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.

In many cases, mainstream banks have already declined an identical application before it is presented to a credit union. Despite the economic downturn, or perhaps driven by its impact on employment and income levels, there remains a steady in-flow of members seeking to set up new enterprises, particularly in the service and retail areas. We are informed that many applications display a total absence of market research, no understanding of basic business practices and no awareness of current market conditions. Unfortunately, we are told, most of these applications reflect an expectation that optimism will triumph over reality. It would be of interest to the committee to know whether other entities such as Microfinance Ireland, which allocates funding from the microenterprise loan fund, are experiencing the same level of inconsistency and lack of preparation from businesses applying to them for funding. Indeed, the Department of Jobs, Enterprise and Innovation may also have experienced this weakness through its suite of financial schemes to assist businesses of a range of sizes across all industry sectors.
A second challenge is the perception that credit unions are not equipped or appropriate to undertake commercial lending. There is certainly a perception at Government level, perhaps informed by our regulators, that credit unions are not equipped for commercial lending. Various legislative provisions were enacted during 2012 which fuelled the perception that no credit union was suitable to lend to the SME sector. An impact assessment conducted prior to the Microenterprise Loan Fund Act 2012 reported that credit union lending to business start-ups is only sanctioned on an exceptional basis and that such lending was not generally appropriate for the credit union sector overall. The Department of Jobs, Enterprise and Innovation excluded credit unions from benefiting from the State guarantee scheme under the Credit Guarantee Act 2012 when providing business lending. This occurred despite CUDA alerting the Department to the exclusion and requesting the designation of credit unions as participating lenders where they could meet the terms and conditions set down by the Minister as applicable to mainstream banks.
In view of the findings of the Commission on Credit Unions and the move towards tiered structuring of credit unions, such perceptions and State-imposed obstacles act as a further hindrance that credit unions must overcome in order to lend to small and medium enterprises. Perhaps the perception can also be found within local communities that when it comes to commercial lending, credit unions are not open for business. That is a reflection of the lack of promotion of the service by credit unions themselves. It is something to look at.
The third challenge we have identified involves regulatory barriers to expanding credit union services. The seeds of change within credit unions are well and truly sown. A defining characteristic of this trend is the greater emphasis placed on being an efficient provider of a broad range of financial services. The Credit Union and Co-Operation with Overseas Regulators Act 2012 requires every credit union to have in place a risk management officer, a compliance officer and an internal audit function. To be sustainable, some credit unions will choose to move to the next stage of development and offer a wider range of services, including business lending.

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.