Banking contrary to unions' mutuality

By Peter V O'Brien

Thursday 17th April 2003

Credit unions have no desire to become registered banks, despite offering a full range of banking services.

Association of Credit Unions chief executive Doug McLaren told The National Business Review it was contrary to the concept of mutuality. A credit union dealt with "its own people," who had a commonality of interest he said.

They also came under the general control of the Registrar of Friendly Societies & Credit Unions while Securities Commission rules now required a compulsory trust deed. The compulsory deed may supersede the current limit of $250,000 for each depositor.

Any credit union's maximum individual deposit must be no more than 10% of total assets. A question could arise as to whether there was conflict between the two rules.

There were 55 credit unions at the end of last year, of which 45 were members of the association. Affiliates had about 180,000 individual members and all credit unions accounted for about 200,000 members.

The number of unions declined in the past three years. There were 71 at the end of 1999, with 124,000 members, or an average of 1887 a union, though the size varies greatly. That average had risen to 4000 at the end of 2002.

Amalgamations over the years (there were 117 unions in 1993, with 105,000 members) arose from such factors as church-based unions merging with community-based unions in the same areas and thereby maintaining the essential commonality of interest and company-based organisations merging as a result of corporate changes. Fewer unions with more members should lift the overall asset base of each.

The "commonality of interest" is a fundamental matter distinguishing credit unions from other financial institutions, including banks and general term-instalment finance houses.

There has been criticism of the credit union structure on the ground, among others, that they are exempt from tax.

Mr McLaren explained his association's view on that matter. "Credit union members pay tax on interest they receive. There is no tax on reserves, because the reserves are owned by the members."

A credit union's reserves must go to charity if the organisation closes. Any changes from a union to a limited liability company would have the same effect under current legislation, Mr McLaren said.

A recent Ministry of Economic Development white paper looked at various matters to make the legislation governing credit unions more realistic in today's world. Conflicts between the unions' trust deeds and some provisions of the act are one of the issues under examination.

The daily nuts and bolts operations are practical, removed from political and ec onomic issues about the co-operative movement. Its officers and members obviously have an interest in the more abstract matters, but the officers' days are spent dealing with members supervising a financial business.

Hastings-based Baywide Credit Union is a good example of the structure and operations of a sizeable credit union. General manager Brian Coe and assistant general manager Gaven Earle told NBR their organisation had 15,500 members and total assets of about $61 million. Deposits were $52 million, reserves $7.5 million, loans $49 million and investments $11 million. (The monetary amounts do not total exactly, because of rounding.)

Baywide's "commonality" of members' interests is residence in Hawke's Bay, defined as extending from Wairoa in the north to Dannevirke in the south. It has a staff of 40, including a five-person administration group in Hastings. The union has grown in financial terms at about 28% a year, compounded, for the past three years, well above the average for non-credit union financial organisations.

Its lending rate on personal loans is 10.9% a year. Rates paid to depositors are 5.8% at call, 6% for six months and 5.75% for 12 months.

The union deals with about 160 enquiries a day, either by phone or interviews with members, the "inquiries" including loan payments (70-100 a week) and deposits. Baywide has a substantial number of transactions through its automated system, as do other credit unions.

The movement has become cagey in recent years about transaction numbers in the range of services, because the finance industry is extremely competitive. Trading banks, which probably have themselves to blame for people switching to alternatives, have the financial clout to compete against credit unions' gains in members' numbers and asset growth.

It seems sensible for credit unions to avoid giving the banks and other competitors information on a plate.

Baywide's senior management have university degrees and lending officers are trained in-house and through external courses, including debt management and debt recovery. That situation is widespread among the medium-sized to large credit unions, giving the lie to accusations they are based on the operations of enthusiastic amateurs.

Even relatively small credit unions employ qualified people and the association provides practical support on practical matters to its members.

Baywide may seem a rather unusual credit union, given the geographical spread of its commonality when compared with, say, Credit Union Hamilton. The latter is relatively compact, geographically, in the Waikato. It went from St Mary's Catholic parish in Hamilton to incorporate the surroundings, including the Raglan credit union.

The daily operations of credit unions are basically the same, whether based in the Waikato or Hawke's Bay. Commonality might be a question when referring to Wairoa and Dannevirke but it will probably be resolved at Napier's McLean Park in spring, when rugby's NPC gets under way.

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