# Article: The lessons from Berehaven Credit Union



## Brendan Burgess (7 Aug 2014)

Here is an article in the Sunday Business Post last Sunday

*Called to account: our credit unions need to wake up*

        3 August 2014 by Brendan Burgess



            The High Court appointed a liquidator to Berehaven Credit Union         recently because, said the Central Bank, ''it is financially         unstable and is at increased risk of corporate failure. The odd         thing is that there was no suggestion that Berehaven had already         failed or was insolvent.

            From the information provided to the High Court, it probably         has a small excess of assets over liabilities. However, it was         in slow decline, so, in time, it would have become insolvent and         would have become unable to pay its liabilities.



            The problem with Berehaven is that its members had around €10         million in savings accounts, but only around €1 million in net         loans. If the credit union charged 10 per cent interest on these         loans, its total income would be €100,000 annually. It would not         have been able to pay the staff and the expenses of offices and         computer systems out of this income, let alone pay a dividend on         its €10 million of savings.



            So the enterprise was unsustainable and guaranteed to become         insolvent in time. The board should have realised that its         business model was no longer viable. It should have opted for an         orderly wind down, where it could have collected in loans and         repaid the savings and deposits to members. A High Court         liquidation is a needlessly expensive and needlessly disruptive         way to close down a solvent enterprise.



            The board should have realised this at least five years ago and         voted to wind down the business at that stage. It's very         difficult for a community based board to face up to this         reality, so the Central Bank should have forced it to do so. The         Central Bank should order a credit union to wind itself down         long before imminent insolvency becomes a threat to members'         savings.



            The Department of Finance needs to stand firmly behind the         Central Bank in its efforts to wind down these credit unions.



            It is reported that the Central Bank tried to get Bantry Credit         Union to take over Berehaven. But this would have made no sense         to Bantry.

            Bantry is a model credit union. It has built up reserves, ie,         retained profits, of €9 million. Its total loan book is €9         million. It has €44 million in members' shares which it has         placed on deposit. It would not want the headache of taking in         €10 million more cash from the members of Berehaven.



            The Central Bank has bizarre rules which require a credit union         to set aside reserves of 10 per cent of the members' savings         even if those savings are invested in state guaranteed banks and         government bonds.



            So if Bantry took over €10 million of savings from Berehaven,         they would have had to set aside €1 million of profits to         reserves, which would probably mean that they would not be able         pay a dividend to their members this year. Bantry was quite         right to refuse to get involved.

            Every credit union in the country has a big imbalance between         members' savings and members' loans. This surplus liquidity         encourages the credit unions to make risky large business and         property loans which they do not have the skills to assess         properly. These large, speculative loans are far removed from         their core social lending function.



            Many credit unions have incurred substantial losses investing         in perpetual bonds and other products which they did not         understand. Others have used the surplus cash to build flashy         offices. These offices are now worth a lot less than the cost of         building them, and so they have to recognise losses in their         accounts.



            The smaller credit unions which are still solvent but which are         slowly becoming unviable, should be told to wind themselves down         in an orderly manner.



            They can return their savings to the shareholders and either         collect in their loans over time, or sell the loan book to a         neighbouring credit union. If they don't do this now while they         are solvent, they will end up being forced into liquidation with         consequent disruption and high liquidation costs.



            Many of the these points have been made before. But the credit         unions refuse to change. If the credit union movement is allowed         by the authorities to continue to bury its head in the sand,         then we can expect many more Berehavens. They should address         these problems while there is still time.



            The bigger, profitable credit unions are also facing huge         strategic issues. Let's look again at the figures for Bantry         Credit Union.



            According to its latest accounts, it has accumulated €9 million         in profits over the years. It had around €9 million of net loans         to members. In other words, it could fund all its loans from its         accumulated profits.It did not need any of their members's savings. Yet it had €43         million in members' savings for which it had no borrowers. It         had this money on deposit with the main banks where it earned 3         per cent. Bantry paid its members a dividend of 1 per cent on         their savings. Members would have been far better off putting         their money on deposit directly in the banks and earning the 3         per cent, instead of earning only 1 per cent from the credit         union. This year, the banks have been paying much less than 3         per cent, so Bantry will struggle to maintain its 1 per cent         dividend.




            Bantry should act in its members' interests, and return all         their savings to them and let the members deposit their money         directly in the banks. If Bantry no longer had deposits from its         members, it would save a huge amount of systems, staff and         insurance. It would also be subject to almost no Central Bank         interference in its affairs, as the Central Bank's main concern         is the protection of savings.



            Bantry Credit Union was set up as a social lender to lend money         to people who could not get loans from the main banks. It         fulfils this mission very well indeed. Last year it handed out         1,278 loans averaging €3,500 each for cars, home improvement,         holidays and weddings.



            There doesn't appear to have been any very large loans for         investments or property development. But Bantry now has enough         accumulated profits to fulfil this mission. It simply no longer         needs its members' savings.

            If the movement weeds out its failing enterprises and refocuses         its successful ones on social lending to people who can't get         loans from the banks, we can get back to a very successful         credit union movement in Ireland.



_Brendan Burgess is the founder of askaboutmoney.com_


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## WizardDr (16 Aug 2014)

In the fog that is Credit Unions there are a number of things being overlooked:

1. The Central Bank has not a single idea between its five floors of anything called radical that might see Credit Unions survive.

2. Sustainability is quite possible for small credit unions as well as large ones.

3. Part of the philosophy of Credit Unions is financial education and money management - just because they have huge savings rather than loans - someone with brains would see that they could / should lend to other Credit Unions without having to 'close down' This is a radical idea that is beyond the thinking of a Central Bank who think we are better with less than more of these.

4. The Government Bonds: Credit Unions should be facilitated by the lazy NTMA who cannot be bothered dealing with the 360 unwashed as opposed to the sopgiticated guzzler from the US or Germany.  Interest on these bonds  which we are paying to anonymous overseas holders is paid GROSS (Note: you are being excoriated here on your savings - if you have any - by a savage DIRT tax that is insane and moronic and constitutionally suspect simply because if you are not liable at a higher rate you cannot claim back the excess.

5. The Central Bank pays massive fees to large Big firms in the legal / financial world who do not understand one thing about them except charging huge fees. How wonderful the work of Ernst & Young in Newbridge. 

6. Its about time that solutions from the Central Bank took account of a number of matters such as:

(a) The number of alleged failures in a population of 396 - is in single figures
(b) The creation of huge compliance costs and procedures is out of all proportion to the failures;
(c) In the case of Newbridge - whilst there were failures - it should be noted that the Rescue Services in the form of the Central Bank crashed several times and caused as many 'fatalities' as the original car crash itself. But they are unaccountable.
(d) Less of these meets the objective of the Central Bank;
(e) The perception is that they are staffed by people that philosophically see no value in the peasants running financial services. 

Believe and weep.


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## Brendan Burgess (17 Aug 2014)

WizardDr said:


> 1. The Central Bank has not a single idea between its five floors of anything called radical that might see Credit Unions survive.



I agree that the Central Bank's strategy and thinking is completely wrong, but... The Credit Unions were saved by Brendan Logue, who stopped them going mad during the boom. 

But the Credit Unions themselves have not got many ideas. I have spoken to a few, and their thinking is stuck in some philosophy more appropriate to 1950s Ireland. 





> 2. Sustainability is quite possible for small credit unions as well as large ones.



I agree. Merging credit unions will not affect their sustainability much. 



> 3. Part of the philosophy of Credit Unions is financial education and money management



But they do it terribly. They force people to borrow at 12% while saving at 1% or less.  

Berehaven's customers haven't received a dividend for years. Why did Berehaven not tell its members to save their money directly in a bank? 



> - just because they have huge savings rather than loans - someone with brains would see that they could / should lend to other Credit Unions without having to 'close down' This is a radical idea that is beyond the thinking of a Central Bank who think we are better with less than more of these.



Is there any Credit Union in the country which has a shortage of members'  savings?  Is there any Credit Union with borrowing? 

The surplus members' funds must be returned to their members, so that they can deposit them at far higher rates directly in the banks.


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