The credit union movement debates its future this weekend, writes Laura Slattery

More than three million Irish people - more than half the population - belong to a credit union, making the movement more popular here than in any other country.

Although credit unions vary widely in size and style, the co-operative, voluntary ethos that drove the movement to provide not-for-profit savings and loan services to the local community still sets them apart from the heavily marketed, commercially driven banks.

Traditionally, credit unions have been the number one source of loans for people denied credit elsewhere. But, with unsolicited loan offers now flying into letter boxes almost as often as flyers for takeaway food, the days of having to endure a grilling from a condescending bank manager in order to access credit are over.

The value of loans among members of the Irish League of Credit Unions (ILCU) increased by just 7 per cent to €7.1 billion last year - a growth rate that lags those enjoyed by other institutions.

And while the 14.5 per cent growth in the value of savings remained healthy, with the €12.6 billion balance buoyed by €1.8 billion worth of Special Savings Incentive Accounts (SSIAs), the battleground for savers' money is likely to intensify further over the coming year as SSIAs mature.

Credit unions will promote their tax-free savings accounts as a new home for money that was previously diverted into SSIAs, but accessible, online deals from banks may more readily appeal to younger generations, less likely to be tied to any one community.

The future of the movement will be debated this weekend as ILCU, the all-island body to which 535 credit unions are affiliated, holds its consultative general meeting.

Finance Minister Brian Cowen is guest speaker, and ILCU chief executive Liam O'Dwyer hopes his visit will herald some commitment on the part of the Government to change rules relating to the kind of loans credit unions are allowed offer.

Credit union legislation from 1997 restricts the percentage of loans that credit unions can offer over longer terms: only 20 per cent of the loans advanced can be for longer than five years, and within that, only 10 per cent can be for longer than 10 years.

"Credit unions are already at the maximum and are having to say they can't give loans to members, and that is hurting us. Our development is being stymied," says O'Dwyer.

But the registrar of credit unions, Brendan Logue, who regulates the movement in the Republic under the Irish Financial Services Regulatory Authority, is not in favour of removing the limits. "We regard long-term securitisation as a specialist enterprise," says Logue. "Interest rates are also rising, which puts more pressure on this kind of lending. We don't believe the credit unions are prepared enough."

There may, however, be some degree of extra flexibility on offer, he adds. "We are keen that credit unions do not suffer a competitive disadvantage."

Credit unions can offer products such as mortgages in conjunction with other financial institutions. Bishopstown Credit Union, in Cork, is approved to distribute mortgages to its 20,000 members in association with IIB Homeloans and other applications are being assessed.

O'Dwyer says the average rates charged by credit unions on loans compare well to the market. But in many cases the rates can be bettered by competitive loan providers in a position to offer faster approvals. O'Dwyer points to the insurance that automatically comes with credit union loans and the possibility of receiving an interest rebate.

But it is difficult to show the value of these rebates to potential customers, according to Bill Hobbs, who is chief executive of a breakaway representative body called the Credit Union Development Association (CUDA), which represents 16 of the larger credit unions.

Hobbs believes credit unions should be charging lower rates on loans and paying higher rates on updated savings products. "The business model for credit unions is designed for 1986 and it's not okay for 2006."

The Savings Protection Scheme (SPS) operated by ILCU is one example of this, he says. "There should be an independent and statutory deposit guarantee scheme, like credit unions have in other countries.

"The SPS is a discretionary and stabilising scheme. It will bail out the credit union if it is in trouble, and then the depositors - maybe."

The regulator, too, wants the SPS to become independent of ILCU and reformed so it offers "maximum protection" for all credit unions and their members.

"We would like to see it independent of any sectional interests and we are not in favour of it being administered on a discretionary or arbitrary manner," says Logue.

O'Dwyer says a proposal to put the SPS into a subsidiary of ILCU and run it both as a guarantee and a stabilisation scheme will be put to its members.

Solvency in the credit union movement is generally good, says Logue. But one potential issue is the mismatch in liabilities: most savings are available overnight, while loans don't have to be repaid for usually one, three or five years, which could spark a crisis if thousands of members were to suddenly demand their savings back at the same time that a credit union incurs bad debts.

Events in Monaghan this week, while not threatening to the future of the credit union, show the dangers of unexpected losses.

Logue recently instructed Monaghan credit union not to issue a dividend to members because of its bad debts, while Gurranabraher credit union in Cork was forced in 2003 to take hundreds of members to court to recover money.

It is also "a matter of concern" that not all credit unions are covered by the SPS, Logue says.

In July, the Supreme Court will hear an appeal by ILCU against a High Court judgment that its decision to expel credit unions who sought loan protection and life assurance from somewhere other than the ILCU-controlled life assurance company ECCU was anti-competitive and an abuse of its dominant position. Credit unions who did not take out the ECCU cover faced loss of access to the SPS.

Also on ILCU's agenda is its next attempt to upgrade the technology used by credit unions and develop an electronic payments system. It has been told by the Irish Payment Services Organisation (Ipso) that it can become part of the clearing house as long as systems are up to scratch.

Credit union members are still smarting from the ISIS fiasco that ultimately cost the movement €34 million without ever providing the promised technological solutions.

Electronic funds transfer and ATMs are running in four credit unions, while in Northern Ireland social welfare payments can be paid directly into accounts.

Although credit unions don't have to comply with the regulator's consumer protection and fitness and probity codes in respect of their core savings and loan services, O'Dwyer is still concerned about the cost of red tape, which he says puts the volunteer-staffed credit unions at a competitive disadvantage, especially when offering the smaller loans that are the core business of many credit unions.

Logue says the unions need to be more transparent and more efficient. "People have a high degree of loyalty to the credit unions, because they are local, community-driven and more understanding of the needs of their members. But there is a limit to the amount that people will pay extra and the amount of inconvenience they will go through."