When you have low income, it is very difficult to get credit. And yet most of us would not be able to handle certain purchases directly, even if we make a decent salary. This is where the Credit Union offers a real alternative.
Run by a voluntary board of directors that is elected by its members, a credit union is basically a financial cooperative, owned and controlled by its members.
They offer affordable loans and encourage members to save. By law, the maximum that a credit union can charge is 12.7% and it is charged on an increasingly reduced balance, which means that each week or month it will pay less and less interest. There are no hidden fees and you will not be penalized for paying off the loan early.
Anyone can join a credit union, as long as they are part of the “common bond.” They can be people who live in a shared area, who work for the same employer, or who belong to the same association.
So how can you start your own credit union?
The average time it takes to establish a credit union is one to three years. The minimum number of members required for the initial setup is 21 and the maximum number of members once established is limited to just 5,000 people.
Once you’ve gotten enough members to start your union, there are a number of tasks that will need to be completed.
o First, decide on a common link: where your credit union will operate
o Assemble a group with the necessary range of skills and experience to develop a successful community business
o Run a donation drive – find out what demand there is for a credit union in the area you want to serve and use the information gathered to inform your business plan projections
o Join the British Credit Union Association (ABCUL) as a Study Group member – for just £ 35 a year you get a comprehensive manual and access to all ABCUL information services
o Discuss and research your plans with regulators – The Financial Services Authority (FSA) will need to approve your common bond and make sure your business plan and policies and procedures meet their standards. The FSA website http://www.fsa.gov.uk provides the regulatory requirements that credit unions must now meet to safeguard members’ money in the same way as banks and mortgage companies.
o Get funding and sponsorship, and include the numbers in your business plan
o Elect Officers: Credit union officers and employees will be required to obtain ‘Approved Person Status’ from the FSA and will need training for their duties.
o Think about marketing and promotion and how you will achieve the objectives of your business plan.
o Start your credit union.
It is also vital to secure sponsorship from local sources, such as employers, housing associations, business groups, or councils, as setting up your own credit union can initially be a costly process. ABCUL estimates the costs between £ 30,000 and £ 70,000 to set up a plan with premises and staff for the first three years.
Credit unions in the UK must also achieve a statutory minimum reserve of 10 per cent of aggregate assets to protect their members. Until they reach this level, credit unions must transfer at least 20 percent of their surplus to reserves each year.
Covering you and your limbs
In the UK, a credit union has to take out insurance to protect its members’ funds against fraud and mismanagement. However, there is no industry-wide compensation plan to protect member savings in the event that a credit union goes bankrupt.
Before setting up your credit union from scratch, consider investigating whether credit unions in neighboring areas would be willing to expand their common bond to your locality or workplace.
Many credit unions are expanding their common ties to cover much larger populations, and your area may already be included in someone else’s plans. ABCUL can advise you on initiatives happening where you are and put you in touch with the right people.
For the community at large, a Credit Union improves the general financial knowledge of its members and offers training to its volunteers who invest in local money.
It helps restore a sense of pride in disadvantaged and disenfranchised communities and provides a means to address financial exclusion.