Money for the masses

People who can't borrow from banks are forming credit unions. Rachel Fixsen reports on a concept that is popular with the self-employed and those on low incomes

Climbing interest rates please savers and punish borrowers. But if you're on a low income, it may make no difference at all. Returns on small balances are rarely more than a pittance and when it comes to borrowing, banks often refuse - leaving you to pay extortionate rates to a door-to- door lender.

"The returns on offer to poorer savers can be so bad, many would do as well stuffing their cash under a mattress or splashing out straight away," said the National Consumer Council's chairman, David Hatch, earlier this year.

The extra costs in handling small amounts of money at a time put savings institutions off, and they concentrate instead on winning better-off customers, the NCC said. Credit unions - a type of do-it-yourself bank - often provide the answer.

Dubbed Britain's best-kept money secret by the NCC, credit unions are formed by people clubbing together to save their money. After a certain period of regular savings, membership entitles you to borrow at a low rate of interest - 1 per cent a month, or 12.68 APR. Each credit union has its own formula for how much you can borrow. A smaller credit union may lend two or three times the amount you have saved.

Because they rely largely on volunteer staff, returns on small savings balances can be much higher than commercial savings institutions give. Sometimes they even rival rates paid on larger sums of money. For instance the credit union run by West Midlands police has paid a 6 per cent dividend for the past three years.

Apart from reaping the returns credit unions offer, many people see supporting them as part of an ethical approach to their savings. "Money is recycled within the community, stopping it being leeched out by anonymous multinational organisations," says Heather Rainbow of the NCC.

They also help people develop skills, because volunteers on the committees have to learn skills such as accounting, she adds.

Credit unions are formed by people who have a common bond. Either they work together, belong to the same association or live in the same area. The idea is that members are less likely to default on a loan they ultimately owe to friends, neighbours or colleagues.

The concept developed in Germany last century but it was not until 1964 that the first credit union was set up in the UK. The 1979 Credit Union Act gave the movement a legal framework. Under this law, their objectives are to encourage savings and play an educational role in financial matters.

London cabbies often find it hard to borrow from banks so the London Taxi Drivers Association Credit Union, which was formed in 1979, has been a godsend for its 2,500 members. "It's extremely popular because a taxi driver is basically a self-employed person, and they have great difficulty obtaining a loan of, say, pounds 1,500 from a bank," says Neil Cunningham, manager of the credit union.

Taxi drivers typically borrow when faced with their twice-yearly tax bill, he says. But because of the way credit unions work, when the member repays the loan, he or she has to continue contributing a regular amount into their savings as well. So next time the tax bill comes around, things will be easier.

Credit unions lend for a wide range of purposes. Often members need to borrow for holidays, household goods and Christmas expenses, says Stephanie Sturrock, general manager of the Association of British Credit Unions (Abcul), one of the two trade bodies which represent credit unions. The other is the National Federation of Credit Unions, which has a smaller membership, but covers the smallest credit unions as well as larger.

Residents of Clydebank set up the Dalmuir community credit union in 1977. There are now more than 5,000 members and the credit union was able to loan pounds 3m last year.

About 49 per cent of the membership is unemployed, says Dalmuir credit union chairman Rose Dorman. Banks are not exactly queuing up to lend to the jobless. "There are plenty of alternatives," laughs Mrs Dorman, "from loan sharks to provident cheques." By this she means the notorious door- to-door money lenders who charge anything from 60 per cent in annual interest.

Dividends vary from one credit union to another. In each of the past six years, the LTDA credit union has declared a 4 per cent dividend, while Dalmuir has paid out 3 per cent.

There are now nearly 600 credit unions in the UK, with more than 50 groups in the process of registering. In 1995, they loaned a total of pounds 74m. Changes to credit union laws three years ago have paved the way for more people to become members of these organisations. Now you can belong to a community credit union whether you live or work in a certain area, whereas before, all members had to live in the area.

But less than 1 per cent of adults in the UK belong to credit unions - a far cry from countries like Canada, Ireland, Australia and the US where between a third and a half of adults belong to credit unions.

If you want to join a credit union, Abcul will give you contact details for one in your area, if one exists. If not, you could start one. You need to find 12 to 15 like-minded people to start a study group. You then have to become trained in credit union management and register with the Registry of Friendly Societies.

The Association of British Credit Unions, 0161- 832 3694; the National Federation of Credit Unions, 0191-257 2219.