Credit Unions to be allowed increase interest rates to compete with banks

Proposals to overhaul sector to be brought to Cabinet within weeks

Credit Unions will be allowed to increase interest rates to compete with banks with products like credit cards and overdrafts under proposals to be brought to Cabinet within weeks.

The move is part of a major push to grow the credit union movement with other measures aimed at supporting collaboration between different credit unions to encourage more lending in areas like mortgages and small business loans.

Minister of State for Finance Seán Fleming outlined the plans in an interview with The Irish Times.

The programme for government sets an ambition of enabling the credit union movement to grow as a key provider of community banking.

There has been concern that the majority of credit union members are saving and not taking out loans, with the average loan-to-asset ratio standing at 26 per cent – which is seen as not sustainable.

Mr Fleming said he had been telling the sector: “You are credit unions, not just savings unions.”

Credit Unions currently must limit their monthly interest rate on loans to 1 per cent. This limit would be doubled to 2 per cent under plans being progressed by the Minister of State.

The Credit Union Advisory Committee recommended the move to the Fine Gael-led minority Government amid concern that retaining the ceiling at such a low limit reduces competition and could discriminate against high-risk borrowers.

Proposals from Minister for Finance Paschal Donohoe to increase the monthly interest rate to 2 per cent did not get over the line before the 2020 general election.

Mr Fleming said he hoped the plans to overhaul the credit union sector – which come on the back of a consultation process – will be brought to Cabinet before the summer recess and be passed by the Oireachtas in the autumn.

Of the proposal to allow credit unions to increase their interest rates to as much as 2 per cent per month, Mr Fleming said some would not want to charge more.

“But for those that want to compete with people doing overdrafts and credit through credit cards, those credit unions will be able to compete.”

He said he would expect some credit unions to offer credit cards “down the road” but not as early as this year.

The Fianna Fáil Minister of State said encouraging collaboration between credit unions was the “big area”. He highlighted the Cultivate scheme of loans for farmers operated across 38 credit unions as the kind of collaboration he wanted to see more of in the sector.

He had met the largest credit unions and they “have difficulty going on their own on the mortgage issue” due to staff requirements and risk-assessment reasons, he added.

“They would be much happier if they could have a group collaborating on a particular mortgage product” with a credit union service provider doing the “backhouse work”.

Mr Fleming said such service providers currently had no standing in legislation and they would be recognised in the new plans.

In future credit unions would also be allowed refer members to other credit unions if they do not offer a particular product, he said.

Other plans include changes to the role of volunteer boards designed to reduce their workload and to shift day-to-day activities to management, while maintaining their oversight role.

Cormac McQuinn

Cormac McQuinn

Cormac McQuinn is a Political Correspondent at The Irish Times