# The future of Irish Credit Unions



## CGorman (27 Nov 2005)

There was an interesting article about Irish credit unions in todays _The Sunday Times_. The article basically questioned the ability of Irish Credit Unions to offer competitive loans at present and I feel it prompts the debate - whats the future for Irish Credit Unions?

Brendan was quoted in the article saying _“The really serious problem facing the credit unions is that they are massively under-lent,”_ - on this I agree fully with him. I know in my own area, Mullingar (agruably Irelands largest community credit union with 29,339 members), the union made this exact point a year ago in the Annual Report - they can't lend out enough money... so what did they do? They bought the Town Mall! A quick look at this years balance sheet - €76m in loans verses €90m in Investments. Its nice to see they are doing or trying to do something with the excess funds, but I note that the Town Mall - which is located at the heart of a thriving town - actually lost money this year!

As far as I know, Mullingar is the exception to the rule, that credit unions are overtly expensive, with a relatively low (compared to other credit unions) loan interest rate of 7.9%, an annual interest rebate of 20% (real rate is less than 7% thanks to rebate) and a dividend of 2.5%. Yes still high compared to _"top up your mortgage and pay 3.5% interest"_ - but better than 9%+ interest.

My view is that new blood and an end to the reliance on volunteers is sorely needed. The treasurer of our Credit Union - which has *€149m* in savings - received just €6,250 this year for his work!


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## CGorman (30 Nov 2005)

Thank God someone's interested! Thought the thread would sink away with 0 posts!

From the CU Ireland website:


> _What is an Interest Rebate?_
> 
> An interest rebate is a refund of loan interest back to members who paid loan interest on their loans during the preceding financial year. A credit union may only pay an interest rebate if it has also paid a 2% dividend on member's shares. The interest rebate is paid at the same rate to all borrowing members.
> 
> Interest rebates have become very popular with credit unions in recent years. This has probably occurred due to the reduction in lending rates available to our members from other financial institutions as credit unions try to compensate members for the higher rates being charged. For many credit unions the interest rebate represents a cautious step that prepares the credit union for a cut in its lending rate. When a credit union sees that has the ability to pay a dividend and



Read more [broken link removed].


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## Observer (1 Dec 2005)

I think that increased (mainly foreign) competition has driven down margins in the Irish banking business.  This has eroded the niche that the credit unions formerly enjoyed whereby they could easily afford to undercut the exorbitant rates charged by the banks.  The issue now facing the credit unions is that lack of scale (and thus relatively high fixed costs) is impeding the offering of more competitive rates.  This is driving the CUs to chase higher volume business (more customers, larger loans, even mortgages)  But this is also essèntially driving CUs in the dìrection of becoming de facto banks themselves with all the implications that this brings.


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## Riddler (1 Dec 2005)

An initial quick somewhat rambling contribution...

Good observation. It's true that of the key problems facing CU's is the fact that they are significantly underlent. Why is this so...I believe it;s a factor of 

a Price ie rate somewhat uncompetitive
b Access & Convenience + Loan application-approval-issue process
c Regulations - cap on lending over 5-10 yrs and 10yr+
d Product obsolesence 
e Socio/Demographic shift in use of and sources of credit- younger population using multi-channel competitor offerings (car finance in the garage forecourt etc)...refinancing using mortgage debt etc
d Market saturation within local boundaries ..remember a CU's market is local and not national 
e Sheer number of CU's (need to consolidate)

The current challenge in the short term is how to get more short term money out *locally* and reverse the loans/investments trend...and in expanding the range of cost efficient transactional services which will should be managed on a cost neutral basis and not bring in an additional significant cost layer..the cost of lending is also a primary issue and this is where process efficiency has to be applied...driving down the cost of issuance and loans management and increasing access and speed of issue. 

CU's appear to have a choice either they can stick to the knitting and manage accordingly or look to expand the product mix and revenue streams which means building new competencies in new areas of business. In both cases scale is an issue. The fact is scale potentially exists in loans and deposits but scale ( process efficiencies) cannot currently be tapped given that each CU is a seperate enitity with differing IT platforms. 

I would pose one question... is the future in

(a) sticking to the knitting and getting better at it
or
(b) Expanding the range of revenue generating products and services 
or
(c) a combination of both 

Point of info: CU's are legally limited in the amount they can lend either to one person, over 5 years and over 10 years. At this time direct mortgage lending off their own balance sheet is not a real option.  

_*R*_


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## Brendan Burgess (4 Dec 2005)

A great thread Mr. Gorman!

I went to the AGM of my local Credit Union, Sandymount on Wednesday night. There were about 100 members in attendance, with an average age of 60+. If this is indicative of the average age of the membership, the movement will die out over the next few decades. 

Credit Unions had a key role when we were a poor society and banks would not lend to poor people. Now we are a very rich country and the banks will lend to most people. 

There is a problem of access to financial services for some people, but I understand that the Credit Union movement has become middle class in recent years and has moved away from dealing with this problem. 

So do they have a future at all? I am a member but I am unlikely to borrow from them. The cheapest loan is 5.7% ( after the rebate) for loans over €30,000. Why would I pay 5.7%, when I can extend my home mortgage at 2.9%? They pay 2% on deposits, but I can get 3% from Northern Rock. 

The good news is that they seem to have moved away from insisting that you keep a matching deposit. They should all state their policy on this publicly. 

Interestingly, they seem to be encouraging the growth of Credit Unions in Russia and Africa and maybe that's the whole point. They are appropriate for 2nd and 3rd World economies, but maybe they are not appropriate for a rich country like Ireland. 

I think that they have had a very useful purpose in local community lending, but may not have any role in complex financial services such as insurance or mortgages. 

Brendan


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## Crugers (4 Dec 2005)

> I went to the AGM of my local Credit Union, Sandymount on Wednesday night. There were about 100 members in attendance, with an average age of 60+. If this is indicative of the average age of the membership, the movement will die out over the next few decades.


 
With over 70% of the population of Ireland as members the average age of membership is a long way below 60+. The age profile for CU based SSIA’s probably reflects the general membership profile
18-24 - 7%
25-34 - 20%
35-44 - 22%
45-54 - 23%
55-64 - 19%
65 + - 9%
And there are more in the pipeline…
Moylough-Mountbellew Credit Union is one of a number of CU’s that have established a branch in local secondary schools. The banks approached in Galway expressed no interest but the credit union was enthusiastic and the branch was formed. A Jesuitical approach?




> Credit Unions had a key role when we were a poor society and banks would not lend to poor people. Now we are a very rich country and the banks will lend to most people.


With over 54% of all personal unsecured loans sourced from Credit Unions it is probably wishful thinking on the banks part that they *will* lend to most people.



> There is a problem of access to financial services for some people, but I understand that the Credit Union movement has become middle class in recent years and has moved away from dealing with this problem.


Research confirms that credit unions are Ireland‘s leading source of social finance with over € ½ bn in such loans approved at mid-2004. Finance Minister Cowen commented that "the benefits to the community of this type of lending are significant - including employment creation, community education and environmental enhancement…”
Mr. Brendan Roche(RIP) is acknowledged to be the founder of MABS. Through his experience in the Lough Credit Union in Cork, he developed the idea of Special Accounts System and his vision of an independent service to work with those who experienced problems of debt. I doubt if there is a MABS in Ireland today that doesn’t have strong connections to their local CU.
Far from moving “…away from dealing with this problem…” the movement is growing to service the needs of a greater proportion of the population.



> So do they have a future at all? I am a member but I am unlikely to borrow from them. The cheapest loan is 5.7% ( after the rebate) for loans over €30,000. Why would I pay 5.7%, when I can extend my home mortgage at 2.9%? They pay 2% on deposits, but I can get 3% from Northern Rock.


Well they’ve survived and grown without your need to borrow from them. However you can be comforted by the fact that your savings are being put to good socially responsible use locally. 




> The good news is that they seem to have moved away from insisting that you keep a matching deposit. They should all state their policy on this publicly.


Eeeehh! No!
They haven’t moved away from the legal obligations as set down in the Credit Union Act 1997. The Act restricts CU from allowing withdrawal of savings below 25% of total indebtedness.
What they have done is moved further away from using only your saving record as the sole criteria for assessing your ability to repay loans. Loans must be for provident and productive purposes. In days gone by you would have to prove you could afford the repayments by having a savings record. Once saved the law restricted withdrawals.
As for publicly stating their policy, I suppose their policy of complying with the law could and should be taken as read!




> Interestingly, they seem to be encouraging the growth of Credit Unions in Russia and Africa and maybe that's the whole point. They are appropriate for 2nd and 3rd World economies, but maybe they are not appropriate for a rich country like Ireland.


There are currently 136 million people served by more than 43,000 credit unions in 91 nations around the world. Some of the worlds biggest credit unions are in USA, Canada and Australia. ILCU Development Fund doesn’t bother spending money on encouraging growth in these 1st World economies it prefers to make a difference in places like Poland, Russia, Azerbaijan, Outer Hebrides, most of Africa and the like.



> I think that they have had a very useful purpose in local community lending, but may not have any role in complex financial services such as insurance or mortgages.


You probably right there! If you want “…complex financial services…” then go to the banks. I’d hold off commenting on the mortgages just yet. Having legal constraints on the upper amounts and term of loans has held back CU’s from being able to offer these services. But Brendan Logue of IFSRA says his desk is overflowing with applications from CU’s applying for permission to go down the mortgage route. As soon as they implement a “…clean desk policy…” in IFSRA the situation and outlook may change dramatically.


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## RainyDay (4 Dec 2005)

Brendan said:
			
		

> I went to the AGM of my local Credit Union, Sandymount on Wednesday night. There were about 100 members in attendance, with an average age of 60+. If this is indicative of the average age of the membership, the movement will die out over the next few decades.


I'd bet a fiver that the average age of those attending the BOI, AIB, EBS, INBS AGM's was pretty similar. I wouldn't read anything about age of members from this.


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## Brendan Burgess (4 Dec 2005)

Crugers

I am getting conflicting messages on this savings requirement. For me, this is the one big issue which makes borrowing from the Credit Unions so expensive. As a consumer advocate, I find it wrong that they do not factor in the cost of leaving money on deposit at 3% while borrowing at 9%, into calculation of the APR.

The legal position is that if you have a share account, you cannot reduce it below 25% of the amount borrowed. Is that correct? 

One ethical Credit Union told me that they advise their customers to withdraw their savings and put it towards their purchase so that they have to borrow less.

Some years ago I asked the Sandymount Credit Union to explain their policy in writing but they refused. At the meeting, they were a bit vague when someone else asked about it. I gathered that the savings requirement is gone. They are lending to non-members and they are not using any guidelines like 4:1. 

I would recommend Credit Unions if they were open and clear about this issue of lending. If there is no requirement to have savings, loan rates of 6% are competitive for unsecured lending. But I can't get a clear statment on it. If AIB or Bank of Ireland had such a requirement and were not up front about it, then there would be Tribunals of Inquiry into their practices. 

Brendan


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## RainyDay (4 Dec 2005)

munstershug said:
			
		

> 2.  The key advantage the CU offers me personally is teh ability to repay the loan early without penalty.  My derstanding is amost bank car loans are fixed?
> 
> Am I correct or misguided!


There are no penalties with repaying *variable rate* car/personal/house loans early. Such penalties would breach the Consumer Credit Act.


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## NiallA (4 Dec 2005)

CGorman said:
			
		

> _“The really serious problem facing the credit unions is that they are massively under-lent,”_


 
Is part of the problem with credit unions being under lent, not more to do with additional savings which up until recently holidayed in sunnier climes, not returning to retire in credit unions.

The taxman has not taken as big an interest in credit unions as he has in banks yet.  (unified it system in banks makes it easier to run checks) so money being dumped in accounts and left to accrus interest, where people are afraid toput it anywhere else (except perhaps under the mattress)

Bray credit union recently capped it's amount allowed in an account to €100k, they have reduced their dividend (ie interest on savings) to 2.5% and increased their loan interest rebate, to try turnaround the problem of under lending.


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## Murt10 (4 Dec 2005)

Brendan said:
			
		

> So do they have a future at all? I am a member but I am unlikely to borrow from them. The cheapest loan is 5.7% ( after the rebate) for loans over €30,000. Why would I pay 5.7%, when I can extend my home mortgage at 2.9%? They pay 2% on deposits, but I can get 3% from Northern Rock.
> 
> 
> Brendan




If you are remortgaging your home for E30,000 then I think that it is correct that you would be better off going to regular a mortgage provider. If the amount were smaller E1,000, 5,000, 10,000 15,000 or 20,000 then it may be easier to go to the Cr Union. There are still a huge number of people in this Country that that main banks won't touch for a loan. These are people that the CR union will help. Also,  if people cannot get credit elsewhere they will have to go to moneylenders, both legal and illegal.

Also, if money is needed in a hurry for whatever reason, I have found the CR union very accomodating. When you want to repay the loan there are no additional charges. They work out how much interest you owe up to that date and that is what you pay. They will also stop charging you interest as soon as you make a partial repayment on your loan. If you have a term loan the bank will probably not be so flexible.

Isn't there normally legal fees with a remortgaging which will wipe out the low interest rate being charged if the amount is less than say e20,000. Additionally the CR union will double your shares if you die and will also write off any outstanding loan. Unlike the banks they do not charge an additional fee for this, or insist that you pay for additional insurance to cover this possibility. No doubt receive a commission on this insurance

As to whether CR Unions should be giving mortgages or not I would be against this as I don't feel that they have the competence or experience to deal with large financial loans.  

Wasn't there some scandal in the USA about 10 or so years ago where Savings and Loans companies, which I think are similar to our CR Unions, got into a lot of trouble when they started to finance large deals. 

Wasn't there a CR Union in Cavan or Monaghan, which was also in trouble two or three years ago, for giving out large loans to transient people who didn't have real roots in the community but just happened to be living there.

Finally, if you need the E30,000 for another purpose rather than home improvements loan i.e. buying a boat or a car, will the bank still charge you 2.9% or will they charge you a much higher rate. 


Murt


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## Brendan Burgess (4 Dec 2005)

Hi hugger



> 1.  I should not pay off such a short term purchase over a long term like a mortgage



You will see this advice on AAM and elsewhere, but you can repay the "short term" element of the loan over a much shorter period.

Brendan


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## Crugers (4 Dec 2005)

> Brendan said: _I am getting conflicting messages on this savings requirement._


To become a CU member you must have *some* savings / shares. Standard Rules for ILCU affiliated CU's states a minimum of one, maximum of ten shares as a prerequisite for membership. (1 share = €1).
Because each CU is autonomous some could require only one some could require ten before you become a member and therefore be eligible for a loan. (Not necessarily get one but be eligible, a member)
There should only be one rule re required number of shares in each CU and it should apply to each and every member. 
When it comes to applying for and issuing loans each CU will have its own Loan Policy and Terms & Conditions. These are not set out in the Standard Rules or the CU Act but certain maximum value and maximum term loan limits are.
In answer to your question on the legal position:
To be eligible for a loan you must be a member. To be a member you must have some shares so there is no 'IF' about it.
If a member has a loan that member, according to the CU Act, can't reduce his share balance below 25% of his loan value.
However it is *not* a requirement in the CU Act to have any percentage of the loan value before you get a loan. The CU ACT only requires you to be a member (and that could be as few as one to ten shares). So it would be legally possible for a member of a Credit Union to have Shares of €1 and get the maximum loan permitted within the CU ACT. It wouldn’t be common practice! 
Some CU's do have Loan Policies that require members to have a certain value of shares before they will grant a certain value loan. That is their policy and their policy is agreed by their Board who are elected by their members. It shouldn't be a secret! It should be explained to applicants!

Many CU's have websites and some define their loan policies on their sites. I've yet to see two the same. Sandymount does not display their Loan Policy (and their quoted interest rate is not their APR either).



Section 35 of the CU ACT 1997 is clear that it (the Credit Union) can lend to *members*:
_35.—(1) Subject to the following provisions of this Part, *a credit union may make a loan to a member*… _
Section 17 Sets out who can be a member:
_17. — (2) Membership of a credit union shall be limited to, and consist of, the signatories to the application to register the society as a credit union *and such other persons, having the common bond set out in the rules of the credit union*, as have been duly admitted members of the credit union in accordance with the rules and comply with such of the rules as relate to membership. _
And Section 6 defines what a common bond can be:
_6. — (3) The common bonds referred to in subsection (1) (b) are—_
_( a ) following a particular occupation;_
_( b ) residing or being employed in a particular locality;_
_( c ) being employed by a particular employer or having retired from employment with a particular employer;_
_( d ) being a member of a bona fide organisation or being otherwise associated with other members of the society for a purpose other than that of forming a society to be registered as a credit union;_
_( e ) any other common bond approved by the Registrar._


Regarding issuing loans to others who are not members:


_Section 35(11) If a credit union knowingly contravenes any of the provisions of this section__, it shall be guilty of an offence._

I would take it that if Sandymount are lending to non members they could be guilty of an offence. I'd qualify that by saying that if they are lending to "non-qualifying members" they would still be within the law. A non-qualifying member is one who did have the “common bond” but now does not. For example if you originally qualified for membership of Sandymount CU by living or working within its defined common bond area (+/- Dublin 4) but then moved to live or work in Dublin 1, you would be a “non-qualifying member”. The CU Act restricts the total value of loans the CU can issue to NQM's.

CU's are permitted to INVEST in a number of institutions as set out in Section 43 of the CU ACT (*which does include one exception to the lending rule*):
_43.—(1) Subject to any provision made by regulations, a credit union may invest any of its funds which are surplus to its operating requirements and are not immediately required for the purposes of the credit union—_
_( a ) in securities in which trustees are for the time being authorised by law to invest;_
_( b ) in the shares of or deposits with or *loans to a credit union*;_
_( c ) in the shares of a society registered under the Industrial and Provident Societies Acts, 1893 to 1978; or_
_( d ) in such other manner as may be prescribed, being a manner appearing to the Minister to be beneficial to the credit union._





> Brendan said: I *would *recommend Credit Unions if they were open and clear about this issue of lending


I presume you meant *might!* Dependant on the T&C's.



> Brendan said: If there is no requirement to have savings


There is always a requirement to have savings, the question is how much is the absolute minimum!

Like all /most lending institutions the applicant’s status at that time will be the most important driver of the applicable T&C's of any credit given.
For instance: Say you decide to borrow €5k from Sandymount.
If you have had a tenner lying in your shares for the past 10 years and there had been no movement on your account other than the annual dividend I would expect the CU to require some proof of income and ability to pay. (I would be surprised if they didn’t request that you include a sum to be put into your shares alongside any repayment if and when the loan is passed).
If on the other hand you had €50k sitting there for ten years you would be treated somewhat differently.
Likewise if you had €1k in shares for the past 10 years, but during that time had borrowed €5k per year and paid it off each year you would be treated in a different manner again.

Quotes from online loan facilities:



> _GE Money: ...depending on individual applicant status_





> _AIB: Credit facilities are subject to repayment capacity and financial status and are not available to persons under 18 years of age. Security may be required_





> BOI: Couldn’t access theirs but I’d bet they quote it somewhere


 
I think you would find that if you applied for a loan from Sandymount CU they would be quite happy to discuss their T&C's in your individual case. You might decide it is or is not your best option.


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## RainyDay (5 Dec 2005)

Crugers said:
			
		

> To be eligible for a loan you must be a member. To be a member you must have some shares so there is no 'IF' about it.
> If a member has a loan that member, according to the CU Act, can't reduce his share balance below 25% of his loan value.
> However it is *not* a requirement in the CU Act to have any percentage of the loan value before you get a loan. The CU ACT only requires you to be a member (and that could be as few as one to ten shares). So it would be legally possible for a member of a Credit Union to have Shares of €1 and get the maximum loan permitted within the CU ACT. It wouldn’t be common practice!
> Some CU's do have Loan Policies that require members to have a certain value of shares before they will grant a certain value loan. That is their policy and their policy is agreed by their Board who are elected by their members. It shouldn't be a secret! It should be explained to applicants!


Hi Crugers - Thanks for the detailed explanation. Would it be the common view in CU circles that the legal requirements are (at best) disjointed. To have a requirement that you can't reduce your balance below 25% of the loan, without have a requirement that you have to have 25% to get the loan actively discriminates against those who have money on deposit. Indeed, it may well encourage them to move their funds elsewhere before getting a loan to avoid having the 25% tied up.

Would it be more sensible either to enforce the 25% limit as a requirement for getting the loans, or to scrap the 25% completely? Is there any practical value to this 25% limit?


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## Brendan Burgess (5 Dec 2005)

Hi Crugers

When I say that Sandymount Credit Union is lending to non-members, I assume that this means that they are lending to people who were not members until they applied for the loan. In other words, if a non-member wants a loan, they stick in €20 into a share account and apply for the loan. 

If the Credit Union is the cheapest loan in a particular case, I *will *recommend them. There are no ifs and buts about it.

I support the idea of mutuality. But I will borrow from whoever is the cheapest. I borrowed from the EBS when it was the cheapest. But when they lost their status as cheapest lender, I borrowed elsewhere. 

Brendan


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## Riddler (5 Dec 2005)

Fellows

This thread is evolving into an operational level product analysis..interesting stuff if you have the time or inclination to follow it. 

Credit Unions are here, they are not going away , they may not be the cheapest, but people are still joining, saving & borrowing..

The future is in issues of sustainability and growth (not current product/rate arguments or bias)..can we focus on this first and then solve for the current set of problems ?

_*R*_


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## Slim (5 Dec 2005)

Crugers

Congratulations on a very informed post/posts. Very clear. I might just add that the problems for credit unions have been exacerbated in recent years by the fall in ECB rates, which has left CUs exposed to much keener competition from the banks etc., the avalanche of mattress money in the wake of the introduction of the Euro, and the tightening up by banks of their cheque cashing procedures. Also, the lack of a common technological platform has left the CUs disadvantaged. The need for electronic fund transfer and ATM services is hugely important and may be the single greatest challenge ahead. 

Slim


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## CGorman (5 Dec 2005)

Slim said:
			
		

> The need for electronic fund transfer and ATM services is hugely important



Yes the ATM issue is very important. There is a ATM at my local credit union, but theres been no effort by the union to inform me about it, how to get a card, can it be used at other atms etc. Again I believe my local CU is the exception rather than the rule - very few CU's have ATM's as far as I know.


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## Slim (7 Dec 2005)

Members of Credit Unions should be aware that the maximum amount that the CU can pay to a nominee after the death of a member is €13,000. Any amount after that must be dealt with under probate or a grant of administration. This limit is contained in the 1997 CU Act and is very much out of date. For example, if a member aged 54 has €6,500 saved in shares and dies suddenly, his/her shares may be increased under the insurance scheme (doubled as member was under 55) to a max of €13,000 and all of this may be paid to the nominee. However, if the member had €15,000 saved, only €13,000 would be paid out to the nominee and the balance would have to be held pending administration/probate. NOTE: this problem would not arise where a joint a/c is held. Not all CUs offer joint accounts.

Slim


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## Brendan Burgess (7 Dec 2005)

Riddler said:
			
		

> The future is in issues of sustainability and growth (not current product/rate arguments or bias)..can we focus on this first and then solve for the current set of problems ?
> 
> _*R*_


 
Hi Riddler 

Credit Unions will only survive if they have good products. At the moment, I think that they are expensive. I can't be sure though, because they are not open about their lending policies. 

If the current structure does not allow them to provide loans as cheaply as the competition, they will gradually die out. 

So the discussion of product and rates is the core of this thread.

Brendan


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## Riddler (9 Dec 2005)

Brendan

At the risk of being pedantic the thread is titled The future of Irish Credit Unions ...not credit union products per se. If you look to my earlier contribution you will see that I have listed products under a number of headings as being important but also listed other current constraints. Products including pricing are symptomatic of deeper issues that lie at the heart of the sustainability of credit unions as alternative financial service organisational structures. It is arguable that CU's are the most heavily regulated sector of the retail/consumer FSI and therein lies the root of serious structural constraints inhibiting and preventing development including product innovation.


Riddler


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