Trust for banks has fallen in recent years and many people have switched to Credit Unions as a more ethical and trustworthy alternative. In addition, as Credit Unions do not have to satisfy external shareholders (or indulge in the risky practices of banks), many have been able to pay a dividend in excess of the interest rate banks offer savers. For many Credit Unions these factors have resulted in a huge increase in the level of shares.
The level of uncertainty over employment has led to many Credit Unions experiencing a decline in demand for borrowings. The result is that shares in Credit Unions have increased dramatically in comparison to loans. In 2012, the rate of growth in shares was 10% higher than the growth in loans in Scotland and in Britain as a whole, the loans to share ratio was 75% compared to 80% in the previous year.
An increase in shares means that the cost of paying the same dividend rate increases as does LP/LS Insurance costs. These all have an impact on what the Credit Union can transfer to Reserves at the year end. At the same time, the shares boost the level of assets within the Credit Union. The result is a lower capital to asset ratio and this is a position affecting an increasing number of successful Credit Unions. In extreme cases this can cause regulatory compliance issues.
Some new products have the potential to make matters worse for these Credit Unions. Interest bearing shares are likely to attract an increase in the level of shares as well as committing the Credit Union to a fixed rate of return at a time of uncertainty.
Many Credit Unions are looking to increase lending, but in the current climate this is not easily achieved without taking further risks. As a result, some Credit Unions are considering restrictions on deposits and/or lowering their dividends as methods of trying to limit the level of their shares and increase reserves.