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.