What is happening to our credit unions?

They are about to have the biggest overhaul in their history.

Why?

Nearly 60 per cent of people in Ireland are members of at least one credit union. All told there are 403 credit unions offering savings and loan facilities to millions of consumers, but despite their enduring popularity, they have struggled in the face of the financial crash and, like the banks, they are dealing with growing levels of default and arrears.

How bad is it?

The credit unions are certainly not as badly off as the banks. Having said that, some of them do not have enough capital to function properly. All told there were 51 credit unions with less than the required levels of reserves – 10 per cent of assets – at the end of 2011. Of the 403 unions, 25 were found to be “seriously undercapitalised”. Across the sector, loans in arrears are estimated to be about €1 billion.

So what is being done to help them? More bailouts?

Thankfully, no. Last summer the Government set up a commission to review their future and to recommend how it could be protected. Chaired by Prof Donal McKillop of Queen’s University Belfast, it was asked to take into account the sector’s not-for-profit mandate, volunteer ethos and community focus, while examining the protection of depositors and financial stability. Its final report was described by Minister for Finance Michael Noonan as a “fundamental turning point in the development of the credit union movement in Ireland”.

What action does the commission recommend?

Its key finding is that the credit union movement needs to be dramatically restructured over the next four years. Credit unions which are weak and in danger of insolvency will voluntarily merge with stronger ones. A new body, the Credit Union Restructuring Board, is to be established to engage with credit unions and facilitate the process.

What will the restructuring process mean?

As a result of the mergers, the number of credit unions could fall by as much as 50 per cent.

What other changes will we notice?

Credit unions capable of operating on a more sophisticated basis will be allowed to offer a wider range of products and services and will be allowed to engage in a broader range of lending and investment activities.

Anything else?

The commission recommended a tiered system of regulation with varying levels of control being exerted on institutions. Larger, more sophisticated credit unions will have to have more stringent safeguards. There will be new rules on minimum competency levels and probity for staff, but the commission has stressed the credit unions’ hallmark of volunteerism will remain in place.

What happens next?

During the restructuring, the Central Bank is likely to operate a stabilisation fund for viable but undercapitalised unions. New laws to cover the main commission recommendations will published in June.