EXECUTIVE SUMMARY
1. This report discusses the nature of credit unions and considers the extent to which they offer an alternative model to mainstream financial services. It also charts the historical development of credit unions; documents theoretical paradigms within which issues pertinent to credit unions may be considered; presents statistical data for the worldwide movement and the movement in the United Kingdom ( UK) and its regions; considers legislation, regulation and the financial inclusion agenda in the UK; assesses which factors are important for successful credit union development; and maps out the challenges and risks faced by Scottish credit unions and how these challenges and risks can be addressed.
2. UK credit unions have increasingly become viewed as an important tool in the fight against financial exclusion. Consequently, government policies of financial assistance, financial de-regulation and re-regulation have tried to develop a sustainable credit union industry capable of serving the financially excluded. Against a backdrop of the current downturn in general economic conditions, the movement is refocusing upon the financial inclusion goals of government and has been encouraged to do so through significant levels of financial support. This is not without risks. If future Government priorities change, putting into question further financial assistance, many credit unions may be over-extended (staffing and premises) and may not have the necessary self-reliance mechanisms in place to survive. Such overt emphasis on financial inclusion also risks credit unions being tarred as the poor man's bank. This may cause membership imbalance toward the interests of borrower members. This will be counterproductive as member benefits are maximised within a neutral credit union (i.e. one which balances the interest of saving and borrowing members).
3. A merger process is now occurring in Great Britain ( GB). As yet there is little evidence that this has realised scale economies for Scottish credit unions. The merger process will continue and it is expected that eventually scale economies will result with larger credit unions eventually in a position to offer a better service to members. A further trend is that of rising levels of bad debt write-offs. If this is not 'nipped in the bud' it will result in credit union failures.
4. Collective action by trade associations is extremely important in for example the provision of centralised services to members and technology based money transmission products, The latter it is suggested is critical to a more general acceptance of credit unions in GB. However, the jury is still out on whether the trade bodies have the scale, expertise and drive to radically change the operating environment for member credit unions. It is also suggested that the probability of success would be greater if there was one trade association (currently in Scotland there are two trade bodies).
5. A significant factor in the recent success of the credit union movement in the Balkan states has been the 'buddy system' operated by the credit union movements in the United States ( US) and Canada. These mature credit union movements have provided financial assistance but more crucially, they have replicated aspects of their own operational systems and provided expertise in the implementation of these systems. Scotland has always enjoyed strong links with both Canada and the US. The adoption of a 'buddy system' for Scottish credit unions could well be beneficial.
6. More generally the report notes that credit unions have been successful in countries where there has been significant need and perhaps limited competition from other financial services organisations. Despite re-branding and significant financial support from Government credit union growth in GB has as yet been pedestrian in comparison. This raises the question of whether there is a real appetite for credit unions in GB and whether a Community Reinvestment Act, such as that in the US, would be more effective as a solution to the provision of affordable financial services for all.