Séamus Healy (Tipperary South, Independent)
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I urge the Minister for Finance to introduce a ministerial order to allow credit unions to lend 40% of their loan book over five years and 20% of their loan book over ten years, thereby amending section 35 of the Credit Union Act 1997 which is unfair to credit unions as it stifles the growth of the credit union movement.

The credit union movement is a significant community, voluntary and financial organisation and credit unions occupy a unique position in the social and economic fabric of their communities. In the financial services sector credit unions have a unique ethos and modus operandi which distinguishes them from commercial financial service providers. The main reason for this difference is that volunteers have ultimate responsibility for the general control, direction and management of the affairs, funds and records of the credit unions. Credit unions are not-for-profit organisations with social and economic objectives. They are community-based financial co-operatives providing services to the communities within which they operate. Credit unions are owned by their members. Unlike customers of commercial financial services providers who avail of a service, credit union members are uniquely placed to participate in the operation and governance of their credit union. They provide a major social and economic service.

The credit union that I know best, and of which I am a member, Clonmel Credit Union, was founded in 1963 by a group of employees of St. Luke's Psychiatric Hospital in Clonmel, including my dad. Today that union has 21,907 members, €90 million in savings, 26 staff and a purpose-built headquarters. That is reflected throughout the country.

The umbrella body, the Irish League of Credit Unions, has 430 affiliates and 2.2 million members in the 26 counties and a further 100 affiliates in the Six Counties. This is a large organisation in which many well-known people have been involved, for example, John Hume.

The Credit Union Act 1997, which is out of date in respect of financial services, limits the amount credit unions can lend on their loan books. When the Act was introduced the assets of credit unions was approximately €3 billion and loans amounted to approximately €2 billion. At the end of 2004 assets were in the region of €11.5 billion and loans in the region of €6 billion. The effect of the Act and in particular section 35, is that on average credit unions effectively have more money in investment than on loan to members. This is already a reality for many credit unions and the number continues to rise. This could not have been envisaged in 1997 when the Act was commenced.

Savings by members of credit unions which cannot be lent to individual members of the unions, must be invested in banks and building societies and other financial institutions to be lent by them. The money cannot under law be lent to members because the section limits the loan amount. I ask the Minister for Finance to introduce a ministerial order extending the amount that credit unions can lend. I hope the Minister of State has good news.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am replying on behalf of the Minister for Finance, Deputy Cowen. I thank Deputy Healy for raising the matter. It is an important issue which the Department of Finance is examining. Under section 35 of the Credit Union Act, loan terms over five and ten years are limited to 20% and 10% respectively of each credit union's portfolio overall. These limits may be changed by ministerial order under the Act.

The Irish League of Credit Unions is proposing an increase in the lending limits to 40% for five year loans and 25% for ten year loans. The league argue that the current limits on long-term lending affect the competitiveness of the credit union movement, as credit unions are not in a position to compete with the banking sector in one of the more demand driven areas of the lending market.

The Registrar of Credit Unions is opposed to any change in the lending limits at this time, primarily because of the danger of increased credit risk. He is of the view that underwriting skills are weak in many credit unions, and that arrears and bad debt provisions in the movement overall are rising. In his view, the ability of credit unions to mange the inherent risks arising from long-term lending is not sufficiently developed.

The Minister for Finance appreciates the concerns of the credit union movement, which Deputy Healy outlined, in regard to long-term lending and acknowledged them in his address to the consultative general meeting of the Irish League of Credit Unions in April 2006. In particular, he noted the strong view held by credit unions that increased longer-term lending could make a substantial contribution to alleviating the issue of surplus investment funds. In considering any change to the lending limits, however, it is important to ensure that it does not lead to any worsening in the overall risk profile of credit union lending. The objective is to ensure the funds entrusted to credit unions by members are not put at risk.

Given the divergence of views on this important issue, the Department of Finance concluded that further assessment and analysis was required of the appropriateness of the proposed easing of current lending limits, balancing the requirement to support the development of credit unions with the requirement to safeguard members' savings. Consequently, the Minister for Finance referred the matter to his credit union advisers, the credit union advisory committee, requesting their advice as to whether a review of the current limits on long-term lending by credit unions should be initiated. The credit union advisory committee is very aware of the importance of this issue and its recommendations are expected soon.