Irish credit unions have seen their loan book shrink by 45 per cent in the past eight years, leaving their loans-to-assets ratio at a “dismal” level that raises serious questions about the movement’s future, according to a Government-commissioned report.
The report by the Credit Union Advisory Committee, chaired by Donal McKillop, a financial services professor at Queen's University Belfast, recommended a full review of Central Bank lending limits.
The committee will also start a review this year of a current 1 per cent-a-month interest rate cap on credit union loans, which may help the sector broaden the type of loans it offers.
A slump in credit union loans to 26 per cent of assets last year from 49 per cent in 2007 “is a situation for deep concern and raises fundamental questions about the relevance of the present credit union business model”, the report said. The ratio, which ranks among the lowest five among 105 credit union movements in the world, should be about 50 per cent, according to Mr McKillop.
The number of credit unions in Ireland fell from about 400 in 2007 to 320 last year and is expected to decline to about 270 by the end of this year or early 2017, he said. By then, about 55 credit unions will have assets of more than €100 million, or 60 per cent of the sector’s total.
Mr McKillop said the lending decline was driven by the financial crisis, when borrowers focused more on repaying loans, and as credit unions had to deal with the “significant upheaval” of overhauling corporate governance and restructuring.
However, the report said the fall may also have been stimulated by Central Bank lending restrictions. These include limits to what credit unions can lend to various types of business and caps that no more than 30 per cent of loans be for a period of more than five years and less than 10 per cent exceeding 10 years.
For a large credit union with €40 million of loans seeking to get into the mortgage business, this means that it could only extend €4 million for home loans.
Gauge of profitability
Total income across credit unions fell to €562.4 million last year from €860.6 million in 2007, while their return on assets, a key gauge of profitability, fell to 1.51 per cent from 3.53 per cent over the same period.
The advisory committee, set up by Minister for Finance Michael Noonan in 2004, said that most of the recommendations set out by the Commission on Credit Unions in 2012 have been implemented.
Mr McKillop said the “really good news” is that bad debt provisions, liquidity and capital ratios across the sector are now “really strong”. Last year, the Credit Union Restructuring Board said it only expected that €20 million out of €250 million set aside by the Government to rescue ailing credit unions to end up being used by the time the fund is wound up.
Mr McKillop declined to say whether the committee will recommend lifting the current 1 per cent-a-month interest rate when it reviews this. In the UK, the limit has risen to 3 per cent from 1 per cent in the past decade, he noted.