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.