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Re-discovering a paradigm: the promotion of savings by credit unions within the policy context of UK asset-based welfare.

Anita Marchesini, University of Bologna

Paul A Jones, Research Unit for Financial Inclusion, Liverpool John Moores University

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Abstract

It is now recognised that the current financial crisis owes much to the expansion of a credit culture in many developed countries. Over several decades, countries such as the UK have seen people finance their spending, not from savings or current income, but from more and more borrowing. Credit became a way of life, and by 2008, the Bank of England revealed that some 11 per cent of the UK population reported difficulty in keeping up with their bills and credit commitments.

Credit unions are self-help, member-owned financial co-operatives that exist primarily to serve their members. Since the end of the 1980’s, many credit unions in Britain were established in low-income areas with a specific remit to serve the poor and financially excluded. For the most part, in line with the prevailing culture, they were established as borrower-oriented organisations, whose primary objective was to offer affordable loans to people who otherwise would be targeted by high-cost, alternative lenders, often charging over 200% APR on low value loans.

However, influenced by international approaches to credit union development, and latterly by the impact of the financial crisis, many credit unions in Britain have endeavoured to transform themselves into saver rather than borrower-oriented institutions, particularly in low income areas.

This paper arises out of a 6 month research study, conducted by the University of Bologna in partnership with the Research Unit for Financial Inclusion at Liverpool John Moores University, into the impact of this transformation within British credit unions. It concludes that the move to become more focussed on saving has not only strengthened credit unions as viable, third sector businesses, but also has resulted in enabling many people on low incomes to access a surer pathway into financial inclusion. The paper analyses the impact of UK Government asset-based policies on British credit union development as well as partnership approaches to service delivery.

Introduction

The UK is probably the only European country to introduce asset-building theory, as conceived originally by authors such as Sherraden in the US (1991), into national policy in order to maximise savings and build a savings culture. At a national level several public initiatives were set up under the Labour Government (1997–2010) in order to foster the increase of savings and assets (creation and accumulation), and to tackle their erosion. (preservation).

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This context contributed to many British credit unions rethinking their purpose and strategic policies, in line with this emerging shift towards a greater focus on saving.

There is not an extensive literature on the fostering of a savings culture. Therefore there is a strong case for re-investigating critically the role of credit unions under a new perspective: not solely as providers of affordable credit, but as effective promoters of the value of saving. In reference to institutional theory, this paper endeavours to analyse whether credit unions assist, or otherwise, people on low incomes to save. It also outlines the impact of the policies of credit unions, and their approaches to partnership working, on the development of a savings culture in low income communities.

By way of introduction, key terms are explained in order to establish a structural framework.

Asset-based policies are ‘all public policies that involve encouraging or forcing individuals

to hold assets’ (Emmerson and Wakefield, 2001:4). In 2000, the work Ownership for all published by Kelly and Lissauer (IPPR , 2000) paved the way for a debate on asset building that has characterised the UK scene. More specifically asset-based welfare, as introduced by the Labour Government, was conceived as an additional, ‘complementary, strand of welfare policy’ (HM Treasury, 2001), alongside the improvement of job opportunities and of public services, and of opportunities to maximise income. Social policy initiatives carried out by the Labour Government emphasised saving. These were based on what Prabhakar (2009) distinguished as two main ways of thinking about holding assets: as a means of bringing about social and economic development; and as ‘a condition of social citizenship’ (pag.54)1.

As the name ‘credit unions’ suggests, in Britain these financial cooperatives have typically

focussed on the lending side of their business. However in line with their statutory objectives, credit unions also play an important role in promoting a mentality of thrift and in stimulating the saving demand. Also, they are key-actors in educating financially capable members. Financial capability is ‘a broad concept, encompassing people’s knowledge

and skills to understand their own financial circumstances, along with the motivation to take action’ (HM Treasury: 2007:19). Central to the term is an understanding of behavioural change2. Financially capable consumers have inevitably to make decisions about and to take actions on saving while planning ahead, budgeting, and managing their finances effectively.

1 The author goes on by stressing that overlaps exist between the social policy and citizenship strands of asset-based welfare 2 There is no general agreement on a universal definition and terminology of financial education: financial literacy, financial capability, economic education, economic capability and financial education are often used interchangeably (Orton, 2007; CPRN, 2007). However, although capturing the same general concept, they are characterised by slightly different conceptualisations. The Discussion Paper conducted by PRI, 2004 describes financial capability as ‘a more promising conceptual framework’ (pag.6) if compared to financial literacy, on the premise that: first, it includes also responsible and informed behaviour. Second, the term moves beyond the strict categorisation: financially literate or illiterate and financial capable or not (Dixon 2006, pag.21), thus depending on individual characteristics and on the changing environment. In this sense it has a dynamic nature. Third, by referring to other authors, the study recognises that financial literacy makes precise assumptions about the educational needs of the disadvantaged groups, namely in terms of budgeting and money management. However different levels of capabilities are diversely distributed across the population.

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Methodology

The research was based on a mixed methodology, collecting both quantitative and qualitative data. A questionnaire survey was conducted of 125 British credit unions, of which fifteen replied in full (a response rate of 12%). Qualitative methods included semi-structured, in-depth and face-to-face individual interviews with eight credit union staff and volunteers. The research was conducted between October 2009 and March 2010.

1. Economic institutions and the habit of saving

One of the main underlying drivers of the current financial crisis has been the expansion of a credit rather than a savings culture in many western countries over the last few decades. In 2007, Britain registered the highest real income per capita in the European Union. However, with one of the lowest saving rates in the EU, Britain had become a credit-oriented culture where people borrowed rather than saved. It was consumer credit that stimulated the economy and the demand for products and services. The problem was that often people had begun to live beyond their means.

‘UK economy is awash with cheap money. Interest rates remain virtually the lowest they have been for decades. Even unsecured loans are available for less then 10% APR. (…) The credit is now a way of life, and a convenient means of enabling ‘us’ to buy anything from foreign holidays to this week’s supermarket shops’ (Cooper in Darton, 2004: 123).

This cultural context of easy access to credit is one of the main factors that explains the declining saving rate that characterised the period 1993 to 20073. The increasing level of household indebtedness in Britain is also well documented. Even in 2004, it exceeded £1 trillion, equivalent to around 140% of household income, this was up from around 105% in 1994 (May et al.2004). As of November 2009, UK consumers had £1.46 trillion of outstanding debt and personal borrowing represented 160 per cent of household annual pre-tax income (National Audit Office 2010). Equally up was the similar and apparently coterminous rise in serious debt problems. By 2008, Bank of England research found that some 11 per cent of the UK population reported difficulty in keeping up with their bills and credit commitments (National Audit Office 2010).

In this regard Dixon (2006) maintains that:

‘There has been a shift from a thrift ethic where people limit their consumption of goods to a consumption ethic’ (..) people are more willing than ever before to take on debt and use credit in return for more immediate gratification, and less willing to think for the long term’ (p.18).

It is hardly surprising that the most recent Family Resources Survey has found that, in 2007-2008, 27% of all households had no savings at all which rose to 44% among low income households (with total weekly households inferior to £2004).

3 See www.statistics.gov.uk/instantfigures.asp 4 Overall figures show that affordability and level of savings are strictly connected. However there are a number of different factors which aggravate saving exclusion. As stressed by Kempson (2005) income is not the only significant

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Furthermore from another survey5 came out that 38% of lower income families were saving informally6 only, compared to 29% of the better off.

Hence, for many the need to restore a culture of thrift became a critical issue. This is a unifying theme that lies behind the concept and policies of asset-building, understood as the process of the creation, accumulation and maintenance of assets. In this regard, Thiel and Nissan (2009) have recently described asset-building as:

‘a strategy to help people out of poverty (that) differs in its approach to more traditional thinking which seeks to iron out lows on incomes. The emphasis of asset building is on long-term savings, either through savings accounts, wealth creation (e.g. house purchase), but also through investment in education and training’ (NEF, 2009).

The definition emphasises the contribution that assets (as a stock of resources)- if juxtaposed to income (as a flow of resources)- can offer to individuals in terms of assistance, especially to those who live within a context of vulnerability7. However, the latter are subject to the prejudice of being regarded not solely “un-creditworthy” but also unworthy or incapable of acquiring assets and of using them for development8.

There is therefore a strong case to explore how financial institutions, by assisting in the modification of individual preferences and in behavioural change, may influence people’s attitude and propensity to save. According to Bowles (1998):

‘Markets and other economic institutions do more than allocate goods and services: they also influence the evolution of values, tastes and personalities (….) . Changes in economic organisation may foster dramatic changes in value orientations (…). If preferences are endogenous with respect to economic institutions it will be important to distinguish between the effects of the incentives and constraints of an institutional

factor explaining a individuals’ saving behaviour. Indeed the recent regression analysis on the unbanked carried out by Kempson and Finney (2009a) has revealed that the level of education (Age left full time education: 16 or under), the household composition (One adult, one or more children), the affiliation to an ethnic group (e.g.Pakistani or Bangladeshi), the presence of long-standing illness; Permanently sick/disabled; age profile (25-34 years old is the most risky range). 5 Source: new analysis carried out by Kempson and Finney (2009b) on the Baseline survey of saving for and children, dated 2004 (N=1940). Also, 12% of the respondents were saving formally only (compared to 20% of the better off); 25% were saving both formally and informally (compared to 34% of the better off). 6 Research carried out by Dolphin (2009) has shown that ‘families in the study used a range of savings devices, including Christmas clubs, giving the money to a friend or another family member and jars and tins in the kitchen’. The author goes on by stressing that ‘handing the money over to someone else to look after, are seen as important because they take away the temptation to dip into money before it is supposed to be spent’ (pag.17). NPC (2008) underlines the frequent use of Christmas clubs, run for instance by butchers, pubs, social clubs, toy shops (pag.87) and workplaces, where savings are put together. It is common knowledge that the implications of informal savings are that financially speaking the individual will not earn any interest on savings (returns). Perhaps more importantly, in legal terms the risks of fraud, mismanagement and collapse (and also theft or loss) are implied (safety). Indeed customers’ savings are not covered by the FSA’s Financial Service Compensation Scheme (FSCS). 7 ‘The state of material insecurity often translates into a psychological state of worry and anxiety. Income vulnerability occurs because, without any financial cushion, even a small mishap such as a broken washing machine or fridge can upset the precarious financial ends meet on a low income (Sodha and Lister, 2006:8) 8 Beverly and Sherraden, (1999:458) denounce the prejudice towards the poor in terms of not being motivated to save (e.g. they lack foresight, precaution, and/or desire to leave a bequest), not having the discipline to save; or that deferred consumption is impossible, given their limited incomes’. On the contrary US empirical research has revealed that although the amount of savings rise parallel to incomes, saving rates are higher among the poor.

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set up (…) on behaviours, and the effect of the institution on preferences per se’ (p.75-79)

In a similar way Bonazzi, (2006: 94) argues that:

‘Individuals create institutions but in turn these same institutions shape the individuals, by establishing constraints and prescriptions. Therefore it is the case of institutions that (…) suggest the ways to act as much as to know and interpret the world’9 (pag.94)

In Can the poor save? Saving and Asset building in Individual Development Accounts (2007) Schreiner and Sherraden state that: ‘People tend to follow the life paths worn smooth by policies and to take greater notice of options highlighted by institutions’ (p.17). The authors stress that institutions are those ‘policies, programmes, products and services that shape opportunities, constraints and consequences’10 (p. 30). In other words, financial institutions can put in place the conditions to enlarge the set of choices accessible to everyone, by stimulating demand in the saving market. Underlying the theory there is the idea of reciprocity: once the individual is given an asset, he/she is supposed to use these assets in order to achieve the objectives that are valued by him/her. Hence the financial capability perspective is relevant to saving and asset accumulation: as Sen (1999) argues, economic facilities are substantive freedoms to achieve the goals that each one of us values. In this perspective assets have an instrumental value , not solely a market value per se.

1.1. Towards an institutional theory of saving

The US academic Sherraden (2006) identifies the seven institutional constructs regarded as key-elements of an institutional theory of saving; these are: (1) access; (2) information; (3) incentives; (4) facilitation11; (5) expectations; (6) restrictions; (7) security. In particular these drivers emerged through applied research into Individual Development Accounts (IDAs) in the US.

‘Institutionalised12 saving mechanisms’ are mentioned in terms of: convenience and safety characterising these public initiatives and the raising of attention on the beneficial outcomes of saving coming from the implementation of specific policies. Later studies (Sherraden and Schreiner, 2007) explore further the rationale, by considering not only the economic, but also the socio-psychological effects that may derive from the specific design of the institutional structure of asset-building programmes13.

9 Our translation 10 In ‘Schemes to boost Small Savings: Lessons and Directions’, presented at a conference ‘Access to Finance: Building Inclusive Financial Systems’ World Bank, Washington, DC, May, 30-31, 2006, Sherraden describes institutions as ‘formal laws and regulations, financial enterprises and services, and financial products’ (pag.8) 11 The first four of these were included in previous study by Beverly and Sherraden (1999). 12 By ‘institutionalised’ they mean ‘relatively formal and structured saving mechanisms’ (pag.469) 13 The scholars identify eleven ‘non-economic effects’ (pag.32 onwards) coming from IDAs; these are: the creation of a social pattern, by sending the message that poor people can save; the connection with financial education; the match cap as a psychological norm in terms of target setting; the statements as a feedback what shows the progress towards saving milestones; the requirement of regularity as a fundamental element to acquire the habit (even if participants deposit

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Financial information and education are based on the internalisation of the notions underlying the dynamic process of saving. Findings from IDAs research has revealed that 10 hours of education is positively associated with developing a positive approach to savings ; behind that threshold no effect seems to appear. Attractive saving incentives are represented for instance by a higher match rate or match cap. From qualitative research the scholars found that IDA participants often turn the monthly saving cap into a target and goal (Sherraden, 2006: 9).Similarly, facilitation (e.g. payroll deduction, automatic transfer) are positively correlated with the quantity and frequency of saving.

Restrictions in terms of designated uses for IDAs are a typical feature of the US Asset-building programmes, not belonging to the UK model.

Security is the connected with the perception of safe and sound institutions for depositing savings. Together with convenience and returns it is a feature that savers most value (WOCCU, undated).

1.2. The replication of Asset-building within the U K context

Against this background, in Britain Labour Government interventions to combat financial exclusion were initially based on the so called ABC model. The focus was on widening access to money advice (A), increasing the number of ‘banked’ individuals (B); and widening access to affordable credit (C). However, more recently there has been an increasing interest in the promotion of saving and asset-building that resulted in the set up of public policy initiatives, which included the Child Trust Fund14 (CTF), the Saving Gateway (SG) and Individual Savings Accounts (ISAs).

Interestingly according to Prabhakar (2009) the Labour’s approach to asset-building relied heavily on ‘using the state to distribute assets’ in the form of saving (pag.54), a different approach to the current Coalition Government, which although favouring saving tends to see a reduction in the role of the State. The underlying idea for the previous Government was that governmental social expenses were social investments , in line with what the sociologist Esping-Andersen regards as activation policy. In this sense a shift from a ‘Social

insignificant amounts); the orientation towards future; realism in assessing the probabilities of realising the various possible consequences of saving. 14 The Child Trust Fund is a savings and investment account for children. Those born on or after 1 September 2002 were to receive a £ 250 voucher to start their account. In particular children from lower-income families were to receive a larger payment and the funds will be locked away until adulthood (18 years old). For more information see http://www.childtrustfund.gov.uk/. The Child Trust Fund is now being phased out by the current Coalition Government as part of a series of money-saving cuts. The Saving Gateway is a two year cash saving account, available to people who are entitled to certain benefits or tax credits. It provides a strong incentive to save, through a Government contribution of 50p for each pound saved. The aims of the scheme are to kick-start a saving habit among working age people on lower incomes, by providing a strong incentive to save through a Government contribution for each pound saved; and promote financial inclusion, by encouraging people to engage with mainstream financial services. The current Government decided not to roll out nationally the SG. Individual Savings accounts are one of the schemes based on tax relief as an incentive to save. However, it is worth noting that a research carried out for the HM Treasury (2005) has revealed that respondents in the lowest income group (i.e. those who earned less than £9,360) had the lowest level of ISA ownership. The main reason relates to the progressive nature of the British income tax system.

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Welfare State to a Social Investment State’ occurred (Sherraden in Kober & Paxton, 2002:5).

NPC (2008) questions whether financial services are social or market goods, thus implying a different role for the State. As maintained by Emmerson and Wakefield (2001), the intervention of the Government is needed in order to correct irrational saving decisions, synonymous of a kind of market failure that needs to be addressed.

Crucially the last Government financial inclusion strategy was based on a partnership approach, that involved collaboration between central government, regulators, local authorities, other commercial organisations and not-for-profit organisations, sharing a common commitment and working towards agreed goals. Hence Santiago, et al, (2005) maintains that the previous Government embodied ‘facilitator, mediator and regulator’ roles (pag.47).There was a strong focus, for example, on encouraging the banks to work with community financial organisations, including credit unions, to develop financial services in low income communities. This led banks such as Barclays to set up its own financial inclusion team and fund a range of developments in the community15

By focussing specifically on partnerships with the third sector (e.g. credit unions, housing associations, money advice agencies), Mitton (2008) maintains that ‘it ‘[the third sector] is able to combine advice with product provision, to undercut high street rates, to be socially responsible and to promote a savings ethic’ (pag.19). These organisations are seen as providers of saving products, as well as contributing to the creation of non financial assets, such as training and education16.

2. Credit Unions as asset-builders

Historically credit unions originate in the willingness of individuals to come together for mutual benefit and, often, to respond to the needs of the less well-off. They are ‘the modern reflection of the long tradition of financial mutual aid within working-class communities’ (McArthur, et al, 1993).

With respect to this, McKillop (2005) states that:

‘All financial cooperatives are conceived around the guiding principles of the cooperative movement. Simply put financial cooperatives are people based and rely on the active participation of members to differentiate themselves from investor owned firms, and to develop and support their competitive advantage’ (p.303).

Berthoud and Hinton (1989) also maintain that:

‘A credit union is a cooperative society offering its members loans out of the pool of savings17 built up by the members themselves. A union is formed by a group of people with a common interest or “bond”- working for the same employer, living in the same area or belonging to the same church, club or ethnic group. By agreeing

15 See http://group.barclays.com/Sustainability/Responsible-finance/Financial-inclusion 16 Points of criticism related to credit unions are: (1) their patchy geographical coverage; (2) the difficulties in the lending activity connected with the credit assessment against bad debt. (Mitton, 2008) 17 Since 2003 the Financial Services Compensation Scheme (FSCS) protects credit unions’ depositors, equal to banks and building societies. See: www.fscs.org.uk/

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to save regularly they build up a fund from which they can borrow at favourable interest rates18. The interest on loans provides the union with an income to cover administrative expenses; any surplus is returned to members in the form of a dividend19 on savings. The common bond between members is intended to minimise the risk of default on loans20. A credit union is a non-profit organisation, controlled by its own membership’. (p.1)

Since the beginning of the 70s many British credit unions were set up with the specific mission to (1) counter financial exclusion; (2) tackle poverty; (3) promote community development; (4) counter disadvantage; and (5) to establish themselves as local development tools (Davis and Brockie, 2001). In line with that, according to Jones (2005) a ‘pervading sense of social mission’ embodied the involvement of many volunteers, which ‘is recognised as going beyond mutuality and cooperative endeavour’ Professionally organised credit unions offer access to ‘flexible savings accounts, instant and accessible loans, bill payment accounts, affordable home and contents insurance and access to money advice and debt counselling services’ (Jones, 2006: 43).

As defined by the 1979 Credit Unions Act21, the objectives of the British credit union movement are: (1) the creation of sources of credit for the benefit of the members at a fair and reasonable rate of interest, (2) the promotion of thrift among the members by the accumulation of savings; (3) the use and control of the members' savings for their mutual benefit; and (4) the training and education of the members in the wise use of money and in the management of their financial affairs22.

With respect to the first element cited, according to Jones (2008):

‘Combating sub-prime lending was at the heart of the anti-poverty credit union strategy. The argument was that this reduced high cost interest repayments on loans and so increased income available to borrowers and their families’ (p.2143)

In the late 80s the phenomenon of bank branch closures, named as ‘financial desertification’ (Thrift and Leyson in Rossiter, undated, pag.7) took place across Britain, mainly for efficiency reasons. Indeed, it is recognised that the focus of banks and building societies on more profitable customers contributed to financial exclusion. That financial gap

18 In regard to loans, rates are capped to two per cent per month or 26.8% APR. 19 More specifically deposits made by members into the credit union are dividend earning shares, which are all £1.00 in value. The dividend is paid annually out of the credit union’s profits . All members are equal in terms of voting rights, regardless of the size of their shareholding. 20 The sharing of a “common bond” is reputed to act as a form of “moral persuasion” which encourages borrowers to repay money loaned from the savings of neighbours, friends or colleagues. (ABCUL Information, 2003 downloadable www.abcul.org) 21 According to Jones (2008) the 1979 Act ‘provided a legislative and operational framework that gave credit unions an identity and the opportunity to build an image of financial security and safety. Under the Act, all credit unions were now required to register with the Registry of Friendly Societies, and directors had to take out fidelity bond insurance, which would protect members’ assets against theft and if credit union officers were found guilty of fraud’. The scholar goes on by stating that ‘its impact would be as harmful as helpful to the development of the credit union movement’ (pag.136). The claim is that the restricted legislative framework, by limiting a credit union’s ability to attract member savings deposits and by imposing a capon interest rates on loans, was one of the explicative factors of a restricting expansion. 22 In addition to that the credit union may, by resolution of its board of directors, adopt one or both of the following social policies within its policies: (1) to contribute towards the alleviation of poverty within the community; (2) to contribute towards the economic regeneration of the community.

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in economic disadvantaged communities was often filled by predatory lenders- high cost credit providers, loan sharks and illegal money lending23- a phenomenon that is still prevalent nowadays. with large numbers of high interest rate loans companies selling loans to the less well off. For the strong local identity of credit unions enables a viable alternative to that high-cost credit providers, thus preventing the asset erosion that threaten individuals and communities.

Jones (2005) argues that serving the financially excluded has led to strong political support of credit unions, seen as ‘vehicles for regenerating local economies’ (pag.14).

Re-discovering the paradigm of saving

Aware that a complete anti-poverty strategy cannot rely solely on the satisfaction of the credit needs of the poor, credit unions traditionally established predominantly as borrower organisations, introduced a shift in focus by adopting a micro savings- led model. In this respect Jones (2008) argues:

‘[i]f the introduction of current accounts was the major step forward in operations, prioritising saving was the sea change in new model organisational culture’ (p.2147).

As reported by Jones (2006), ABCUL coined the expression ‘quality credit union’, thus ‘conceiving saving attraction as key to the sustainability of financial intermediaries, built on members savings nor external capital’ (pag.45), among the others24.

In a similar way Richardson (2000) underlines that saving mobilisation is one of the seven elements25 central to the modernisation of credit unions throughout the world, thus implying:

1. the possibility of economic independence from external financing and from subsidies (e.g. Growth Fund);

2. the provision the liquidity to enable to make loans to the members.

Generally speaking there are several specific elements of the credit union cooperative form that embody savings attraction. First, the increase of total savings builds up the credit union’s stock of share capital out of which it is able to offer loans. Secondly, as long as members invest in their local credit union, as there are no outside shareholders to pay, they know that the only people drawing benefit are people within the common bond. Third savings records are among the criteria of assessment for lending (Berthoud and Hinton, 1989).

23 For more information see also www.stoploansharks.direct.gov.uk or the Research report entitled “Illegal money lending in the UK” (PFRC and POLICIS, 2006). 24 Jones lists the other key elements; these are: flexible lending policy (without the requirement to save in order to borrow); a responsible assessment of the capacity of the member to repay the loan; easy access to cash ; the possibility to deposit wages or benefit for the members; a professional Board of Directors. 25 The other six ‘doctrines’ identified by Richardson are: open door massification; portfolio diversification; efficiency; financial discipline; self-governance; assimilation. The author included those elements in the light of: (1) the increasing abandonment of solidarity group lending within microfinance institutions (MFIs), superseded by individual loans; (2) the high desertion rates among MFIs; (3) a non competitive microfinance model in the financial arena; (4) high delinquency and concentration of portfolio risk; (5) a slowing down democratic development.

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Results coming from the research survey revealed that 93 % of the credit union respondents attached the maximum level of importance towards the promotion of savings. Only one respondent out of fifteen regarded it as ‘quite important’.

In addition to that 86% of all respondents reported that their credit union was both savings and borrower oriented equally. Among the reasons identified for being borrower-oriented the main one was the high demand for loans from the membership. This is confirmed by the last ABCUL26 Policy Survey (2009) that shows a 64% increase in demand for loans from people on low incomes and a 46% increase from middle and higher income people for loans as a result of the recession (N=70). The other reason given was the high liquidity.

When asked about the objectives of their savings policy, credit unions identified the maximisation of the number of savers with small savings balances (24%), whereas a similar percentage (27%) represented the attraction of large deposits from members with higher incomes. These results are diametrically opposite, as the former could mirror a saving policy targeted to people on low incomes (they are likely to save small amounts), whereas the latter illustrates a propensity to attract members from a wealthier background.

Moreover. according to Jones (2004):

‘In credit union strengthening projects throughout the world, the creation of new deposit accounts which could be withdrawn easily and which received a competitive rate of interest was seen as key not only to the credit union’s organisational stability but to enabling people to take the steps towards financial inclusion’.

Therefore of savings maximisation is central to the long-term sustainability of credit unions. It is a win-win strategy for both the members and the credit unions themselves.

Furthermore currently the UK Government is making some important changes to British credit union legislation and regulation, expected to be enacted later in 2010, which will significantly enhance the capability of credit unions to maximize the promotion of savings. For instance, for the first time, all credit unions will be able to offer interest on savings instead of just a dividend. A co-operative dividend is paid on the results of the year’s trading, whereas interest can be provisioned for in advance and thus it offers members greater information on savings rates. Also the new legislation will widen the concept of the common bond which will enable corporate organisations and groups to make deposits in credit unions. According to ABCUL (2009) almost 50% of the credit unions plan on offering interest on savings accounts; almost 90% and 80% respectively plan on accepting local community groups and business/social enterprises into membership.

3. Main drivers for saving exclusion

According to Blake and de Jong ‘Not everyone who fails to save is financially excluded. Rather, exclusion describes those who do not have the skills or opportunity to save, as well as people who save in informal or insecure ways, like in a jam or under the matress’ (NPC, 2008: 85).

26 The Association of British Credit unions Limited (ABCUL) is the main trade association for credit unions in Britain. It represents around 70% of credit unions, which in turn provide services to over 80% of British credit union members.

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With regard to the savings market it has been argued (FSA, 2000; de Aghion and Morduch, 1999) that the main reasons for people not saving formally are due namely to self-exclusion, rather than a saving rationing as in the case of credit. Indeed ‘compared to other areas of financial services, there are no major structural failures in the supply of savings accounts’ (Kempson and Finney, 2009b: 35). Banks and deposit collectors are supposed to act with no risk, which instead lies entirely with the depositor. Indeed:

‘the informational asymmetries that undermine bankers when making loans are absent here. Here the table is turned: Now it is the banker who may be subject to moral hazard, and it is the customers who are unsure whether they can trust the financiers’ (de Aghion and Morduch, 1999: 164).

A similar view is stated by WOCCU (undated):

‘Savings mobilisation is a demand-driven activity. A savers institution asks savers to place their funds within its caretaking. This relationship reverses the traditional power relationship between client and financial intermediary’ (p.9)

According to Mitton (2008) financial inclusion (and extensively, saving exclusion) can be assessed on the demand side in relation to ‘financial capability’, and on the supply side in relation to access to financial services (product design and delivery). In order to investigate the reasons for people not to have at least average (non-retirement) formal saving rates, Kempson and Finney (2009b) distinguished between:

- barriers that prevent people from saving at all; these are related to: (1) affordability; (2) prioritising spending over saving; (3) life-stage factors and changes in circumstances; (4) borrowing; (5) remitting; (6) preference for alternative provision; (7) Lack of a desire to engage and

- ‘meta-barriers’ (coming from the interaction between demand and supply side) that hinder the shift from informal to formal saving; these are: (a) physical, geographical and psychological access (b) Knowledge and understanding of financial products and services (c) Attractiveness of formal accounts27.

Apart from the elements already cited, New Philanthropy Capital (2008) identifies the social context as a key factor, by stating that those on low incomes ‘are not subject to the same pressures’ that lead average income households to follow ‘pathways that offer a clear route into savings almost as a default option (for example, a graduate bank account into a savings account)’ (p.86).

In their work Collard, et al, (2003) describe the five main elements that represent properly the savings needs of people living on low incomes; these are:

27 To define access, Kempson and Finney (2009b) cited the perception by low income people that ‘mainstream banking institutions would not welcome them as customers’ (pag.28), and parallel to that there is a lack of trust towards commercial providers; often a geographical barrier exists, given the phenomenon of ‘desertification’ (see par.2) thus increasing the transaction and psychological costs; etc. To explain knowledge and understanding of financial products, the authors put some light on the interrelation between ‘low levels of financial capability and knowledge and non-use of formal saving products. But the direction of causality is not entirely straightforward’ (pag.36). Interestingly, as stressed by Sodha and Lister (2006), ‘opaque and poorly understood incentives based on tax relief’ (pag.39) were among the reasons of a low take-up of ISAs by those on low incomes. Attractiveness of formal accounts is linked with the design of saving products (accounts with incentives not to withdraw, accounts dedicated to saving for a particular purpose, accounts with transparent and tangible records of deposits and balances. By Kempson and Finney,2009b:.36).

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1. Affordability, e.g. minimum account balance or minimum amount to open an account;

2. Product design, e.g. criteria of simplicity and transparency or payment discipline;

3. Accessibility, in terms of:

� Geographical location;

� Eligibility criteria;

� Access to savings.

4. Providers, e.g. safe and sound financial institutions;

5. Additional services, such as:

� Information and advice;

� Transactional banking services;

� Access to loans.

Similarly Kempson and Finney (2009b), on the basis of the 2nd Saving Gateway Pilot Project, maintain that low-income people are attracted by simple, accessible accounts that accommodate small deposits and where their savings are not at risk; they prefer face to face transactions. An outstanding importance is also attached to well-known, local, trusted providers. Moreover they find that (1) interest rate/rate of return28; (2) flexibility; (3) easy to understand accounts, are among the most important product features.

4. Are credit unions an effective response to saving exclusion?

The features described in the section above mirror exactly the ways of working of credit unions in fulfilment of their mission.

First they are trusted29 financial intermediaries. Evidence coming from both of the Saving Gateway pilot project has revealed that ‘trusted providers with a local presence can play a role in overcoming both psychological access problems’ (Kempson and Finney, 2009b: 9).

Second, they are community based providers (Griffiths, Howells, 1991b) with a strong local presence (Donnelly, 2004; Sodha, 2006)

Third they adopt a personal approach, thus representing a social added value. In this regard the leader of a credit union stated:

“We slowly took the roots in the community. (…) We sit down and discuss with them and ask how much money they want and we do that at their level. Our office here is very friendly but more than all I think that our members will tell you that they see us as a place that will help them. Most of our staff here had been in that situation, we also understand the experience and the problems that they are having. If someone

28 Notably research carried out by Kempson and Whyley (1999) has shown that people with small amounts to save value more the security of savings rather than the interest rate. 29 It is common knowledge that trust in the financial system is a precondition for individuals to deposit money

13

has got a problem other will say him: “Go to the credit union, they will be able to help”. So we have not in particular done anything special. It is just because of the relationships we have with our members and that word spread out in the community”

Also, when asked the kind of incentives that the credit union had adopted to encourage members to save, the same manager claimed:

“Our way of encouraging is just talk to people. If their parents have never saved, most of the time nobody has ever sat down and discussed with them about what they can save. It is also encouraging them to find a way that suits them to save. We have got a member who saves 20 pence pieces and he brought them in with a bag full of copper and by doing that he saved over a £1000. The point is how to save the money best”

Therefore credit unions respond not solely to the financial but also to the relational needs of the members, in line with the social objectives characteristic of their belonging to the Third Sector.

Notably these non profit financial intermediaries address the saving needs of low income individuals namely through their own policies but also through partnership approaches with Government and other third sector organisations. In this sense Jones (2006) underlines that an effective response to the multi-faceted problem of financial exclusion has to be implemented ‘in a coordinated and holistic manner’(pag.42). In this regard 73% of the survey respondents revealed to belong at least to one network30, as a key strategy for a better outreach, depth and breadth.

4.1. From the demand side: credit unions, financial capability and saving

According to the Credit Unions Act 1979, ‘the promotion of thrift among members’ and ‘the training and education of members in the wise use of money and in the management of their financial affairs’ are two of the statutory objects of a credit union. Generally speaking financial capability31 is strongly interrelated with saving; also, the latter is one of the determinants of the former that in turns affects individual economic and psychological well-being (FSA, 2009)32.

This view is strongly echoed by Emmerson and Wakefield (2001) who underline the importance of financial education in helping individuals who are not saving enough. In addition to that, evidence from the USA has shown how the inclusion of financial education programmes as complementary to IDAs may increase individual’s saving rates (see, for instance, Clancy, et al, 2001) . An often cited study reveals that financial education in school (Bernheim, et al, 2001) brings positive effects on adults’ subsequent saving rates.

30 From the answers given by the respondents, it emerged that credit unions work closely with other Third Sector organisations such as money advice agencies, social housing providers social enterprises, community associations. Credit unions are represented on the Government’s Financial Inclusion Taskforce. 31 For a definition of the term see the key terms in the introduction of this paper 32 It is worth noting that in occasion of the OECD-Brazilian International Conference on Financial Education-15 December 2009, Rio de Janeiro, Brazil- was expressed the need to adopt a behavioural perspective on financial education.

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73% of the survey respondents reported that their credit unions carried out financial education activities. However, according to Jones (2008) 91% of the sample (N= 216) said that financial education is important to their credit unions, but only 51% argued that it was ‘very important’.

In respect of that, the manager of a credit union interviewed stressed that:

“It is fundamental that our members are financial capable and I think it is true particularly in this deprived area. It has a high proportion of residents living on benefits(…); they live from day to day with their finances. They have never planned ahead, many have never had a bank account, they had never saved so it’s about educating them and changing the way that they think. This is our main focus, to build up an asset base (…)”

More specifically many credit unions do not have a formal education policy, ‘most of the guidance is given informally on a day to day basis’ (Evans and Broome, 2005:233). This is confirmed by Jones (2008) who underlines that financial education by credit unions take the form of ‘informal, personal and oriented to learning through doing’ (p.39). In this sense it is fundamental that experience (access) is complementary to knowledge. One of the credit union’s leader stated that:

“Financial education is delivered in a very informal way. As a team we picked up a lot of our knowledge over the years, by also attending training sessions (…). So we transmit our knowledge to our members, for instance as soon as we find some heating schemes that would help them, we put leaflets, and things like this… it is just pointing simple things out”.

Results arisen from the survey have revealed that the vehicles used for financial education in credit unions are: informal money management advice to members (27%); tailored, individual professional money advice (10%); financial education classes and workshops (20%), seminars; newsletter with money management advice (7%); financial education leaflets being left in community locations and libraries (13%); financial education in schools (10%). Moreover 73 % of credit union managers answered they have been involved in networks in order to promote members financial capability33.

It is worth noting that, if in principle there are clear benefits coming from financial capability, criticisms and complexity emerge connected with its implementation. Kempson and Finney (2009b) stress the ambivalence of the impact of financial education and advice on saving, underlining how compulsory financial education on budgeting can ‘deter some people from

opening an account at all’ (p.45). Moreover insights coming from behavioural economics have shown that some cognitive biases (for instance, procrastination) underlie saving behaviour (FSA, 2008), thus representing intrinsic psychological barriers that prevent

33 To take one example, credit unions run school saving clubs, thus teaching namely to children in primary schools how to deal with money and the value of thrift. In this regard the manager of a Unify credit union stated: “It started originally just in one primary school, we are now in twenty primary schools across the bureau for a total amount of 840+ children. They are good little savers. The message does go back to parents from their children but most importantly the children learn how to save. We know from talking with parents, teachers and children themselves that they really value those savings”. Furthermore as key actors of the government’s financial capability agenda, credit unions are involved in the Money Made Clear project, For more information see: www.cfebuk.org.uk/

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individuals from taking consistent saving decisions34. Furthermore a lack of research exists concerning the evaluation of financial education programmes35.

4.2. From the supply side: saving products’ assessm ent in the light of low income members’ needs

The shift to a greater focus on saving is to be seen through the wide implementation of flexible and tailored savings products developed either through ‘bottom-up’ credit unions’ saving products and/or through the adoption of ‘top-down’ Government schemes (CTFs, ISAs).

As far as the first point is concerned credit unions that took part to the present survey offer between one and four saving products. All credit unions offer a standard share account, linked with the status of being a member of the credit union. Moreover 53% of the sample reported that they offered saving products for special occasions, as Christmas, holidays, communions, etc.; they are characterised by restricted withdrawals during the year.

Furthermore credit unions offer Junior saving accounts (73% of the sample). It is noteworthy that according to ABCUL (2009), 92% of respondents said that they provided junior savings accounts. This is particularly interesting also in the light of the activities carried out by credit unions in partnership with schools36. In this regard New Philanthropy Capital (2008) stresses that:

‘Credit union saver accounts offer one model that could be rolled out more widely. The aim is to introduce and normalise particular financial habits in people’s lives- whether opening and reading bank statements or putting money aside each month in an account’ (pag.47)

34 Several credit union managers we spoke to, underlined the complexity of financial capability: “ Particularly if they are on low income they think that it is not important because they do not have enough money to manage. I have got this money and all have to be spent. The debt advisors find out that people do not want their problems sorted out. It is very difficult to persuade them that there may be some behavioural change, that they can make to avoid the same situations in the future. I think that this particular financial capability agenda is proving very problematical ” 35The program evaluation is “a causal analysis which asks whether outcomes observed are different from what would have been observed for those same individuals if there had been no program” (Holden et al, undated, pag.34). According to NPC (2008), the lack or inadequacy of rigorous evaluation systems is due to two main factors: (1) the preventative and gradual nature of the education per se, which brings about some structural difficulties in establishing a casual relationship between the knowledge accumulated and the consequent behaviour; (2) lack of data, given the recent development of the of financial capability and the almost voluntary organisations-driven work, often characterised by insufficient resources or capacity to evaluate their work. Atkinson (FSA, 2008) took up the challenge to review the literature concerning financial education evaluation policies, in the light of the targets identified by the National Strategy for Financial Capability, as introduced by the Labour Government in 2006. Moreover, by considering the case of financial education targeted to children Holden, et al. (undated) point out that, in contrast to older individuals, the results of this learning activity reveal themselves only in the long run. Generally it is not the case of an immediate change of the financial behaviour (pag.2). The authors stress the two main challenges connected with the evaluation of programmes targeted to young children (age 2-7): - the need to take into consideration the relationship between the efficacy of financial education and the level of child’s cognitive development; - the problem of using subjective assessments which could be influenced by the previous knowledge accumulated, own expectations and external pressures (pag.38). 36 See note 33

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In the light of affordability, most of the credit unions do not require a minimum amount to open a savings account (apart from one pound share to become a member) nor minimum account balance. Also, they are very simple and easy to understand. These are all characteristics particularly relevant to those on low incomes (see for example Collard, et al, 2003).

Interestingly the design of the saving products mirrors some elements of economic psychology and behavioural economics37. For instance, credit unions adopt many of the deposit-side and withdrawal-side commitment mechanisms within saving products, identified by Ashraf, et al (2003)38. The former ‘work by helping individuals make regular deposits into a saving account’; the latter ‘work by deterring withdrawals’. However credit unions interviewed in the present study noted that the withdrawal policy should determine the right mix between those who might need quickly the money in case of unexpected events, and those who are ‘self-aware enough to feel that the money will be safer from their future self’ (pag.6).

Among the deposit-side features there are ‘automated transfers from one financial asset

to another’ (e.g. direct payment by standing order/direct debit; deposits from state benefits), defined as ’nonbinding commitment device’(pag.6), as the transfers can be stopped at any time. Similarly automatic reductions from paycheques are based on removing money from the account, before the client can even access it. Also in this case the automatic deductions can be easily stopped. Beverly and Sherraden (1999), include payroll deductions in the category of pre-commitment constraints, as ‘techniques that make it difficult to choose current pleasure at the extent of future pleasure’. They are an effective way of facilitating higher saving rates and more regular contributions, as they eliminate the ‘temptation to spend that money, and the participant no longer has to make, on a monthly or biweekly basis, a conscious decision to postpone consumption’(pag.465). Similarly, Blake and de Jong (2008) reported ABCUL’s statement concerning payroll deduction in which low-income employees ‘can accumulate savings quickly and painlessly. It seems more powerful than the standing order where you “see the money” first’.

Bonuses help the individual to overcome the inclination to postpone saving decisions (often characterised by procrastination), by establishing a deadline that is supposed to lead to a more regular saving behaviour.

Most credit unions organise deposit collection sessions, at which members can pay their weekly or monthly savings instalments or loan repayments. These are located in convenient local shops or collection points, usually inside community centres, churches, etc. Furthermore there is an increasing use of Paypoint-electronic deposit system- in which

37 Sodha and Lister (2006), by referring to other authors, suggested to ‘work with the grain of how people think’ (pag.56) when designing a saving product. They analysed how to include the insights coming from behavioural economics into the Saving Gateway scheme. The tendency to inertia leads the authors to incorporate easy deposit methods; rollover of Saving Gateway accounts into other saving vehicles on maturity; initial saving bonuses. The tendency to anchor to only one piece of information or to a single experience, when making decisions, leads the authors to suggest to include personalised saving targets. The use of mental accounting, ‘allows consumers to attach labels to encourage savings towards set ends’ (pag.57). 38 The object of the study analyses is specifically the saving products offered by financial institutions in developing countries. Therefore not all the deposit-side and withdrawal-side mechanisms are employed by credit unions in developed countries. For instance, automatic increases and lock box: they are not considered in the present study.

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people can pay into credit union through local shops, garages, etc. In this respect Collard et al (2003) note that

‘regular meetings to which members can bring their savings (…) provides not only a routine to saving, but also a degree of peer pressure to encourage members to save’ (p.22)

In relation to the withdrawal side features, semi liquid saving products are characterised

by restricted time of withdrawal, usually compensated by higher interest rates. Ashraf, et al, identified labelled accounts (or targeted savings) within the same category, basing on the use of mental accounting principles. These are the same ones underlying the restricted use of funds .

‘To the extent that individuals want to save for particular purposes but have difficulty doing so with their normal saving account, a specially labelled account for that purpose in fact has the necessary influence to inspire increased savings towards that purpose’ (p.8).

Findings coming from a study conducted by Dolphin (IPPR, 2009) who, by using a sample of 58 low-income families, found that the majority of saving undertaken by families was for specific reasons, such as Christmas, birthdays and holidays (pag.16). Similarly Kempson and Finney (2009b: 44), referring to other authors, underline that people on low incomes are used to save separately towards different needs (the so called ‘jam-jar’ approach). Generally speaking credit unions usually offer saving accounts with restricted use of funds; these are labelled, targeted savings.

Obviously withdrawal fees provide incentives to keep money in the savings account. However from one side, a client could prefer withdrawal-fee-accounts as a way to ‘protect him or her self from impulsive withdrawals’, thus acting as a deterrent. From the other side in case of a flat fee , the clients will be pushed ‘to withdraw less frequently but in larger amounts’. That would create two negative effects: (1) the cash does not earn any interest; (2) self-control problems (Ashraf, et al, 2003:10) .

Delayed withdrawals39 ‘help the individuals to avoid the temptation to spend funds on purchases that will later regret’. Furthermore, ‘knowing that this money is safe from future impulse withdrawals individuals are likely to make more deposits’ (pag.10).

The underlying idea of peer monitoring is social capital as a reinforcement contract device40. The study categorised that both as a deposit-side and withdrawal-side device.

Results from the survey indicate that credit unions saving products have deposit side features, rather than withdrawal side features41.

39 It is the case of the credit union’ Christmas savings’ accounts, characterised by the impossibility to withdraw until October or November. 40 In an attempt to identify the nature of the common bond, Baker (2008) stated that: ‘Although the common bond does impose restrictions, arguably it forms a fundamental component of uniqueness of credit unions. (…)[It] acts analogously to an honour clause, as to default on such a loan would be in effect be to default on a loan from the community in which you live, and from where the funds for the loan are originated. (….) It defines the scope of a credit unions community influence, without which the whole identity of the credit union would be called into question’ (302-303). Interestingly, NS&I (2009) has revealed that peer pressure play a role in the acquisition of financial habits, thus including also saving. Also, the common bond ‘is seen as an essential safeguard ensuring that there exists between the members a sense of mutual loyalty, concern and trust’ (Griffiths and Howells, 1991b: 208).

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Figure 1: Withdrawal-side and deposit-side features of credit unions’ saving products

0

2

4

6

8

10

Share

Account 1

Share

Account 2

Mem

bershipshare

Christm

asS

/A

Regular S

/A

Standard

S/A

Lock InA

ccount

Share

account 1

Share

Account 2

Share

Account

Christm

asA

ccount

Holiday

Account

Budget

Account

Share 1

account

Christm

asA

ccount

Holiday

Savers

General

Savers

Mem

bershipA

ccount

InstantA

ccess

Christm

asS

/A

LoyaltyS

aver

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Saver

Special

Occasion

SB

B the

Wallich

Rew

arder

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Share 3

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asS

aver

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bershipA

ccount

Prem

ierplus

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/A

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asS

/A

PartnersCU

Bristol CU NorfolkCU

Blackpool,Fylde &

Wyre CU

Enterprise CU Erew ash CU Hull and EastYorkshire CU

LASA CU Police CU SAVEEASY –Llanelli & District CU

SplotlandsCU

VoyagerAlliance

CU

WelcomeCU

Bargoed,Aberbargoed and Gilfach

CU

WrexhamCounty

Borough CU

withdrawal deposit

Source: the authors

The latter are characterised by effects which go in opposite directions. Indeed from one side they help the members to keep the money in through disincentives to pay out (e.g. restricted withdrawals during the year), but from the other side that means lack of flexibility and in case of an emergency (e.g. an unexpected bill or payment) that could represent a major problem for those on low incomes, who are likely not to have other sources of money.

Alongside incentives to save represented by specific products design, one could find the combination of savings with complementary services with the same incentivising

purpose. This is the case of saving alongside (or following) loan or debt repayments and insurance. The survey has shown that 66% of respondents said that they offered complementary services to support savings. In relation to loans, ‘credit unions have a strong model here, because they encourage borrowers to save while they are repaying their loan, and continue saving once the loan is paid off’ (NPC, 2008:94). During the period of the loan, many credit unions do not allow borrowers to withdraw savings if the balance of the loan is higher than that of the savings. Perhaps most importantly, the fact that members go on saving also ‘beyond the lifetime of a loan’ embodies a strengthening of the saving habit and ‘act as a cushion to avoid future trouble’ (NPC, 2008:94), thus having also a preventative function. Also, members are likely not to need to borrow anymore.

41 In the histogram x-axis represents the number and name of saving products for each credit union in the sample. The name of the credit union (CU) is also indicated. The y-axis shows the number of withdrawal side and deposit side features that each saving product has on a total of 10 (five and five, respectively). Most of the data falls between three and five features.

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In addition to that, credit unions offer other incentivising schemes, such as additional services at preferential rate for savers (e.g. loan with lower interest rate42). Jones (2008) maintains that ‘building savings, or assets, directly contribute to moving people out of poverty, both economically and psychologically’. More specifically he identifies the benefits in terms of a ‘greater access to lending at even lower rates of interest’ (pag.2147). This is confirmed by the survey run by Collard and Smith (2006), showing that among the main reasons for saving within a credit union the ability ‘to borrow’ was the second most common one, mentioned by 39% of the members43 (N= 1473). Survey has shown that among credit unions savings attached to loan repayments (47%) and additional services at preferential rate for savers (29%) are the most common schemes.

Furthermore, findings show that members with high levels of savings tend to take out larger amount of loans than those with lower savings. There are three main reasons for that: (1) large pools of saving enable the credit unions to offer large loans; (2) those who have been able to build up savings are regarded as ‘loyal members and good risks’; (3) members with high incomes would tend both to build up savings more quickly than the poorer members, and would also want to borrow in larger amounts’ (Berthoud and Hinton,1989: 98-99). It is worth noting that the majority of interviewees reported to value most the regularity of contributions made by members on low incomes.

Moreover the attachment of a savings vehicle to current accounts is regarded as an incentive to save. According to Jones (2008) access to loans and savings accounts is one of the features that of Credit Union Current Account that members in the sample most valued (N=328). More specifically those services were felt as important because ‘a current account would enable them to have all their finances in one place’; also, the scholar reported that most of the people interviewed stressed that ‘they were attracted to the current accounts because they assisted them to save’ (pag.53). However, only 14% of the credit unions participating in the Policy Survey by ABCUL (2009) offered the Credit Union Current Account.

The leader of a credit union stated:

“We hoped that it (the CUCA) would help people, for instance transferring money by standing order across into the savings account. Then it would become a regular standing order that would increase the savings habit”.

Furthermore another element of savings’ attraction is the provision of Free Life savings insurance44 alongside savings accounts45. It means that ‘on a member's death, the amount

42 For instance, Lodge Lane and District Credit Union offer two different loan products with different interest rates on the basis of savings’ records. In particular they are: (1) Express loan 2% a month on a reducing balance (an APR of 26.8%); Saver loan: 1% a month on a reducing balance (an APR of 12.68%). In the case of South Tyneside credit union the loan policy establishes that the monthly rate decreases in relation to the amount of savings on the account, and is higher for new members who do not have savings records. 43 The study goes on by clarifying that 48% of community based credit unions identified the ability to borrow as a reason for saving. 44 Parallel to that, credit unions offer Loan protection insurance without any cost for the borrower. In case of death before the full repayment of the loan, the insurance would repay the loan for the member. 45 www.abcul.org/page/about/savings.cfm That is subject to conditions. For instance, Enterprise Credit Union pays for each account a benefit of 100 % in case of death, depending on the age brackets. For example if we make the hypothesis of £7500 savings

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of savings can be as much as doubled by the insurance and paid to whoever the member chooses’46. This is something that no other financial intermediary is currently able to offer, apart from credit unions. In this sense they are regarded as the ‘Britain’s best kept secret’ (Griffiths and Howells, 1991a). However, no study has ever investigated whether the free mutual insurance is a reason for saving and borrowing in a British credit union47.

In relation to the Government initiatives, the majority of survey respondents were not Child Trust Fund providers (60%). The percentage is much higher in the case of Individual Saving Account (80% are not providers).

Interestingly, initially the take-up of CTFs by potential providers has been described as ‘not enthusiastic’48 (Bird, 2008:11). Now the situation has reversed. Figures coming from the 2009 CTF Statistical Report has shown a significant increase in providers in the year to 5 April 2009 (that) reflects a growth in Child Trust Fund provision through Credit Unions. Indeed the number of credit unions switched from 6 on a total of 49 providers in 2008 (12,25%) to 31 on 77 providers in 2010 (40%). However, if we look at the total number of UK credit unions, only 6,5% approximately offer the Child Trust Fund.

It is difficult to make hypothesises about such a quick growth. In common with all the other providers is the consideration that CTFs embody ‘an excellent opportunity to build a relationship with a new young customer, which in time could lead to further business throughout their lifetime’ (IPL Finance, undated). That means that CTF is ‘a long-term route to new membership via Junior Savers and eventually full membership’ (Bird, 2008:24).

As far as Individual Savings Account is concerned, the policy survey by ABCUL (2009) has revealed that 10% of credit unions respondents reported to offer that product. However 33% of the sample plan to include it in the products offered in the future.

Conclusion

For a long time the predominant social pattern was that people on low incomes were not only unable but also unwilling to save. In this sense the enormous contribution of asset-building has been to overcome that prejudice, through the idea that saving should be considered as a habit, a skill-based behaviour- and as a process developed through the policy interventions of financial institutions. Dixon (2006) states that ‘Giving people the tools and support necessary to change their behaviour- ‘empowering’ them to take action- is often more effective than trying to influence them in other ways’ (p.48). Therefore a paternalistic approach is strongly rejected, in favour of a participative one.

• 18-64 years : 7500 + 7500 = 150000; • 65-80 years : 7500 + 1750 (15%)= 8250. 46See www.abcul.org 47 Research carried out by Collard and Smith (2006) identified the following reasons for saving within a credit union: the convenience to save, the ability to borrow, the recommendation by a friend or relative, the ethical and community based features of these organisations. 48 One reason is that for legislative purposes, credit unions can offer solely Cash Child Trust Fund Accounts. However they are encouraged to offer other types of CTF Account, including Non-Stakeholder products. For instance ABCUL that have secured a deal with Scottish Friendly society.

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In this context credit unions, as part of the family of microfinance institutions, embody key-players in the financial arena. Interestingly, according to ABCUL (2009) 62% of credidt union respondents reported an increase (24% significant) in deposits over the past year and 64% increase in demand for loans from people on low incomes (28% significant), during the financial crisis.

There are three key innovative elements that emerge from the present study.

First, credit unions help members to build financial assets, but also to build non financial ones too. In this sense the outstanding importance of financial education comes out clearly. The UK Financial capability agenda is laudable and embodies an example for countries as Italy where the use of consumer credit and usury is slowly increasing. Moreover for instance, 8 Italians in 10 cannot calculate the effects of an increasing of the discount rate on their savings; 4 Italians on 10 cannot calculate the effects of an increasing on a 5 year period of an active rate of interest on their current account . In addition to that ABI (Association of Italian Bankers) built an Index of Financial Education49: Italy has a score of 3.5 on a scale between 0 and 10. A key recommendation is that cooperative banks, financial cooperatives and microcredit organisations could implement financial education services to their customers on the basis of their specific and diverse needs.

Second, according to ABCUL (2009),

‘Credit unions continue to forge multiple partnerships with relevant agencies that work in the field of financial and social exclusion in order that a more holistic approach can be adopted to solving people’s problems’

This report goes on to stress that credit unions work with a wide range of partners in order ‘to extend their services to a large number of people and to cross-refer people between agencies’. In this sense an holistic approach through partnership working is strongly recommended, particularly in the financial sector.

Third, notably credit unions work strongly in partnership with the Government, which recognises the value of their mission driven activity, between social and economic aims. This could open some debate in Italy where the relationship with the Public sector is weak. On the contrary, microfinance should be included as part of the so called welfare mix.

To conclude, credit unions give both monetary and non monetary incentives to their members, in order to get them into the savings habit. However there is also the need for further investigations to be carried out into the notion of social capital related to financial non profit actors that adopt a relationship based approach. Notably, given the ‘dual nature’ of members in a credit union, savers and potentially borrowers, there is a strong case to explore how these two financial behaviours interact. This is particularly worthy as it could deepen the knowledge concerning low income people needs and attitude toward money.

49 Consortium Patti Chiari- Ambrosetti The European House (2008)

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About the authors

Anita Marchesini was awarded her second-level degree in ‘Economy and Management of cooperative enterprises and non profit organisations’ (March 2010) at the University of Bologna, Faculty of Economics (Forlì). She also attended the European Summer School on Social Economy (2008). As part of her MA dissertation, she took the present Research in partnership with Liverpool John Moores University. Anita took the lead in the research project on which this paper is based. Email: anitamarchesini@gmail.com

Paul A Jones works in the Research Unit for Financial Inclusion in the Faculty of Health and Applied Social Sciences at Liverpool John Moores University UK. His research interests are mainly in the fields of financial services for people on low incomes, money and debt advice and credit union development. He has published a range of works and papers on credit union development, on access to credit and on tackling financial exclusion.

Email. P.A.JONES@LJMU.AC.UK

Full details of his work can be found on the website, www.ljmu.ac.uk/HEA/financialinclusion .