The credit crunch – are credit unions able to ride out the storm?

Dr Clare Chambers is a senior lecturer in law, Commercial Law Research Unit, Bristol Law School, University of the West of England, Bristol.

Introduction

Credit unions are financial cooperatives which conduct their business for their members. The principal purpose of a credit union is to receive deposits from and to make loans to members. They do not serve the general public. Membership is restricted by a qualification which is referred to as a common bond or field of membership. The origins of credit unions are to be found at the heart of the Industrial Revolution when Robert Owen established two famous cooperatives in Rochdale and New Lanark. The most prominent cooperative influenced by his ideas, the Rochdale Society of Equitable Pioneers, opened their famous Cooperative shop on Toad Lane in 1844.[1] It was an important step in the social and political change that was taking place throughout Europe and in which the people of Rochdale can justifiably claim to be leaders. By 1848 the Cooperative had 140 members and the society’s membership increased to 390 and by 1880 the national membership of consumer societies had reached over 500,000 and by the turn of the century 1.5 million. The members of the two cooperatives subscribed to shares and paid small amounts to raise sufficient funds in order to purchase goods below the market value and then resell them to the members at a saving.[2] These cooperatives were the result of the ‘growing complexities of modern economic life for both farmers and workers’.[3] Importantly, the Rochdale Society of Equitable Pioneers developed a number of principles that have assisted the development of credit unions.[4] The principles were open membership, the democratic control of the organisation,[5] a limited interest on share capital and the return on member’s interests being in proportion to the member’s patronage.[6] These principles illustrate why credit unions are a unique financial cooperative. Under the guidance of the World Council of Credit Unions, or WOCCU, the growth of credit unions is remarkable. In 2007, there were 49,000 credit unions and 177,000,000 members in 96 countries.[7] The aim of this paper is twofold. First, to illustrate how credit unions are able to grow in times of economic hardship – a situation that is demonstrated by examining the impact of the ‘Great Depression’ in the US and the ‘credit crunch’ in the UK. Second, the paper highlights the importance of deposit protection schemes when credit unions face financial difficulties in the US, UK and Ireland.