and local focus, that is a very low figure.

In general, it is important to note that credit union loans represent excellent value, both for personal and business borrowers. The average rate of interest is just over 10%. That interest rate incorporates all charges. We do not have interest penalties and the like. Therefore, the product is good value.

I will outline some of the roadblocks and try to explain why we are not more involved in lending to SMEs. It is partly attributable to inertia in the sense that, traditionally, the private or personal market has been our primary one. If a business person or his or her financial adviser is thinking about a loan, the credit union is probably not his or her first choice or the first organisation that comes into his or her head. Every credit union is an independent legal entity, free to make its own business decisions, subject to law and regulation. A result of this is that credit unions are free to decide, as a matter of policy, whether they want to get involved in commercial or business lending. Many have decided not to do so, perhaps because they have identified that they do not necessarily have the skills to assess business loans. They may consider the risks are too great, or that the cost of acquiring the necessary skills is too high. These are some of the reasons we are not very much involved in the market.

In addition to internal roadblocks, there are some external ones. Loans to SMEs are riskier by their nature. As a result of the financial crisis, credit unions have a low appetite for risk. If they were to become more involved in the commercial lending sector, they would face additional scrutiny by the Central Bank. Some may have decided they do not want this. These are some of the reasons we are not very much involved in lending to SMEs.

Another major roadblock is that over half of credit unions have some form of lending restriction from the Central Bank. Most of these restrictions include some kind of prohibition on commercial lending. In this context, commercial lending can include personal loans to self-employed persons, in addition to business and community-type loans. Even where there is no restriction on commercial lending, most credit unions have a monetary restriction. That limit would preclude any meaningful lending to SMEs, particularly when personal loans to the borrower must be factored in as part of these limits.

Having spoken about the roadblocks, we would like to mention a couple of possible solutions or ways of overcoming them. Credit unions could use the expertise in county enterprise boards around the country. A small number of credit unions have done so to a limited extent. In a nutshell, the credit union performs a preliminary review of a business loan application. If it believes the application is a runner, it refers it to the local county enterprise board which can provide direct support, be it through a financial adviser or otherwise, and assist in preparing business plans or making financial projections. If necessary, it can provide ongoing mentoring for the SME to help it to develop. The decision on whether to grant a loan is a joint one between the credit union and the county enterprise board.

This system has worked in Kilkenny in recent years as part of an arrangement between St. Canice's Kilkenny Credit Union and Kilkenny County Enterprise Board. In this case, the credit union set aside a fund of €2 million for loans. It considers applications for loans of between €10,000 and €40,000. To date, over 55 applications have been approved, totalling just under €1.2 million. This represents an average loan of approximately €21,000 or €22,000. Around two thirds of these loans are approved, which is a relatively high rate of approval. We estimate that there are approximately 129 jobs associated with the projects. The outstanding amount on these loans is approximately €439,000, which is small in the national scheme of things, but it could be a lot bigger if the arrangement was extended to other credit unions. From anecdotal evidence, the vast majority of loans perform well. The scheme could be extended to many other credit unions, particularly if there was some form of guarantee available to reduce the risk to them.

The second suggestion is to allow credit unions to invest in a fund that could be lent to SMEs. The idea is that credit unions would invest a limited ring-fenced amount of money, probably related to their reserves, that would be managed centrally by an appropriate body with the skills to lend to SMEs and manage business loans on an ongoing basis. This kind of system would help to get over the variability of services or skills within credit unions and, to some extent, help to get over the lending restrictions.

It would allow all SMEs in all parts of the country to benefit even where local credit unions were unable to lend directly. While such a scheme would require Central Bank approval, it would be a very popular option for credit unions, particularly if there was some level of guarantee to reduce their risk.

We are in the business of lending, which is our primary source of income. We want to lend and have the money to do so. SMEs need funds and they have a vital role to play in underpinning prosperity locally and nationally. Credit unions can be part of a solution. We would welcome continued engagement with relevant Departments in this regard.

Damien English (Meath West, Fine Gael)
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We will take questions after the presentations have concluded. I invite Mr. Kevin Johnson to make his presentation.

Mr. Kevin Johnson:

We are grateful for the invitation to share our thoughts on current activities and a possible way forward. I am CEO of the Credit Union Development Association, or CUDA. I am joined by my colleague Ms Elaine Larke, who is our head of legal and compliance. CUDA is the only legally incorporated representative association for credit unions in the Republic of Ireland. Current membership comprises 25 credit unions serving a combined membership of over 400,000 members, with a combined asset base of approximately €2 billion.
The most appropriate way to start is to share thoughts on how SME or commercial lending occurs in the context of credit unions. Section 6(2)(b) of the Credit Union Act requires credit unions to create sources of credit for the mutual benefit of their members at a fair and reasonable rate of interest. Some credit unions inform us that in meeting this legislative requirement their lending policy includes personal loans to individuals to enhance and support their business objectives. For example, a loan may be given to a local farmer to purchase farm machinery or to a taxi driver to upgrade his or her car. Lending to sole traders and micro-businesses is more prevalent than the committee may be aware, as it is not necessarily recognised or acknowledged as SME lending due to its personal-lending basis. Before describing three examples of the ways in which credit unions currently provide support to the SME sector, I emphasise that this is not a core business for credit unions. In fact, it accounts for only a small percentage of the loan books of those credit unions that provide such loans. It is not intended that it will become a core business.
The first of the three example formats is the traditional personal loan to a member of a credit union which he or she uses to invest in, or replenish, an asset. The committee will be accustomed to this type of credit union finance where standard interest rates apply and the loan term normally matches the lifespan of the asset being purchased. The second format is a scheme presented in conjunction with a local enterprise board. The committee may not be as familiar with this practice. This is where a credit union or group of credit unions develops a fund to lend from, which may vary subject to demand. The scheme will normally have a minimum loan amount in the region of €5,000, while the maximum amount tends to vary from €25,000 to €40,000. In many cases, the interest rate will be less than the standard rate applicable in the credit union. These loans are for working capital as well as for capital assets. It is important to note that the loan contract is with the individual, not the company. These are therefore personal loans. All applicants undergo an initial screening process by either the credit union or the enterprise board. Applicants who proceed to a full application will, in the first instance, be assessed from a personal credit perspective by the credit union, which will then refer the application back to the enterprise board for review and evaluation. The credit union retains ultimate authority to approve the loan. Unfortunately, these schemes have not flourished either because the Registry of Credit Unions has deemed them to be inappropriate for credit unions or restrictions have rendered it impossible for them to continue. We will return to this point later.
The third and final example is where a credit union provides premises on favourable terms for start-up businesses. For example, a credit union purchased a site and built an enterprise centre. A separate company was established to govern the centre, which consists of a variety of different-sized units. The board of directors for this company has seven directors - four from the credit union and one each from the local authority, Enterprise Ireland and the local community. The purpose of the units are to provide start-up companies with a base to operate from while enjoying a favourable rental arrangement. Start-ups benefit from a package of professional business mentoring and Enterprise Ireland supports to improve their chances of success. The building remains as a working asset of the credit union. Over the years, the occupancy has remained high while rental payments have performed exceptionally well. CUDA is very supportive of trying to grow and develop these initiatives.
There are a number of challenging factors which currently curtail or prevent SME lending by the credit union, including the quality of SME lending applications. Some credit unions have had negative experiences in the area of small business lending - especially with start-up enterprises - which has forced some to deem this type of lending to be too risky. We are informed by experienced credit unions that many of the SME borrowing applications received are unrealistic having regard to current economic conditions and underlying levels of demand. When consulting with our members in preparation for this meeting, one credit union with a long history of supporting small start-up enterprises stated:

There are examples of existing businesses that have not faced up to the impact of falling demand for their business and which seek to augment reduced retained earnings with increased borrowings.

The Act allows credit unions to provide a broader range of services, and different classes of lending. Providing new services, or simply enhancing existing offerings, will assist credit unions in attracting members who wish to borrow and thereby support the survival of the credit union while also helping SMEs.

As part of this process, it is critical that the Registry of Credit Unions puts in place a transparent and clear set of rules and standards for credit unions. Transparency must be an inherent part of the tiered regulatory framework. It is important that credit unions have sufficient guidance and information to enable them to be compliant and to take immediate corrective steps should they experience any deviation. Clarity will help mitigate any concerns about possible subjective behaviour in the past where regulators have been accused of erecting artificial and unnecessary barriers to operating.

It is also worth noting that during recent Dáil debates, the Minister for Finance, Deputy Noonan, noted that “about a dozen individual credit unions have lending restrictions that limit the amount loaned to less than €10,000”. The information was based on information supplied to him by the Central Bank. He then added that as the average loan of many of the credit unions is €6,000, credit unions can continue to make loans significantly greater than the average loan for the sector. In the event that the Central Bank is providing this analysis, it is extremely unfortunate that the opportunity was not taken to also explain the impact being experienced from the extension of such restrictions to encompass connected persons. We are informed that this is the aspect that is having most impact on credit unions that have such restrictions placed on them. In that instance, loans are limited to €10,000, or even €25,000 across a section of connected credit unions members. Also, it is not unusual for a credit union with a lending restriction to include a blanket ban on commercial lending, which is defined as a loan for the purpose of generating income that will be utilised to repay the loan, thereby ruling out all SME-related lending.

In the current climate, the greatest fear relating to any expansion or involvement in SME lending is the actual or perceived risk associated with such lending, coupled with uncertainties in the likely approaches or regulatory restrictions adopted by the regulator that would limit a credit union’s entrance or continuance in this sector. In terms of the way forward, credit unions could facilitate SME financial education. Many credit unions would be willing to work with the many interested stakeholders involved in the SME sector, in particular those focused on the small businesses and microbusinesses, to facilitate education events that ensure entrepreneurs can construct an appropriate strategic plan.

The second is to develop the required expertise in credit unions. A recurring theme from our member credit unions is the need to develop new areas of investment and revenue stream. Some have a greater risk appetite for SME lending than others and this is related to the varying degree of expertise and commercial underwriting skills and experience within the credit union. However, SME lending is not, and will not be, the core business of a credit union and for the vast majority it would take time to develop resources to perform underwriting and the necessary asset and liability management functions. To a large extent that would involve training and-or employing the necessary skills required.

The Commission on Credit Unions emphasised that there is scope for better and closer co-operation and co-ordination among credit unions towards shared services and standardisation of processes. Credit unions that do not have the necessary skills or manpower could benefit from obtaining back office support from those credit unions that have developed the required underwriting expertise for business lending, while boards of directors ensure they can comply with the rules governing outsourcing of services.

The third is to reduce the risks and to consider providing funding as an investment. A more attractive and immediate way forward for credit unions, especially where the relevant expertise is not present, is that such lending forms part of their investment portfolio and the capital is provided through a central or local government agency, such as the local enterprise board.

Damien English (Meath West, Fine Gael)
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We are running short of time.

Mr. Kevin Johnson:

Going back as far as 2009 we set out a paper on how such an investment bond could be utilised. I would be more than happy to share that information again. In terms of Government plans and guarantees, credit unions should be factored into those plans. If the committee, as part of its recommendations, deem it appropriate to establish a work group to further explore and implement any of its findings we would be willing to actively engage in such an initiative and give our resources to that.

Damien English (Meath West, Fine Gael)
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I apologise for rushing Mr. Johnson at the end.

Mr. Sean Murray:

My name is Sean Murray. I am the CEO of Naas Credit Union. I am also a director of education and training for the Credit Union Managers' Association, CUMA. I am accompanied by Mr. Gerry McConville, CEO of Dundrum Credit Union and a member of the Credit Union Managers’ Association. CUMA thanks the committee for the invitation. We welcome the opportunity to discuss SME lending, the important role the SME sector plays in the country and how credit unions can lend to the sector.

CUMA is the professional organisation for credit union managers in Ireland and it has 250 members. Our aim is to support credit union managers in their role and to offer best practice guidance, training and, where appropriate, representation on issues that affect them. We believe in and are passionate about a strong well-run credit union sector in Ireland. Credit unions are personal lenders and we exist in communities to provide a safe place for the community to save and to provide access to credit for those communities. Today, credit unions are modernising and providing more essential services and that development will continue. There is massive strength in credit unions in Ireland. Membership is significant with more than 3 million members on the island. While not without challenges, credit unions have operated successfully in recent years.

A number of strategic challenges face credit unions that we believe are relevant to the committee today. First, there is a lack of demand for credit in the economy, which resulted in credit union loan books falling. There is also a changed regulatory landscape which means we need to operate differently in the future environment. There is an urgent need for credit unions to grow our loan books in a sustainable and quality way. The SME sector is a very important one for credit unions. We already provide significant lending to the sector. Significant numbers of our members are employed by the SME sector and the income they receive from their jobs help them to pay their loans and support strong and vibrant credit unions. We believe that having a strong and vibrant SME sector will enhance all the credit unions in Ireland.

There is an opportunity for credit unions to lend to the sector. We welcome that fact. Lending to the sector is almost a natural extension of the credit unions' existing market. Already, we provide significant loans to SME owners and business owners for their personal financial needs. In addition, credit unions also offer on a small scale, capital loans and even working capital loans for some businesses. I meet many SME owners on a regular basis who tell me that without the credit unions they would not be in business today, and that the loans they got from their credit union have provided them with the necessary resources to start or to sustain their businesses.

A number of credit unions have already entered the market in a structured way. I can point to three examples later on which we can have further discussion. SME lending by its very nature is much more risky and has a higher level of risk. Credit unions, on the other hand are conservative and our job as managers in credit unions and directors of credit unions is to lend the members' savings. Therefore, we must ensure that we lend those savings in a way that has real responsibility; that the loans are lent prudently and sustainably. SME lending is not without challenges for credit unions. The necessary and specialist skillset is required to consider business plans and projections. Understanding of the sector and the specific business opportunity of the SME is vital. It is fair to say that those skills exist in a limited way in credit unions today, but there are also distinct advantages of the credit union model.

I ask myself what makes one SME more successful than another. Perhaps it is the idea, the plan, the opportunity or perhaps it is luck but quite often it comes down to the willingness of the SME owner to make it work. Credit unions' independence and local nature are our greatest strengths in that respect and they allow us to understand our community, the people to whom we lend and the business to which we lend. Local knowledge of the borrowers is a very important aspect of the loans and while a centralised underwriting model might limit discretion in some cases, credit unions can make quality lending decisions with the right resources.

While a centralised underwriting model may limit discretion in some cases, credit unions can make good lending decisions with the right resources. This type of lending is high-risk and not all credit unions will engage in it. Credit unions need to invest in the expertise, systems and processes required to lend to this market. The experience thus far of a number of credit unions which have entered the space of SME lending has been mixed.

Credit unions in Dundrum and Kilkenny engaged with their local enterprise boards to provide loans to SME owners. In Waterford a similar model was developed, with three of the city's credit unions partnering with the enterprise board to offer funds to the SME market. These initiatives were successful in their own way but they were not sustained in some cases. The challenge of providing the expertise and resources to properly underwrite loans, which is linked to ensuring that decision makers on businesses and loans were also the people who were lending the money, meant that the models were not sustainable. However, a key feature of the models was the aftercare and support provided through partnerships between the enterprise boards, the credit unions and SME owners.

CUMA would like to present three options for the committee to consider in regard to supporting the goal of providing credit to the SME sector. Consideration should be given to extending a partial guarantee for enterprise-based lending to individual credit unions. Where credit unions have already established partnerships with local enterprise offices, they can leverage the great work done by these offices. This model would achieve the goal of lending to the SME sector, and acceptance of the guarantee could be accompanied by opening up a percentage of credit union loan books for this type of lending. This would require the credit unions concerned to develop the skills and resources and to invest in them on an ongoing basis. Local links between credit unions and local enterprise boards would facilitate the acquisition of these skills and the guarantee would help to mitigate the risk appetite for individual credit unions.

Engagement with local enterprise boards has been a very positive experience for a number of credit unions. However, it is not a complete solution. Enterprise boards are excellent at encouraging enterprise but by their nature they involve risk-taking activities. The final decision on whether to grant a loan application is based on the risk presenting to the credit union. Given the existing lack of resources available to credit unions, it may not be easy for them to acquire such resources in the future. This creates a significant barrier to the expansion of lending activities to enterprise.

Consideration could also be given to the development of a co-operative organisation with the resources, systems and skills necessary to consider and underwrite SME lending. This model would see a central company taking referrals from individual credit unions on SME lending opportunities. The central company could complete the assessment in line with agreed criteria, including the local knowledge of the credit union. The co-operative would take a portion of the risk on the loan but could also access the State guarantee and State support for funding. Resources and skills would thereby be centralised and available for all credit unions to access, and individual credit unions could refer their members to the co-operative. This model would need to link with local enterprise organisations to ensure that it properly supports the market. A final benefit of the model is that it would protect credit unions by spreading risk across the sector and allow them to take a diversified view of lending opportunities.

The third and final option is more widely applicable and would involve the Government raising an enterprise bond from credit unions to be used by a State-backed organisation that could lend onwards to SMEs. Credit unions would not be directly involved in credit assessment and underwriting but could refer SME owners to an enterprise bank. This would have the most immediate and countrywide application, because credit unions currently have significant excess liquidity. Every credit union could invest in the bond, allowing the State to leverage credit union capital and enabling lending to the sector.

The development of any lending support to the SME sector would require an engagement with the Central Bank in order to obtain approval for the model. The support of the partial guarantee, along with credit unions' demonstrating the necessary skills and resources to manage the risks of such lending, are key to achieving that approval. It should be noted that successful models exist in more developed credit union systems. In the US and Canada, for example, credit unions are significant lenders to the SME sector, and there is no reason this cannot be developed in Ireland. CUMA welcomes this initial dialogue and would encourage ongoing communication with all stakeholders.

Damien English (Meath West, Fine Gael)
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I thank the witnesses for their informative presentations. It is clear that money can be made available through the credit unions to invest in SMEs. It is a question of developing a mechanism to invest at a higher volume. Mr. Johnson might provide the paper that he published in 2009 to the committee.

John Lyons (Dublin North West, Labour)
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It is refreshing to hear from representatives of the credit unions. I like the idea of the enterprise bond, given that there is liquidity to use. That option deserves further investigation. A question that arose in regard to all of the witnesses' presentations, and which Mr. Murray addressed to some degree, pertains to the expertise required in credit unions to decide on these loans. I understand there will always be applications from, for example, taxi drivers who need to replace their cars. That is a concrete example, but we have learned that the banks still lack the relevant skills to deal with this area. I acknowledge, however, that they have committed to upskilling their staff to deal with new business types that are becoming the norm. These new business types are currently unfamiliar to them and it is difficult to assess a business concept if one lacks expertise in the relevant areas. If a 22 year old individual presented with a plan for the next Google, how do the witnesses propose to deal with him or her? I accept the point that the local enterprise offices can help, but witnesses in previous sessions have questioned whether the local enterprise offices possess the requisite skills. I do not expect the witnesses to have the answer today because it is an issue that has yet to be addressed. Even the banks have not upskilled their staff adequately, and a solution still needs to be found. Perhaps the credit unions are in a better position in this regard.

If countries such as the US and Canada can provide successful examples in this regard, perhaps the committee should investigate these examples further when we prepare our report. My question on expertise is meant in the best possible sense, because every lender appears to be struggling with finding ways to support people who are coming to them with innovative ideas in sectors with which they are only now becoming familiar.

Mr. Sean Murray:

Recognising that a problem exists is the first step in addressing it. As the CEO of a credit union, I recognise the challenges involved in assessing a significant proportion of SME lending. That is why I have noted those challenges in my presentation. There are, however, international opportunities for credit unions and banks to understand the business models that would be involved.

It is fair to say that the solution a credit union might present may not look at the next Google. It is important that the appropriate types of finance are used for the appropriate enterprises as well. I would not try to say that credit unions could achieve a level of expertise and experience in assessing and underwriting loans that might lead us to the next Google, but we certainly would be in a position to support indigenous SMEs. It also comes down to the level or risk and the level of finance required. Where one is looking at significant amounts to invest in a business, again one has to look at what is appropriate. As I understood the brief coming in this morning, it was to talk about the smaller level of lending that credit unions do and are familiar with.

One of the unique features of credit unions is that fact that we are local and our knowledge of the people to whom we are lending. While it is important to understand the business and the sector, it is equally important to understand the person one is lending to, his or her character and whether he or she can make it a success.

Mr. Kieron Brennan:

I will come back to Deputy Lyons on country enterprise boards, CEBs, which are being subsumed into LEOs, and how they can contribute, as well as the partnerships we have referred to in a number of examples such as Kilkenny and Dundrum where credit unions and CEBs have come together. Such a board provides two broad types of support to make that work. One is the underwriting of the credit assessment. The boards, more so than the credit unions, are best placed to have knowledge. They have evaluated grant applications to support business for years and, therefore, they have the technical expertise to plug in. More important, they have a range of supports for the 19 year old with the next Google when he approaches them and that includes, for example, mentoring panels in some cases. Many of them have volunteer panels comprising business people or senior managers who can partner on a voluntary basis with those small companies, give them encouragement and expertise and shepherd them through the process.

Beyond that, there is a range of existing supports under the CEBs. This means three pieces are plugged together - the traditional support from the CEB for an emerging business; voluntary mentoring of emerging businesses; and the credit union with the financial piece - all of which, as my colleague said, involve risk for the credit union. Anything that mitigates the risk would be welcome.

Mr. Kevin Johnson:

This type of lending is not for all credit unions, but it is for some, and we need to keep this in context. Credit unions are going through a significant transition; that is why I made reference to all the new requirements. Credit unions have to have risk management functions, compliance officers and internal audit functions. All of these additional skills are coming in on top of the local knowledge and expertise of the chief executive officers and managers. It must also remembered that the boards of directors comprise people who come from many different walks of life within the community and bring that experience into the frame. That is an added advantage that the credit union has over other lending institutions.

John Lyons (Dublin North West, Labour)
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Will Mr. Johnson explain the voluntary element of credit unions? Are most day-to-day staff in a standard credit union voluntary?

Mr. Kevin Johnson:

No. The structure is simple. The management and staff are professional, paid employees. The board comprises volunteers, who are experts who give their time pro bono. That is not to be confused with the Corinthian spirit. Many volunteers bring a great deal of expertise to the credit union.

Damien English (Meath West, Fine Gael)
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Much of the change in credit unions has happened over the past three years. There are many additional requirements for ILCU members to have particular skills and qualifications to be able to sit on the board. Credit unions, therefore, are much better equipped to take this role on.

Seán Kyne (Galway West, Fine Gael)
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I welcome the delegation. I recently met representatives of St. Columba's Credit Union in Galway at the SCCUL enterprise awards. A number of board members commented on the funding available within a credit union to invest and said they would like to use Government or investment bonds. However, such proposals add to the general government deficit, whereas the Government wants initiatives to be off-balance-sheet.

I would like to address a number of questions to Mr. Murray. The collapse in confidence in the banks over the past number of years has given a stimulus to credit unions. Can this be maintained? Many credit unions are independent. Does there need to be greater co-operation between them in order that they can grow, meaning individual credit unions would have to have confidence in their neighbouring credit unions in terms of regulation, management, corporate governance and so on?

Mr. Matthews mentioned St. Canice's Credit Union initiative with the CEB in Kilkenny. Was that pilot scheme initiated by the credit union or the ILCU?

Mr. Murray mentioned that rural credit unions know their customers and their character and creditworthiness. Does he think, therefore, that if they began to lend to SMEs, they would be taking on clients refused by the banks? On the one hand, the risk would be increased, but on the other, the credit union would know the people who are applying.

CUDA is much more reluctant to get involved in this area than the ILCU. What is the reason for that?

Mr. Sean Murray:

I thank the Deputy for his questions. In terms of stimulus, it is a fantastic opportunity for credit unions. Enormous trust has been built between members and their credit unions over the past number of years. By being co-operative in nature and by always making the right decision, credit unions ensure that trust is maintained. There is an incredible opportunity for credit unions now, and in time, with the right structures in place, I see no reason they could not be the first choice. It is the ambition of many credit unions to be the first choice in the community for personal finance. Given time, with a strong offering in the SME sector, there is also no reason they could not be the first choice in that respect.

There is always room for additional and much more coherent co-operation between credit unions to mitigate risk. Co-operation does not increase risk; in many ways it can reduce it. Model 2, which I presented earlier, is about co-operation. Credit unions co-operate together with a central body which has the necessary skills, experience and expertise at a much greater level than can be achieved in individual credit unions, and by enabling such a body to come together, that would allow credit unions to access that market and potentially be the number one in that space.

Mr. David Matthews:

The St. Canice's Credit Union scheme was a local initiative and it was not part of a pilot. It has worked well. The partnership aspect between the credit union and the board has worked well and the loans have generally performed well.

That is due to the partnership side of it and the assistance that the county enterprise board has been able to give, so the credit union has plenty of confidence in it as a scheme.

Mr. Kevin Johnson:

On the Deputy's question about our attitude towards getting involved in the investment side, our view is that the most short-term, immediate approach is the creation of some form of bond which completely takes the risk away from the credit union side. We would be very supportive of that. We have promoted that idea since 2009. Credit union funds are not earning anywhere near as much as we would like, so this is a very productive use of the funds. It would be more than just a fund. Other witnesses have referred to the lack of awareness of many of the Government-supported schemes. That is certainly a role which we think credit unions could play as well. Without adding any risk to their own balance, they could certainly contribute meaningfully to a community. There are therefore two aspects to this: there is the investment itself, of which we would be very supportive, and the assistance with using the administrative support that is available. There is therefore plenty of potential. Whatever initiatives the committee might recommend and want to pursue, we would be very happy to participate in them.

Anthony Lawlor (Kildare North, Fine Gael)
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I thank the witnesses, particularly Sean, who happens to look after my loan. What has gone on in the Naas Credit Union, particularly during the past two or three years, has been nothing but outstanding. I have attended a number of AGMs and I am delighted to see him here today. I have a couple of questions. What happened during the banking crisis, and to a certain extent the credit union crisis, was the close linkages made between boards, management and the people who were borrowing money. People who received money should never have done so. A lot of the boards are made up of local people. Do we need to make stronger regulations in regard to the role of boards in credit unions?

I love the idea that the credit unions are linking in with the LEOs and using their expertise. LEOs have a limited fund; that is the problem with a lot of them. A lot of good ideas come from entrepreneurs who go to LEOs. Instead of five or six credit unions all coming to use the expertise of LEOs, could it perhaps be done on a county basis, so that LEOs could direct their services to particular credit unions?

Could the Government guarantee be a more partial guarantee, rather than a full guarantee, so that some risk was being taken by the credit union as well? That might make it more likely that whoever one was lending money to would repay it.

Another matter to have been alluded to, and it probably came up in the situation which arose in my area, was amalgamation of credit unions. This is more to do with what John was talking about earlier, namely, expertise. It is not possible for each credit union to have all the expertise. Perhaps the credit union movement could work together to create another level, whether on a county or a regional basis, where the expertise could be pooled. For example, if someone were to come to a manager such as Sean with a good-quality idea, he might not have the expertise to assess it properly, but there might be another level up. It might not be the LEOs that had the expertise, but it would be at the next level up. I know that people might say that it was becoming more like a bank. What has happened in the banks is that the local level does not have the same influence in the decision-making process, but here the local credit union could have a stronger influence but also get expertise from a level above that, rather than each credit union having to go out and source their own expertise.

Some of the ideas being put forward are excellent. The question is how we progress them further. I hate seeing people coming to this committee and it becoming more of a talking shop than something that facilitates. I believe that the credit unions have some €8 billion available. That is a huge sum of money. Witnesses have quite rightly talked today of the ECB reducing deposit rates below 0% on overnight borrowing. Some of them have become involved in Davy's. That is highly risky. If it can be managed properly, there is potential for credit unions to lend to viable - that is the key word - or potentially viable SMEs, but I say again that the expertise needs to be there.

Mr. Kevin Johnson:

I should state first that I certainly do not think that credit unions need stronger regulations. We have plenty of them at this stage. As the Chairman rightly said, the 2012 Act has been commenced in two stages so far. Practically all its sections have commenced. Stringent regulations govern credit unions.

Deputy Lawlor referred to boards. In areas such as risk management, compliance and internal audit functions, there are direct reporting lines to boards. A greater onus of responsibility is placed on boards. Terms are being applied and there are exclusions as to who can serve on boards. There is therefore a set of rules around the governance of credit unions that goes well beyond what one will find in other financial institutions. That has been very well addressed. Credit unions are also subject to regular inspections by the Central Bank. They are called "prison inspections". So there is a high degree of oversight, internally and externally, of credit union operations. I hope that addresses any concerns that the committee might have in that area. The regulatory regime has changed significantly in the past 12 months.

Mr. Kieron Brennan:

A fitness and probity regime has also been introduced for board members, which is fairly stringent. Therefore, as Mr. Johnson has said, things have moved on considerably in the past 12 months. Were regulation to progress any further, we would be very concerned that it could become very difficult to get people to serve on boards on a voluntary basis.

Deputy Lawlor referred to a partial guarantee. Were the State to look at some form of underwriting the risk, I think that we all accept that it would have to be on a shared basis. In other words, there would need to be risk on both sides of the fence, for the credit union and for the Government. We could not expect a full guarantee.

Deputy Lawlor also asked about sharing of skills. The option of the central fund is good one, because it would bring consistency across all credit union activity in this area.

Mr. David Matthews:

That is the way to spread the risk. It just means that one credit union is not overly exposed to some problem in its own area. If it is done through a fund or a bond, the risk is well spread.

Damien English (Meath West, Fine Gael)
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An investment bond, although a good way of getting money to SMEs, does not increase credit unions' business. Do credit unions want eventually to get to lending directly to SMEs or is the preference to go the investment route?

Mr. Kieron Brennan:

For credit unions, a bond or collective investment of that nature is attractive for a number of reasons. There is a large amount of credit union liquidity sitting in banks, which is only good for the banks' balance sheets. In reality, credit unions exist to support local community development activity. Credit unions would like their funds to be invested in communities, be that through SMEs or other initiatives. For credit unions, this is not wholly about financial return but about their mission, which is a social one. The idea of a bond has been advanced for some time. As mentioned earlier by Mr. Johnson, the benefit from the credit union point of view is that it is lending to the State. As such, the risk is eliminated. As the State has a difficulty in terms of its own balance sheet and so on so various options could be considered. We are more than open to a range of different forms.

Damien English (Meath West, Fine Gael)
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The committee examined the idea of a business bank a couple of years ago.

Mr. Sean Murray:

The issue of the bond is a short-term solution. The long-term strategic solution for sustainable credit unions is to be able to lend to people. Our job is to create sources of credit for the community. Whether that is by way of personal loan or a loan to an SME is not important.

I share the view that we do not need further regulation. However, I would urge the application of existing regulation and ask that it be ensured that it is clear, consistent and transparent in terms of what is required. There is significant new regulation in place already which will prevent a recurrence of what happened in the past. It is important existing regulation is applied going forward.

On the question regarding links with local enterprise boards and the sharing of central expertise, that is a development question for credit unions. A strategic issue for us is how we as credit unions develop given our local nature. Credit union members hold dear to them the localness of their credit union. However, as credit unions we need to consider the future in terms of how we best serve those members. The model that worked in the past may not work in the future. The sharing of resources and expertise is an issue with which we are currently trying to grapple.

Michael Conaghan (Dublin South Central, Labour)
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The Irish public owe a debt of gratitude to the credit union movement. One never sees prestigious awards and so on being made to credit unions. Credit unions provide a great service for people who are not used to or are fearful of banks. I am a member of a credit union.

Our economic environment has changed. While I am sure that up to now credit unions were on a steady path, were trusted and have managed their role successfully, is there in this changing financial environment, an unease in terms of the path now to be taken? I get a sense that there is an unease within the credit union movement in terms of redefining its role in a changing economic financial environment. There have been many social changes too. I have no particular evidence of this but I sense that is the case. It would be strange if that were not the case. I am sure that owing to changing circumstances the movement is now having to review what underpinned the traditional fundamental service. I am not sure if I am making sense.

Damien English (Meath West, Fine Gael)
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I think Deputy Conaghan is trying to express the view of most members that everybody recognises the great work credit unions do and welcomes that they are seeking to play a greater role in terms of SME lending. It is not possible for us to discuss today the past and future role of credit unions.

Michael Conaghan (Dublin South Central, Labour)
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I would welcome a response on whether there is a debate within the credit union movement in regard to its past and future role.

Mr. Kieron Brennan:

There is such debate going on. However, it is necessary to put that in context. In the Republic, there are over 400 sovereign entities which may decide their own futures and who may do so on a different basis to their collective credit union brethren. A number of things are discernible. First, there is some degree of consolidation. Credit unions are under pressure from a number of angles, not least the regulatory one mentioned earlier. Other credit unions are looking to the future in terms of their relevance and the range of services they offer to their members. In this regard, they are considering electronic funds transfers and so on and focusing on the new emerging generation who are not necessarily going to queue up with a passbook on a Friday morning to lodge savings and loan repayments and so on. The relevance debate is ongoing. The credit union movement is a co-operative and democratic movement. As such, that debate will take place within the movement in an open way.

Mr. Kevin Johnson:

I echo Mr. Brennan's sentiments. It is essential in terms of the transition that is occurring that the fundamentals do not change. The raison d'êtreof the credit union remains the same, namely, to provide access to credit, which is relevant to today's debate. Current discussion is around clarity, competence and capability and on getting those three "Cs" aligned in meeting the demands of modern communities.

Damien English (Meath West, Fine Gael)
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Would Mr. McConville like to comment?

Mr. Gerard McConville:

From a manger's point of view, while regulation in this area is strict and almost all good, we do not believe we are being allowed to do the things that we want and need to do. SME lending is a part of that. We are tying to align the regulation with the opportunities available for credit unions. If we are going to be treated as professional organisations then we need to be able to do the same things as other financial institutions.

Damien English (Meath West, Fine Gael)
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Am I correct that the commission has identified a role for credit unions in this area but this is not being encouraged by the registrar? Mr. Johnson referred in his presentation to the relationship between the credit unions and the local enterprise boards not being encouraged by the registrar?

Mr. Kevin Johnson:

It was deemed for those participating to be too risky and inappropriate to their capability at that time. However, the environment has evolved. Our regulators are getting better at regulating and understanding the credit union business. I hope they will take on board all the requirements that are now being met by credit unions and that, in demonstrating those abilities, we will now be allowed to expand the services.

Damien English (Meath West, Fine Gael)
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Is it your contention that the regulation exists and that only direction and clarity in that area are required, not more rules and regulations? Am I correct?

Mr. Kieron Brennan:

You made a good point, Chairman, at the beginning of your statement. The Commission on Credit Unions set out a dual approach. One was to strengthen the regulatory framework for credit unions and the other was to enable them to do more of what they should be doing, particularly as the country needs it for recovery and so forth. What has happened at this point is that we have had one piece very fully implemented, which is the regulatory regime. It is very fit for purpose, but we must be careful that we do not have credit unions that are so well regulated that they cannot perform the function we want them to perform. Also, there remains an expectation among credit unions, both from the commission and as you indicated in your contributions during the debate in 2012, that there would be an enabling piece. It is not simply about stricter regulation, but enabling credit unions to do more, such as the subject we are discussing today. Let us collectively agree with the regulatory authorities and others involved on how we go about doing this in a collective and consistent manner. That should be happening.

Damien English (Meath West, Fine Gael)
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It is clear from all the presentations we have received on this topic over the last month or so that the financial capability of the applicant business and the standard applications are not good enough. That refers back to the amount of mentoring and business coaching required. Are you getting requests you cannot even look at or deal with? Are members telling you they need money? There are mixed reports as to whether there is a demand from SMEs. It is clear to us that there is a demand and that there is a gap in this area. What are your thoughts on that?

Is there an interest in credit unions funding working capital as opposed to asset lending? There is an issue with businesses constantly being asked to provide additional security and guarantees. One can probably eventually get money for an asset but one needs working capital and seasonal lending to survive. Most of the businesses credit unions deal with would have different requirements as the year passes. That is being missed by the players at present. Is there a desire on the part of credit unions to plug that gap?

Mr. Sean Murray:

There is no doubt that the quality of applications can sometimes leave much to be desired, but that is not to say they are all like that. There is also a high expectation. We have come from a culture of credit being available and easy to get to a culture where it is not so easy to get it, so a higher standard is required. The gap is sometimes between the expectation of people that they should get credit and the understanding that the fundamentals they are displaying might not enable them to get that credit. In some instances credit unions fund working capital, but in our experience in Naas it is more for equipment for the small and medium enterprises.

Mr. David Matthews:

Credit unions basically engage in asset finance. Working capital finance is a much more complex area anyway.

Damien English (Meath West, Fine Gael)
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Investment bonds could be used in that area.

Mr. David Matthews:

Yes.

Damien English (Meath West, Fine Gael)
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Does anybody wish to make concluding comments?

Mr. Kevin Johnson:

The Deputy asked how we should take it forward. We would be willing to work with the Department on any initiatives it might have. We would be happy to bring whatever help and expertise we can to that.

Damien English (Meath West, Fine Gael)
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I appreciate that. The committee intends to produce a report on this issue in July. We have received many presentations and there will be another one today. There will be a number of other hearings over the rest of June. We hope to give the report, which will include recommendations, to the Department. Some of the recommendations will require more work and we might refer back to you on that as well. There is an issue here but there are solutions and with a little imagination they can be applied. We will engage on that.

We hope to have the report in July, but it will be September at the latest. Hopefully, there will be action after that. Part of that work will involve us reviewing all the presentations we have received and considering the recommendations. If you have any additional recommendations, feel free to send them into us.

On behalf of the committee I thank you for attending the meeting today. No doubt we will be in touch with you again over the next couple of months.