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People's banks chafe under ancient restrictions

Friday 5th May 2000

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Credit Union Trends & Business Services

Proposals for a "people's bank" have thrown the spotlight on credit unions. Association of Credit Unions chief executive Doug McLaren said his organisation had told Deputy Prime Minister and people's bank proponent Jim Anderton it was already the "people's bank."

"We are already it. We don't have 'bank' at the end of our name because we are not a registered bank."

The days have gone when credit unions were considered a grouping of amateur savers collecting small savings, lending them to equally small borrowers and with willing part-time volunteers keeping the books and doing other administrative jobs.

Seventy credit unions are affiliated to the association of the 80 operating in the country - or 89 if Manchester Unity's unions are considered separate units rather than one.

While the number of unions was well down on the 149 affiliated in 1989, individual members and members' funds rose substantially. Total membership of all credit unions (including Manchester Unity) went from 103,000 in 1989 to about 220,000 in the latest figures and total funds from $140 million to $500 million (see tables).

The increase in assets was substantially ahead of inflation and income growth over the period. The apparent paradox of membership and asset growth rising rapidly while the number of unions halved was the result of amalgamations.

Mr McLaren said it would not surprise if the number of credit unions in New Zealand fell to about 55 in the next few years, assuming a continuation of the past 20 years' trendline. "I think it will bottom out on the basis of amalgamations."

These arose from such factors as church parish-based unions merging with community-based unions in the same area - and maintaining the essential commonality of interest - and company-based unions merging as a result of corporate changes.

The world's first credit union was formed in Bavaria in 1849 when a village had a crop failure. Farmers had pledged all their assets, including current and future crops, to moneylenders and after several crop failures they almost walked off the land.

It was suggested the farmers pool whatever they had - usually little - and help each other, creating a credit union on a co-operative basis with farming the common interest. The movement spread to Canada where it became popular among churches in poor urban areas and among prairie farmers who had the problem common to farmers everywhere: seasonal produce and the need to finance operations and living costs between crops.

Credit unions are still big organisations in Canada and in parts of the US where the first was formed in 1909, eight years after the first Canadian union. They came to New Zealand in 1955 when parishioners of St Mary's Catholic parish in Hamilton formed a parish credit union.

St Mary's is still the country's biggest but has been converted from a parish-based organisation to a community-based credit union. The common bond changed from a parish to the community of Hamilton and surrounding areas, including, for example, the credit union in Raglan.

New Zealand credit unions have an anachronistic regulatory structure, operating under the Friendly Societies and Credit Unions Act 1982 and coming under the Ministry of Economic Development (formerly the Ministry of Commerce). Successive governments have talked for years about putting credit unions on the same operating base as other financial organisations.

Nothing has been done, a matter that draws criticism from Mr McLaren. "We are in a highly competitive financial industry. We are the only people who have to operate under a special act of Parliament.

"In the year 2000 we are working with a piece of legislation that was enacted in 1982, which effectively means it was conceived in the 1970s. If anyone can stand up and say that is realistic in today's highly competitive, totally deregulated industry, I would like them to say so."

The legislation led to unusual restraints on credit unions. Members are allowed to have only $40,000 in maximum deposits. The maximum was $20,000 10 years ago.

Mr McLaren said that was ridiculous and inadequate. "We have retired people in Tauranga, Wellington, Nelson who are frustrated because they can't get service from the banks. They want to give us $80,000 of their life savings but we can't take more than $40,000. This was not a problem back in the 1960s, because banks and so on had regulatory legislation."

Mr McLaren said credit unions had deposit restrictions in the past because of perceived security risks.

"Today we are a highly professional organisation. We have a trust deed for credit unions that requires more stringent ratios than registered banks."

All credit unions affiliated to the association have the option of coming under the Tower Trust trust deed, but all unions are still required to have some trust deed. Mr McLaren said operating under a trust deed was not easy and was expensive, but he supported it because it gave the highest possible level of protection.

He said credit unions now offered a full range of banking services, excluding international exchange. They cover bill paying, telephone banking, "access teller" (electronic settlement) and access card used in all Eftpos facilities and ATMs. Credit unions own and operate their own independent, real-time network "from Whangarei to Invercargill."

There are traditional lending activities, including instant loans and telephone loans.

"We can offer loans from $100 of school fees through to home mortgages," Mr McLaren said. There is no maximum loan level.

Credit unions have already been mentioned in the context of a "people's bank," along with New Zealand Post's post shops.

Mr McLaren said the association had made suggestions to Mr Anderton on various matters and had found him supportive of credit unions. "He always has been."

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