DWP launches £38m fund to boost credit unions
Credit unions will receive up to £38m of investment to modernise and expand so they can support 1m more people, Lord Freud, minister for welfare reform, announced today (27 June).
The £38m fund, which follows the £13m already invested last year, will help credit unions to buy in new IT systems and infrastructure needed to increase the numbers of people they help to save and borrow.
However, credit unions have come under fire in the past year due to their frequency of failures, with the Financial Services Authority saying that around six go bust each year. Indeed, this was precisely the number of unions that defaulted in 2011.
According to the DWP, loans from credit unions can save borrowers an average of £401 a year. People with incomes on the lowest 10 per cent bracket would be able to save between £5 and £20 per week if they had access to a trusted local credit union.
The DWP pointed out that just 2 per cent of people in the UK are members of a credit union, compared to 24 per cent in Australia, 44 per cent in the United States and up to 75 per cent in Ireland.
Lord Freud said: “Credit unions provide an essential service for communities and we want to help them to extend the support they provide.
“Credit unions are growing – almost doubling in membership since 2006 – but we want them to be a mainstream option for savers and borrowers just as they are in other countries and to ditch the image of a ‘poor man’s bank’.
“Our investment will help credit unions reach up to one million new customers providing a real alternative to rip-off interest rates from payday loans, doorstep lenders and illegal loan sharks.”
The investment in credit unions follows the decision by the government to take forward the recommendations of the independent credit union feasibility study to help secure the industry’s long term financial sustainability.
The study follows amendments to the Credit Unions Act earlier this year, giving these institutions freedom to provide services to new groups of customers and offer different types of products and partnerships.
The report, which looked at options for modernising and expanding credit unions, said: “Credit unions provide credit at affordable interest rates for people with low credit ratings, but lack the capacity to meet demand.
“The study recommends credit unions could increase access to basic financial services – banking, savings and credit – for up to a million more people on lower incomes, and that they could work towards becoming self-sustaining in the near future.”
The project’s feasibility study found even the biggest credit unions struggle to meet the operating costs of making small loans to people on lower incomes.
The government will also consult on allowing credit unions to increase the 2 per cent monthly cap they face on interest rates.