Finance
Alternatives to Credit Unions: New Horizons Saving and Loans Scheme
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ew Horizons was set up by Cambridge Housing Society (CHS) in partnership with Cambridge Building Society in 1997. Cambridge Housing Society is a Registered Social Landlord and the Building Society is a locally owned mutual. CHS deposited £25,000 with the Building Society. This money underwrites loans made by the Building Society to CHS residents, contributes to a joint pot of money alongside the residents’ own savings to enhance the interest they can earn on their savings and earns interest. So residents saving in the scheme earn an additional 2% interest on their savings because it is calculated on the total amount of money in the pot – currently around £50,000. People can borrow from the Building Society at base rate plus 0.95% and the Building Society will in principle lend up to three times the amount deposited by CHS. The scheme enables people to borrow immediately they sign up to the Scheme, as many participants are likely to need ‘crisis loans’. The New Horizons Scheme aims to provide a one-stop shop approach to a range of financial issues – for instance financial literacy issues, provide welfare benefits and tax credit advice, and access to other affordable financial products, e.g. home contents insurance. Participants are described as financially excluded, 65% of CHS new residents are in receipt of housing benefits, 49% have an annual income of less than £8,500 and a third are on disability or long-term sickness benefits.
Like credit unions, the lending process is based on principles of trust. The loan assessor is part of the team at CHS and will identify areas of risk. They will not approve a loan to someone with more than three weeks rent arrears. The main way in which risk is minimised is to establish a principle of openness and honesty. CHS will do credit checks on people but will not turn down a loan because someone fails the check – only if they have not been open about it. It is believed that this process reduces the risk of bad debts. In 2002/3, CHS had to put £200 into the arrears fund. Cambridge Housing Society is currently developing a franchise model for this.
Suffolk Regeneration Trust S
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Sue Reynolds, John Ide and Jo Burton of CHS with 200th New Horizons account holder Sarah Young and her daughter Jasmine Wells.
uffolk Regeneration Trust is a new Community Development Finance Institution that will begin lending to enterprises, including social enterprises, this April. SRT has been established to address problems of social exclusion and specifically financial exclusion. This remit does include lending to individuals. In the first instance SRT will work with partners, such as the CUs, to deliver personal finance, but in areas where this is not possible, for instance sparsely populated rural areas, SRT will develop and deliver tailored personal financial products directly. CABs and HA debt advice workers will play a key role in making referrals.
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Finance
At the launch of Incredit, (from left to right) Val Taylor (director), Dan Durrant, Stacey Pike, Eileen Lennon, Ray Winder, Barbara Follet MP, Sue Lawton (CEO), Isata Abdulai, Julie White and Jenny Diffell.
Incredit expands support of social enterprises B usiness ideas are like a novel, we have probably all got one in us somewhere, but how do we unlock that potential? Incredit, a Stevenage based organisation, is working with a range of groups to support people who are looking to develop their own enterprise – whether that means becoming self employed, starting their own company or setting up a social enterprise. Incredit began life as Enterprising Communities, a Phoenix Fund project that came out of a joint bid by North Hertfordshire and Stevenage Borough councils. The idea was to act as a signposting organisation for excluded groups who might be looking for business advice.
Accessibility was a gap in the market
It soon became apparent that there was a gap in the market. “Existing enterprise provision was often inaccessible on a number of levels, either by being physically inaccessible via public transport or at times that were unsuitable for people with caring responsibilities. And for some people there were issues around the culture and cost of existing services,” explained Sue Lawton, Incredit’s CEO. One solution to this was to provide sessions at times and in locations that were suitable to Incredit clients. They developed a series of workshops. Part One introduces would-be entrepreneurs to enterprise, as well as fleshing out the sort of personal development that is important to help them to build the confidence to realise their ideas. Part Two gives clients more technical support, covering such issues as an introduction to business structures, marketing, cash flow and book-keeping.
Supporting women and ethnic minorities
One area Incredit has been particularly successful has been supporting women entrepreneurs as well as women in prisons. “Starting up a small business is not the first employment option considered by many women when they are looking to become economically active. The opportunities available through traditional employment routes can be very limiting with few ‘family friendly’ vacancies advertised,” said Eileen Lennon, Incredit Training Manager.
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In its first year Incredit has been able to provide support to a team of 26 enterprises ranging from life coaching to party and events organisers. Support is also provided to people from black and minority ethnic communities “We are able to take our service out to the different communities. By addressing the issues that are specific to each different group we can overcome the barriers to accessing business support and finance and deliver our service in a culturally sensitive way,” explained Isata Abdulai, Black and Minority Ethnic Community Development Manager.
Assisting the “twenty-somethings”
The U30 (under-30) service provides support to young people considering self employment or starting their own business. Many clients need support in addressing some of the barriers, such as homelessness, lack of education and learning disadvantages. Incredit can direct clients towards training and education when necessary or support people who are using established business advice services. This enables people to access mainstream provision by giving guidance before hand, or support for those going through the process. In May Incredit moved into impressive new offices at Saffron Ground in Stevenage. Incredit now rents out space to social enterprises and others who are running their own new businesses. A business incubator unit will provide hot desk facilities for clients as well as access to computers and facilities like a fax, photocopier and meeting space. Workshop sessions are now to be tailored specifically for social enterprise and the organisation now plans to provide support across the Eastern region. If you are an individual or are part of a group looking to take those first, tentative steps into social enterprise or need development advice, you can contact Daniel Durrant, Social Enterprise Development Manager of Incredit.
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Incredit Daniel Durrant Social Enterprise Development Manager Tel. 01438 794436
Case Studies – Finance
Introduction: Social Enterprise East of England, SEEE, is a network of social enterprises, advice and support organisations, local authorities and other groups with interests in Social Enterprise – particularly in its promotion and development. It covers the counties of Bedfordshire, Cambridgeshire, Essex, Hertfordshire, Norfolk and Suffolk. The Eastern Region has some outstanding examples of social enterprise and innovative approaches to providing the sector with advice, support and funding. The SEEE network has been established to promote, celebrate and share these successes and assist in implementing best practice throughout the Region. Are you interested in the development of Social Enterprise in the East of England? Would you like to know more about the services available? Would you like to get in touch with other social enterprises? Would you like the opportunity to influence policy in social enterprise? For an informal discussion on how SEEE may be able to help you, contact
Peter See Development Manager, Social Enterprise East of England T: 01727 813401 peters@exemplas.com
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nterprises need money – to start up, to keep running and to expand. Individuals needs some form of financial service for saving and borrowing. There are a bewildering number of sources and different types of finance, plus the daunting task of applying for funding and managing the money once it is acquired. High Street Banks have a role to play, but may not always be the most
appropriate solution. The case studies given here describe the development of three distinct services: Credit Unions, offering individual saving and borrowing facilities; community finance schemes that can support individuals wishing to start a business – whether social or commercial, and; how financial services may be combined with learning packages on how to make the best use of them.
When the banks don’t want you
Internet: SEEE’s Web partner services are at: www.seee.co.uk www.nearbuyou.co.uk The SEEE network is co-ordinated by Business Link Hertfordshire InTouch is financed by SEEE (funded by the European Social Fund ) and published in its support by Business for People in partnership with Creative Touch, both of which are social enterprises. Layout by Lorraine Peacock.
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The opinions expressed in this publication are not necessarily those of the publishers or of Business Link Hertfordshire, Business for People Ltd or Creative Touch. All rights reserved. No part of this publication may be reproduced, stored in an information retrieval system or transmitted in any form without the written permission of the publishers. This publication has been prepared using information provided by contributors and, while we make every effort, accuracy cannot be guaranteed. SSEER is unable to accept any liability for the consequences of any inaccuracies, errors or omissions in this publication. No representations, warranties or endorsements of any kind are intended.
© SEEE 2005
Mutuality and the Common Bond
Credit unions are mutual organisations – that is, owned by their members. The membership, and therefore ownership, of the CU is firmly based on the principle of a “common bond”. ABCUL defines the common bond as: The qualification for membership to the credit union. It is the one thing which all members have
in common – e.g. living in the same area, or working for the same employer. It is the common bond which makes credit unions unique and different to banks and building societies. It is thought that the existence of a common bond reduces the likelihood of bad debt. Following recent legislative changes, most credit unions adopt an all-purpose
Finance ‘live or work’ common bond, but common bonds Access Access may also be membership of an association, Point Point trade or profession, or working for the same employer. The inter woven pr inciples Partner Local of mutuality and the common bond are Credit Union Access Government therefore societal main planks of viability Appears like an Point Credit union independent and stability for a credit union. for employees While the common bond is seen as a strength by ABCUL and credit unions, it Access is also a potential weakness if the credit Point Access union’s pool of potential members Point is small or the common bond too Access Administration narrowly defined. Point
Point
Accessibility
Savings in a Credit Union may be as little as a pound a time; borrowing is typically under £300. Compare this with the minimum £10 deposit required by some building society accounts and the £50 or even £100 required to open an account. High Street Banks are unlikely to lend less than £1000.
A narrow source of revenue?
Housing Association Credit union for tenants
Centralised services are made available from an administration point, reducing the cost of setting up
Access Point
Access
Credit union for residents
Access Point
Credit union for employees
Other Organisation Credit union for members
Access Point
Resident’s Association
Private Company
Point Typical reasons for members to save or borrow include purchases of a car or holiday, or the more basic requirements of children’s clothes and shoes. The help and opportunity to save small amounts is often a first step in getting a degree of financial stability and some projects with a wider scope, e.g. the Compass community recycling project in Peterborough, works in partnership with a credit union – in this instance RSACUL (Rainbow Savers Credit Union Ltd) to meet this need. A number of CUs, however, find themselves mainly regarded as “Christmas clubs” for holding savings until required, and herein lies a problem. Yields from loans are the only regular source of revenue, so if they don’t lend money they can’t make money. It is
Access Point
Access Point
so many people still do not understand, the struggling groups could do well to learn from this kind of model”.
Service levels
Case1
Given the reliance on volunteers, some CUs experience problems delivering a service that is consistent and convenient for members. This will be more likely if a CU is small or quite new, and can exacerbate the problems of recruiting more members to become financially viable. There is sometimes a problem with the individual(s) managing deposits and withdrawals/loans being available at a convenient place and time. This is not such a problem if the common bond is via an employer of sufficient size to manage the finances through the payroll and its wages or finance department, but can be a real difficulty for community based CUs.
ICU member Sue now borrows from ICU instead of her doorstep lender. Her last doorstep loan of £200 had a total charge for credit of £120 resulting in total amount payable of £320, 32 weeks at £10 per week. Same size loan from credit union: £200 repaid over 26 weeks at £8 per week. Total charge for credit cost her £6.67 interest giving total amount payable of £206.67. No arrangement fees or insurance costs (free insurance from credit unions)
This leads to the issue of size itself. Potential income is a function of the number of members and the size of the loan account. Smaller CUs can tend to be over-reliant on a few hardworking volunteers. What happens if a key person gets sick or quits? Can a tiny volunteer workforce be available at enough times and places to cater for members? The Guild research, while its sampling of CUs was, by its own admission, too small to draw sweeping
Case Studies from Ipswich Credit Union
hoped that more flexibility in any future Credit Unions Act might present a solution to this bind. On the positive side, however, The Guild research shows that members value the opportunity to save just as much as the opportunity to borrow. Nicky Stevenson of The Guild commented: “Some CUs seem to operate in a vacuum and have little contact with other agencies in the community. The successful models, such as the Earlham Credit Union in Norwich, have active links with debt counselling services and other community networks. They also promote a young savers scheme to help people get used to active use of the credit union facilities. Although all the credit unions consulted in the research complained that it is hard to promote a product that
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The issue of size
Case 2 ICU member David tried to open a savings account in Ipswich with a building society. He was turned away from three; they all wanted a minimum opening deposit of £100 or a standing order of £20 per month. He set up a standing order of £10 per month with ICU instead. He said “some months I can manage more, but when I have a phone bill or electricity bill I can’t manage more than £10.” Note that the new Post Office savings account requires an opening deposit of £100, this by a provider who actually seeks to serve lower income people more than the average high street provider!
Finance conclusions from, did note this as a difficulty for at least one of the smaller CUs it interviewed.
A joined-up approach to running a Credit Union
Given the issues of size and the need for credit unions to reach critical financial mass, it is not surprising that an increasing number of credit unions have taken a joined up approach, associating and pooling resources while retaining their independence. This also overcomes some of the problems where the common bond is more narrowly defined.
Mergers: Harlow Save and Leeds City CUs
Two approaches to creating larger Credit unions can be found in the region: through mergers of small CUs, e.g. Harlow Save, previously four CUs. Further afield, Leeds City Credit Union is a very large scheme, formed by the merger of five previous smaller schemes.
RSACULs’ hub and spoke model
An alternative, piloted by a partnership of RSACUL, Waveney District Council and Suffolk ACRE, is the hub and spoke model (sometimes called “franchise” or “satellite working”) whereby a local cluster of collection points can “buy” centralised services from an administration point. RSACUL, itself one of the larger local CUs, is now beginning to demonstrate some positive gains. One of its primary
Case 3 Dan has moved around a lot and is living as a lodger at the moment. He has no bills in his name, and has no passport or driving licence. He has been turned away by banks who say he doesn’t have enough ID, but he has cheques to cash and a job offer. He opened a savings account with ICU, who accepted the ID he had already shown the banks. ICU keeps to the same money laundering ID regulations as all deposit takers, but is able to be more flexible, actually looks at documents and makes a fair decision in accordance with the rules. Banks could do this too, but choose not to – it takes too much staff time. ICU has volunteers who don’t mind spending the time needed to establish sufficient ID.
geographical focuses is the Lowestoft area because there are no banks there. It is also developing the complementary ideas of a food co-operative on the same premises. RSACUL has strong links with the Compass recycling project in Peterborough, and is beginning to explore developments with the Huntingdon Housing Partnership in Huntingdon. RSACUL’s common bond is through local membership of the Co-operative Group.
Ipswich Credit Union
Another good example is the Ipswich Credit Union, which works closely with other credit unions such as RSACUL. In a short period of time they have achieved over 500 members and their loan percentages – as previously stated, virtually the only way credit unions can currently make money – is exceptionally high.
Conclusion
As grants begin to expire, sustainability is an issue for credit unions. Mergers have yielded greater security and economies of scale. Models such as “hub and spoke” that give some of these benefits – where different common bonds preclude merger – may be one of the most promising means of gaining some of the benefits of rationalisation. Peter See, (formerly of Suffolk ACRE and now SEEE partnership development officer) commented: “speaker after speaker at the netCUDAs conference described the hub and spoke model as a goal – and we have done it!” One opportunity for credit unions in the region to develop joint working practices that has been proposed would be to develop a network facility on the Nearbuyou website to enable people to share ideas and develop joint working initiatives. The Guild report also recommends that a feasibility study is undertaken into a joint ‘backroom service’ for small credit unions to enable them to reduce their transaction costs. And is it a vain hope to think that future Credit Union Acts would allow CUs just a little more flexibility in investing savings accounts surpluses? Or that the FSA would agree to the combining of common bonds? And let’s remember that credit unions are not the only game in town – see boxes for further information.
Over the Rainbow S
etting up a new credit union can be a daunting business, costing between tens and hundreds of thousands of pounds. An alternative is offered by Rainbow Saver Anglia Credit Union Limited (Rainbow) through their “hub
and spoke” model. This allows people to set up a collection point in their local district without having to set up a completely new Credit Union. Rainbow currently covers Cambridgeshire, Norfolk, Suffolk, Essex as far South as the A 120, and has plans to expand to cover all the six counties of the eastern region. The CU has been going for six years with a common bond that members must live in the region, and be members of the Co-operative Group. Potential members can join Rainbow for three pounds, and a further one pound will get them into the Co-Op if not already a member. Rainbow hasn’t paid a dividend yet, but hopes to be able to soon. Rainbow is suppor ted by Keith Presence, credit union development worker at Cambridge Housing Society, a very Cambridge Housing Society, says that Credit unions form forward looking housing society part of a multi-faceted strategy to improve the lives of which seeks to help their tenants CHS's residents.
with benefits, education, training and financial services to help those who need it find their way into employment, and improve the quality of their lives. “The housing society is interested in credit unions as part of a multi-faceted solution to improve their lives,” credit union development worker Keith Presence told me. This progressive approach has won the housing society the iN business for neighbourhoods award, for which they were nominated by 60 residents of housing associations across the country beating competition from 300 other Housing Associations. “The key problems facing credit unions is recognition and delivery,” Keith told me, “also, there is a tendency for us to be seen as a second rate alternative to a bank. We are not. Credit Unions are regulated by the Financial Services Authority in exactly the same way as the banks and building
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Finance
All in it together T he Harlowsave Credit Union was formed by the amalgamation of the four credit unions which served Harlow. The largest of these was the Harlow District Council Employees Credit Union, which began life in 1980, as did the Harlow Communities Credit Union. The other two were the Harlow Co-operatives Credit Union and the Parndon C h u r c h e s C r e d i t Un i o n . Because the individual unions didn’t share a common bond, the new CU had to define a new one. It chose a “live and work” in Harlow common bond.
Saving, borrowing and “a foot on the ladder”
One year on and going strong! One of the newer credit unions in the eastern region is the Liberty Credit Union, which received its Financial Services Authority registration in March 2003, and commenced operations in September of that year. The CU is based in Essex, and open to those who live and work in the Romford and Havering areas. The union has a volunteer staff of twenty and one paid staff member, and hopes to employ more in the next six months. The volunteer workforce and the low rent for its premises in Romford keep its overheads low. Its goal is to be self-sustaining in three to four years.
Swift growth From left to right, Ryszard Opasiak, President of Harlowsave; Marie Mendoza, Occasio House resident trained as a collector; Roy Parsons, Treasurer of Harlowsave; Herbert Kyazze, Occasio House resident trained as a collector; and Lorna Spenceley, Leader of Harlow Council
The union has grown fairly swiftly, having to date 300 members, with 20 collection points available to them. The CU made its first loans this year, lending about £50,000 in various amounts. The union’s assets are £85,000 in share balances. Working with some of the larger employers in the area, it plans, in the next year, to set up deductions from members’ payrolls to make saving easier. Reasons for saving vary from those on low incomes to people who share the union’s altruistic point of view.
Harlowsave has 806 members and £986,000 in assets. Its main collection point is at its office, where executive officer Kate Collins works with two parttime administrators and two other parttime staff. The age range of savers goes from babies of a few months who have had accounts opened on their behalf to an 83 year old pensioner. The maximum loan they can give is about £10,000 above shares, and their largest loan to date was £15,900. Harlowsave has been working with
Occasio House, a supported housing project for young people, to help residents into their own housing. Harlowsave has trained young people within the housing project to be collectors, offering them a chance to take the first steps into saving at the same time as they are finding their first home.
societies and consequently are just as safe a place for your money. A recent Which? Report gave Credit Unions an excellent rating, best of breed in some cases, in comparison to other financial services providers. Members also receive life insurance, equivalent to up to twice what they have saved up. Credit unions can even open accounts for homeless people. Keith said, “ as long as people can demonstrate they are honest, reliable and have the ability to pay, that’s all credit unions need to know. We don’t need to know their whole credit history.”
People are getting the idea! O
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Keith Presence Cambridge Housing Society 01223 713746 Rainbow Administration Centre Unit 6 Maxwell Road, Woodston Peterborough. PE2 7HY Tel: 01733 371760
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Harlowsave 1 Adams House, Harlow, Essex. CM20 1BD 01279 451234 info@harlowsave.coop www.harlowsave.coop
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Liberty Credit Union Ltd. 7/9 Victoria Road, Essex. RM1 2JJ 01708 741899 libertycu@abcul.org
ne of the problems faced by credit Communities helped the West Norwich unions in this country is that the very Credit Union employ what Freda describes concept is not as clearly understood or as “one and a half workers,” a Financial known about as it is in other parts of the Services Support Officer and a partworld. In the republic of Ireland, 50% of time Marketing Officer. Apart from these the population are members. In America, two, all the other staff, including Freda, one in four are members. Even former US are volunteers. The union’s catchment president John F. Kennedy is reported to area is the whole of West Norwich and have been a member of a credit union! the “common bond” is that members Whilst living in Ireland before moving must live and work in the Norwich area. to Norfolk, Freda former US president John F. Kennedy is reported Sheehy was a member of a credit to have been a member of a credit union! union. When she saw a meeting advertised Through the efforts of Freda and her about setting up one in the Norwich area, colleagues, more people in West Norwich she attended. She was the only one who now know what a credit union is. turned up! That was 12 years ago, and Freda is also involved with the the union started was the Earlham Credit Healthfirst Welfare Rights Project, which Union which has evolved into the West advises people on low incomes and Norwich Credit Union of which she is now benefits, and works very closely with the the Treasurer. credit union.
Putting a credit union on the West Norfolk map
A grant from the New Deal for
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West Norwich Credit Union Ltd. Norwich, Norfolk, NR5 8AD 01603 501301
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