Credit Unions and Demutualisation
By Race Mathews
Reprinted from the Journal of the Australian Institute of Credit Union Managers, February, 2000
What follows is about why and how demutualisation threatens to destroy Australia's credit unions and what can be done about it. Credit unions are a lot like dinosaurs grazing on prehistoric grasslands shortly before the impact of the asteroid which wiped them out. The difference is that there is still time for their extinction to be averted.
Why the future of credit unions is at risk is simple. In the first instance, the movement's main source of renewal and reinvigoration, through the establishment of new credit unions, was choked off by the enactment of the current financial institutions legislation. So devastating has been the legislation to local financial initiative and autonomy - so insurmountable has been its financial barriers to credit union start-ups and so crushing the burden of its regulatory requirements for smaller credit unions - that, despite repeated attempts, there have been no new credit unions for almost a decade.
Meanwhile, surveys show that many - perhaps most - credit union members no longer understand or value credit union mutuality. How could they, since nobody has bothered to explain what mutualism is and why it is in their best interests for it to be retained? And why, accordingly, would members hesitate to accept the offer of a "fistful of dollars" for their mutualist entitlements - to accept, like Esau in the Bible, a "mess of pottage" in exchange for their birthright?
Another consequence is that credit unions are experiencing a dearth of prospective new board members who have an in-depth understanding of credit unions and unionism precisely at the point where the founder generation, who understood them very well, are dying out. What is being witnessed is a wholesale takeover of credit unions and their board tables by the world view of the wider financial services industry.
Secondly, mergers have been fattening up the existing credit unions to the point where, like the building societies and mutual assurance societies before them, they become attractive targets for would-be demutualisers, with their siren songs in favour of demutualisation. It didn't take the example of the Sunstate Credit Union demutualisation in 1997 - Australia's first and to date only credit union demutualisation - to demonstrate that the reserves of credit unions can provide rich pickings for financial predators. Convince people that credit unions need to get big in order to survive, and you're, halfway to having them accept that big credit unions can only be managed efficiently by becoming banks.
Thirdly, the movement has imported too many senior managers from other sectors of the finance industry, which have little or nothing in common with credit union values and principles. Does not their lack of a proper credit union grounding accordingly render them the more vulnerable to temptation by the obscene spectacle of massively increased remuneration packages - including generous allocations of share options - accruing to some managers of demutualised building societies and assurance societies? Are they in these circumstances any more likely that their building society and assurance society counterparts to be objective sources of advice on demutualisation? And have credit unions anyone other than themselves to blame for having embraced what is effectively a Trojan Horse?
Fourthly, credit unions - like other mutualist bodies including assurance societies, building societies, friendly societies and co-operatives - are widely seen to be an anachronism which has outlived its usefulness. Our times favour competition over co-operation, and individualism in preference to the common good. Demutualisers can always count on a good press, as witness the uncritical attitude of the financial media to a succession of insurance mutual demutualisations, from Colonial Mutual through National Mutual and the AMP to the insurance arm of the NRMA. Correspondingly, those who oppose demutualisation are pilloried as troglodytes, and their arguments are denied a hearing. Is it likely that, when the turn of the credit unions comes, they will be more favourably treated?
Is the situation therefore hopeless? Not necessarily, if credit unions are prepared to learn from their history. Half a century ago - in the 1950s and 1960s - credit unions were effectively a response to circumstances, where a typical home loan was for a thirty year period at a fixed interest rate of around three per cent, but hire purchase interest rates for furniture and other consumer durables were many times higher. What happened was that families in outer suburban Catholic parishes got together round card tables after Mass, pooled what savings they had and took turns to borrow from the pool at interest rates which were affordable for them, thereby creating what were effectively parish credit unions. With the admission of members of other faiths or none at all, the parish credit unions became community credit unions. Later again, trade unions recognised that workplaces were also communities, and the industrial credit unions were born.
The situation today is different. Personal loans for a wide variety of purposes are now available at affordable interest rates from many financial intermediaries other than credit unions. By and large credit unions pay their members the same interest rates on their deposits as banks, and charge similar interest rates for their loans. Meanwhile, new needs have emerged which are at least as urgent as was the need for affordable consumer credit in the 1950s and 1960s. For example, the 1990s have seen a massive increase in the number of Australians who are out of work, under-employed or experiencing chronic job insecurity. In addition, many more Australians are homeless, inappropriately housed or impoverished by the high cost of housing. What is required today is less personal loans than a means of mobilising capital at the local and regional levels to provide jobs and affordable accommodation.
The challenge in these circumstances is for credit unions to reinvent themselves, and so regain their relevance to the lives of those Australians who are most in need of them. As a broad body of experience from the Desjardins credit unions in Canada to the Mondragon credit union - the Caja Laboral Popular - in Spain clearly demonstrates, credit unions have enormous potential for enabling discouraged and dispossessed communities to lift themselves by their boot-straps by - for example - harnessing local capital for regional development and so creating new businesses and jobs.
Similarly, credit unions could readily become the driving force for the development of social housing - including common equity rental housing co-operatives on the Scandinavian or Ontario models - such as are so urgently needed by the great numbers of Australians who are struggling literally to keep roofs over their heads. How mutualist bodies other than credit unions have re-invented themselves is exemplified by Co-operative Services Inc in Detroit, which has evolved its business over time from affordable, hygienic home milk deliveries through eye-testing and supply of spectacles to its present status as a major provider of accommodation and support services for older people.
So much for some key tasks for credit unions in their fight for survival. How then can government help? What is necessary in the first instance is a recognition from government - preferably explicit - that credit unionism is about enabling ordinary people and communities to engage in self-help, and thereby it is entitled to special consideration. While it would be desirable to have back the tax incentives which the Whitlam government awarded to the credit unions in recognition of their not-for-profit status and contribution to community development and well-being, the more pressing requirement in the first instance is for government to get out of the way of credit unions, get off their backs and allow them to get on with the job.
That means getting rid as much as possible of the statutory and regulatory requirements which are blocking the establishment of new credit unions, and cramping the development of those which are already in business or inhibiting them from striking out in new directions in response to new needs. It involves, among other things, recognising that one size does not fit all, and smaller credit unions differ in their regulatory requirements from large ones.
Secondly, legislation is needed urgently to protect credit unions against demutualisation, as much from within as by external financial predators. Ideally, legislation would be expressive of the fundamental characteristic of all mutuals including credit unions, namely that each generation of members adds to their assets in the expectation that they will be retained for the benefit of others still to come - that current members are trustees in effect for the intentions of the dead and the inheritance of the unborn. At the very least, there would be legislation such as has been enacted recently in Canada, requiring that directors, managers and staff of demutualising mutual assurance societies should not receive benefits other than those available to all policy-holders.
Let all this happen and there is a chance - just - that our credit unions may not end up by becoming so many second-rank banks, or be absorbed ultimately by major banks and other financial intermediaries.
Race Mathews is a Senior Research Fellow in the International Centre for
Management in Government at the Monash University Monash/MtEliza School of
Business and Government. He was previously a state MP and minister, a federal
MP, a municipal councillor and chief of staff to Gough Whitlam as Leader
of the Opposition in the Australian Parliament. His Australia's First Fabians:
Middle-Class Radicals, Labour Activists and the Early Labour Movement was
published in 1994 by Cambridge University Press and his Jobs of Our Own:
Building a Stakeholder Society by Pluto Press (Australia) and Comerford and
Miller (UK) in 1999.
Include the citation below and GEO Newsletter grants permission to copy, use,
and distribute this article.