SERVING the Financially Excluded in Scotland

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Is isn't just credit unions in the United States that are expanding their fields of membership. Here along this country's east coast, a relatively new credit union serving the capital of Scotland is also reaching out to broad new audiences.

Capital Credit Union turned 15 years old this year. It began its life serving government employees only in the Lothian region in Scotland, which offered a potential membership at the time of 23,000 employees. To fund portions of its operations, it received an initial grant from the employer for ?20,000 (sterling) to pay for internal services (post and payroll services).

Since 1989, CCU has expanded its common bond from employer to community-living or working in the Lothian and Scottish Borders area in Scotland (geographically about a sixth of the land mass of Scotland). The population of the new common bond area is in excess of one-million people, making it the largest common bond in United Kingdom.

Today the credit union has more than 10,250 members with assets of ?11 million (Sterling).

Below, Capital Credit Union's CEO, Marlene Shiels, responds to questions from The Credit Union Journal about the credit union, its operations and the award it recently won.

CU Journal: Could you tell us more about your credit union, and the city (market conditions) and people it serves. Who are your competitors in terms of financial service providers?

Shiels: Capital Credit Union has two offices, with its main office in the center of the Capital City of Scotland, Edinburgh. Outside of London, Edinburgh is home to more financial institutions in the United Kingdom and most European countries. So competition is extensive.

The financial services market in the United Kingdom is very healthy, as far as the mainstream consumer is concerned, as money is readily available to most and still relatively cheap to purchase. Whilst credit unions and the mainstream banks are fairly heavily regulated, thereby protecting the consumer, there is a "loophole."

Credit unions face very stiff competition from "predatory" legalized lenders who are not regulated, as they do not hold savings. These lenders can charge exorbitant rates of interest. Capital recently bought out a loan on behalf of a member who borrowed ?4,000 at an APR of 99%, which resulted in interest of more than ?8,000 being paid back. Capital charged an annual Interest rate of 11.7%, which cost the member just over ?900 in interest.

More recently, this is an area where Capital has concentrated on trying to make a difference to those people who are financially excluded (underserved) for many different reasons. That may be through lack of income, education about financial matters, or accessibility to a physical bank. Many banks in Britain have been rationalising over the past few years and closing branches which are not deemed to be profitable (doesn't seem to matter about customer needs or services).

Credit unions in Britain are not yet in a position to become "full service" credit unions. This is mostly in part due to the infancy of the movement, but also as legislation, until 2002, was restrictive to the extreme, which meant credit unions had very little ability to grow. However, things are changing for the better and we are working towards offering more services than our current savings and loans.

CU Journal: Could you tell us more about a recent recognition you received for your efforts, and why you were so recognized? And why do you feel it's important to dedicate resources to doing so?

Shiels: Since the change in our common bond, the board of Capital has recognized that we are, in many ways, in a unique position to help those that society and government has deemed to be financially excluded for whatever reason. Many of the people we are now able to help would not have been able to join the credit union when we had a SEG common bond. By working with local statutory and voluntary agencies, as well as our newly reformed Scottish Parliament, we have been able to develop products and services specifically for people who have in the past been in financial difficulties or have so little disposable income or are on state benefits, that mainstream financial service providers will not lend or will lend at excessive interest rates.

The National Awards for Business Excellence is held annually and organizations are chosen by a panel of "experts" for contributions over and above their normal core services in their chosen field. There are regional heats and the national finals take place at the end of June 2004. Capital Credit Union was chosen as the winner in the Lothian Awards for Business in the Community for all the work we have been doing to bring credit unions to people from all walks of life, regardless of circumstances. Given that Capital Credit Union does not rely on any state (government) funding and all of our community activities are funded from our own surpluses, we are, as an organization, probably doing more to help those financially excluded than many of the much larger and wealthier organizations, such as the banks.

The board of Capital Credit Union is completely committed to ensuring that everyone in our common bond area has access to affordable credit and without being penalised for his or her particular circumstances. We believe that this ethical stance, despite sometimes having a heavy burden financially, is worth the effort.

CU Journal: What might many Americans be surprised to know about your credit unions, or credit unions in you country in general?

Shiels: I think what most Americans would be surprised at is both the scale of our credit unions and the limited services we provide. In Britain today there are more than 600 credit unions serving less than half-a-million members. By far the majority of our credit unions have less than 1,000 members, and no credit union in Britain is currently offering a full range of services to members.

We are currently trying to set up a pilot project to partner with one of the mainstream British banks that would allow credit unions to offer checking accounts and both ATM and credit cards. This however is probably still at least 12 months away.

CU Journal: How do you define those who would fall into the category of "financial exclusion." How do these individuals conduct the financial business that they do, if not using a credit union?

Shiels: In Britain, over the past couple of years, both our governments in London and Scotland have adopted "financial inclusion strategies" for which credit unions were seen as part of the solution.There has been a considerable amount of public funds given to credit unions to carry out particular projects that might help those most in need to access financial products, including basic household insurance. Due to the nature of our ethical and co-operative principles, credit unions will take a more holistic approach to members needs as well as treat each member as an individual.

In Edinburgh alone, statistics show that more than 23,000 households do not have access to a bank account. In our own common bond area in the Scottish Borders (the Border with England), there are considerable areas that do not have a bank in the towns or cities. Financial exclusion is twofold - some people banks will not lend to or even allow them to open a savings account because of their particular circumstances (unemployed, on benefits, bad credit history). New rules from our regulator, the Financial Services Authority, has now made this even more difficult, requiring people to have certain types of identification, thereby sending them to predatory lenders as a last resort. For others, having no place to transact can be a problem, particularly for elderly people who are unable to transact through the use of technology. They, too, become financially excluded.

CU Journal: What types of services do you offer to these individuals? What is it that they want? Is there anything you would like to be able to offer but cannot? Have you adjusted your product or service pricing in any way for such individuals?

Shiels: Credit unions in Britain will allow anyone in their common bond area that satisfy the rules the ability to open an account and save from as little as ?1 per week. Most credit unions in Britain will offer loans from ?50, which NO bank in Britain would even contemplate. Small loans (less than ?2,000 still make up our core business. At Capital Credit Union, because we are doing so well, the board last year introduced tiered interest rates depending on how much you borrow (we do not subscribe to risk-priced lending). The maximum, by law, that a credit union in Britain can charge in annual interest is 12.7%. At CCU our maximum is 11.7% annual interest, with 6.5% our lowest.

As well as savings and loans, we also offer competitively priced insurance products for car, health, home, life, funerals and travel, all of which are provided through CUNA Mutual. As our interest rates are already low, they are very competitive for all our members regardless of circumstances. Furthermore, after a 2.50(British Pound) joining fee, there are no charges AT ALL for operating a credit union account and every account comes with free Life Savings and Loan Protection.

CU Journal: In the U.S the issue of "financial literacy" has taken on quite a bit of importance, with some states now requiring it to be taught in schools. What is the situation in Scotland, and how would you describe the average person's knowledge in this area?

Shiels: In a word, poor. Financial literacy is also deemed to be important in Britain. Some credit unions have successfully managed to convince local education authorities or individual schools to allow credit unions to be part of the curriculum to teach financial literacy. However, this is not normal practice and many people still do not understand the importance of managing finances and not living beyond their means. Unfortunately, the laws in Britain are also changing that makes it easier for people to walk away from their debts and this is having quite an impact on credit unions.

CU Journal: Are other credit unions engaged in similar efforts, and have you worked with them? If so, how?

Shiels: At Capital, we are one of the few credit unions, of our size, to take on such a diverse and geographically large common bond, which brings its own problems.

There are other credit unions doing some excellent work in the communities, but on a much smaller scale.

Credit unions, for the most part, in Britain still work together co-operatively and help each other out when possible.

CU Journal: Are other financial institutions, specifically banks, engaged in similar efforts, and if so, what are they doing?

Shiels: Given the governments strategies for financial inclusion, many banks have adopted financial inclusion strategies and indeed have also introduced a "basic bank account," which allows a member of the public to open an account and deposit funds. But it does not have a credit facility attached, and people cannot set up standing orders (payments) to other third parties (say, for utility bills). By their own admission, most banks do not encourage people to open basic bank accounts. They would rather not have the business as it is a cost and not profitable.

CU Journal: One issue in the U.S. is measuring the profitability-the value to the co-op-of lower-income individuals. Are you able to do this? If so, what have you found. If not, why not?

Shiels: At Capital, we have not had to take this approach to date. That is not to say we would not in the future measure the cost of adopting such a wide approach to financial exclusion and what it costs the membership as a whole. As previously mentioned, the board of Capital believes strongly that everyone should be given the same opportunities, regardless of circumstances.

CU Journal: What are your future plans for the programs in place?

Shiels: Oh, where to start. At Capital, we have a very challenging three-year business plan that would see the credit union double its membership to 20,000 members by 2007. We are also part of the pilot project mentioned earlier to see if we can partner with a bank to offer the full range of "banking" services to our members. This would allow us to take an even greater role in providing those most in need access to affordable credit, and enable people from all walks of life to build savings for their future. This challenge alone will require significant investment in technology, staffing, training amongst other resources.

The future for Capital is looking bright, and with a visionary board and good staff team, as well as many members who join because they believe in credit union principles, we are confident we can achieve all our goals.

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