A major existential threat faces credit unions today due to their inability to scale; losing their member base to virtual, internet-based, financial-technology platform companies (fintechs) offering quick, easy and consumerfriendly services via mobile third-party payment applications, albeit at onerous rates. This would be a huge loss to many emerging-market economies.
Credit unions, also known as savings and credit co-operative societies (SACCOS) or financial co-operatives, make a hugely important contribution to social and economic development. Unlike many financial market interventions over the past 30 years aimed at increasing access to financial services, credit unions monetise local assets and distribute them to qualified borrowers. Local distribution is fundamental to local economic sustainability.
These community-based, co-operative financial institutions have been operating in emerging markets for at least 50 years and have become local institutions. The relationships they have built are real and tangible, including teaching financial literacy, thrift and investment in community. This is important because their work leaves a positive long-term legacy to members, members’ families and the communities in which they live.
Historically, they have been found in rural and remote areas of many emerging economies and are often the only financial institution available to the community. Private, member-owned, they offer high social value by keeping the economic benefits of their lending activity within the community – all profits are returned to members and/or are reinvested into the communities in which they operate.
In most developing countries, credit unions are the predominant providers of external financing for micro, small and medium enterprises (MSMEs), which contribute up to 33 per cent of national income and create four out of five new jobs, according to the World Bank.
In Kenya, for instance, SACCOS have been reported to contribute more than 45 per cent of gross domestic product and it is estimated that at least one in two Kenyans directly or indirectly derives their livelihood from these co-operative organisations. In Tanzania, cooperatives (including SACCOS) contribute about 40 per cent to the country’s GDP and employ 94.7 per cent of school leavers every year by financing SMEs, the majority of which are located in rural areas and wholly depend on the co-operative system for external financing.
The challenge faced by credit unions today is the ability to scale and retain their community-based attributes.
Credit unions arose to provide the common person with access to financial services and a self-help alternative to predatory money lenders. Credit unions still have a role in providing lower-cost access to financial services and an ethical alternative to predatory lending via easy-access payments
Brian Branch - president and chief executive officer of the World Council of Credit Unions