The credit union industry is to receive a cash injection of £38m from the government to help it “modernise and grow” and broaden access to credit for people on “low incomes”.
Trade Body the Association of British Credit Unions is the successful bidder to deliver the Department for Works and Pensions’ ‘credit union expansion project’ to help meet the growing demand for “modern banking products for people on low incomes”.
A recent feasibility study in June showed that modernising the industry and helping it become financially self-sustainable would enable credit unions to help up to 1m more people, giving them access to banking products, debt advice and affordable loans, DWP said in a statement.
Currently around seven million people fall into the trap of high-cost credit, with some being charged more than 6000 per cent in interest on short-term loans from payday lenders and other similar groups.
The expansion project will save consumers up to £1bn in loan interest repayments by March 2019, the DWP said.
The credit union sector has been the subject of regulatory scrutiny in recent years as currently around six unions fail each year.
Two credit unions have failed already in 2013. In March FSCS said it had stepped in to provide £460,000 to members of Bristol-based Seven Four Credit Union after it collapsed, after it had already provided £569,000 in February to compensate members of the Cornwall and Isles of Scilly Credit Union.
In June last year, the government announced that it would take forward findings of a DWP Credit Union Expansion feasibility study and DWP would invest in £38m in credit unions to March 2015.
The investment is conditional upon the credit union industry meeting agreed milestones for collaboration, modernisation and expansion - and to deliver this expansion in a way that makes them financially sustainable.
ABCUL will be supported by credit unions with a membership of around 470,000 to carry out the project. ABCUL aims for credit unions to have up to 1m more members by 2019.
David Freud, welfare reform minister, said: “Credit unions offer an alternative to vulnerable people who have few safe options to get cash when they need it most. They are the antidote to predatory loan sharks or high-interest lenders.
“We are pleased ABCUL will be carrying out our investment to modernise and make credit unions financially self sufficient so they continue to help those in their communities who need it the most.”
