Brendan Burgess
Founder
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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
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