Irish credit unions are on the verge of strengthening their competitive position in the mortgage market. As early as the autumn season, every credit union in Ireland will have the capability to offer mortgage arrangements. If they are incapable of providing the loan themselves, they can now forward mortgage applications to other credit unions.
This significant change in policy will provide credit unions with the opportunity to garner a larger portion of the banking industry’s mortgage market. It is predicted that the mortgage lending capacity of credit unions may amount to €1 billion annually by 2027, potentially ranking them among the top five mortgage lenders.
Credit unions can also transfer applications for varied facilities like business loans, current accounts, and debit cards, to their counterparts. Essentially, they’ll be able to partner with different credit unions to cater to a broader range of products for their members.
Legislative modifications approved earlier this year may steer credit unions towards becoming the social fiscal enterprises within the mortgage market of Ireland. With the decline of building societies in the Republic, this move could greatly benefit consumers.
Originating from the late 19th century, building societies in Ireland initially came into existence with frontrunners combining financial assets to acquire properties. The distinguishing factor with these first organisations was their mutual nature, focusing on supporting their members and providing them with competitive rates for savings and home loans rather than generating profit.
The fall of the building society resulted in profound ramifications for the mortgage arena as the community-focused home ownership spirit of traditional building societies was eliminated. The secure pricing provided by conventional building societies was lost, and consumers and their mortgages were exposed to the uncertainties of global financial markets resulting in adverse effects.
The enlargement of credit unions’ role in the mortgage sector aids in compensating for the gap left by the dissolution of Irish building societies.
The Irish government supports this expanded role of the credit unions in the mortgage industry. The Taoiseach Simon Harris, after conducting a series of discussions with mortgage providers during the summer, expressed optimism regarding credit unions’ plans for expansion, particularly in the mortgage sector. Harris has vowed to address several issues brought up by credit unions, giving hope for their capacity to lend and do more.
Ultimately, if credit unions can increase their share of banks’ mortgage sector, it will be to the advantage of consumers. In fact, if usage of credit unions for routine financial services expands, the situation further improves for consumers. The key distinction of credit unions lies in their organisational structure – they are owned and led by members, who are also the consumers. They are thus able to deliver cost-effective banking services to its members by plugging any excess back into the system for their benefit.
The establishment of credit unions started in Ireland in the late 1950s, and throughout their development, they remained loyal to their fundamental values of equality, fairness and mutual support. Their intent is geared towards providing just and feasible credit to all its members, with special concern for those underserved or at risk of being neglected by traditional banking mechanisms.
One of the significant perks of being a member of a credit union is the stability of their product and service costs. Since credit unions grant loans from their savings pool, it shields their interest rates from the impact of fluctuations in ECB rates or international cash market fluctuations. Consequently, the members of a credit union aren’t as affected by rate hikes as regular bank customers, as seen in July 2022.
The growth of credit unions’ mortgage portfolios, as well as their resource pooling efforts, should boost the confidence of the Central Bank. Credit unions consider their members’ cost-of-living constraints when formulating their lending strategies.
Moreover, credit unions offer unique advantages that conventional banks do not, such as loan protection insurance that settles personal unsecured loan balances in the unfortunate event of a member’s death.
Credit Unions usually reward their members with a benefit known as life savings protection, which is tied to their savings patterns, to encourage them to save. This benefit, essential for financial stability, assures a handpicked nominee by a union member a certain amount of money if the member passes away while being part of the credit union. Moreover, credit unions regularly put a chunk of their earnings into local community initiatives, such as educational projects and environmentally-friendly programmes.
Recent legislative adaptations certainly aid credit unions to expand their influence, however, to exploit their maximum utility as mortgage lenders, regulatory modifications are necessary. As per current Central Bank guidelines, credit unions can only transact 7.5 per cent of their assets in mortgage lending, which in exceptional cases can be escalated to 10% and 15%. Although the Central Bank, as the regulator, appropriately sets the prudential framework and lending standards for credit unions, modernisation of these guidelines is a pressing need in order to optimise the newfound potential of credit unions under the revised laws.
An all-encompassing approach towards credit unions should be avoided, and the Central Bank should contemplate introducing a tiered method to these restrictions. As such, credit unions with a past record of competent management of their liquidity and established loan books, coupled with sound governance, can be permitted to lend more.
Even though the Central Bank has historically curtailed credit unions to mitigate overextension risks, it should acknowledge the cautious advancements credit unions have made in growing their mortgage portfolios and their collaborative efforts to accomplish shared objectives. Once prerequisites are met, the Central Bank should be open to easing lending restrictions which are currently impeding the progress of the credit union sector.
As demonstrated through consistent efforts, Credit Unions are equipped, willing, and entirely capable in offering services at competitive pricing, fostering the ideal competition required by customers and the Government.
Kevin Johnson, the Chief Executive Officer of the Credit Union Development Association had made this comment.