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Definitions of the key elements in the UK credit union database. Affiliation This terms relates to the trade association to which a credit union belongs. Over the period for which data is presented the following trade associations dominated
The various trade associations have different ethos and philosophies. Some trade bodies encourage their members to focus on community development, self help and small units while others are more in favour of modernisation, diversification and expansion. Consequently the credit union movement in the UK is somewhat dichotomised. Members The membership of a credit union are tied together by a common bond. The common bond relates to the existence of a common identity where the nature of social relationships stem from reciprocal interdependence typical of traditional community relationships. A common bond based on membership of a particular community is the purest expression of this concept of social relationships based on interdependence. Other forms of common bond are permissible and these are more associational types perhaps reflecting the nature of industrialised society that is not based on pure community relationships. The centrality of common bonds to credit unions has been neatly summarised by Burger and Dacin (1991): "It is a multifaceted concept, interpreted tightly or loosely depending on the nature of the social, political, and economic environment. Common bond has been a strength of credit unions and also their Achilles heel. It has aided the founding of thousands of credit unions, but over emphasis on common bond and disagreements over interpretation have also made it a weakness." Shares This represents members’ savings with the credit union. Each share in a credit union is fixed by statute at £1.00. The maximum saving permitted is £5,000 or 1.5% of the total shareholding of a credit union, whichever is the greatest. At present the legislative situation is that credit unions may not accept deposits other than by subscriptions for its shares. Legislative change is, however, targeted at amending this situation and allowing credit unions to hold shares in either interest bearing or dividend accounts. Dividend A credit union may pay a dividend on its shares after all expenses and taxes have been accounted for. A dividend, at a rate not exceeding 8 percent per annum, may be recommended by the board of directors for declaration by the members at the annual general meeting. Such a dividend is declared on all full shares held during the preceding financial year. Shares held for less than a full year are entitled to a proportional part of the dividend. The normal range of dividend payments is between 3% and 5%. The database provides information on both the total £ value of dividends paid by the credit union as well as the % dividend rate. General Reserves This is a component part of a credit union’s liability structure. Credit unions are required to hold at least 10 percent of total assets in the form of reserves. The computed ratio general reserves as a proportion of total assets highlights that a sizeable number of credit unions fall far short of the 10 percent reserve ratio with the problem more acute for the smaller asset size organisations. If at the end of any year of account the amount standing to general reserve is less than 10 percent of total assets, the credit union is obliged to transfer to general reserve not less then 20 percent of its surplus for that year. The database provides information on both the £ value of general reserves as well as the reserve to asset ratio. Total Liabilities Total liabilities in part consist of members’ shares, general reserves and the dividend proposed. Data is provided upon each of these elements. It should however be noted that the following elements are also included in total liabilities – revaluation reserve, unappropriated surplus, unpaid or accrued interest, provision for taxation as well as creditors and accrual components. These latter components have not been individually documented but are incorporated in the total liability value presented. Loans due by members Recent legislative changes have allowed credit unions to lend up to a maximum of £5,000 above a member's shareholding or 1.5 percent of total credit union shareholding at the last balance date. Credit unions are able to grant loans on the security of a member's shares, provided that those shares exceed the loan. Credit unions may make loans to non-qualifying members in excess of their shareholding. While the maximum repayment period for unsecured loans is increased from two to four years and the maximum repayment period for secured loans increased from five to ten years. Information is provided on both the total number of loans and the £ value of loans. Cash on hand plus current and deposit accounts Credit unions hold a significant proportion of their total assets in the form of cash or near cash (the latter relates to current and deposit accounts held with named banks). Smaller credit unions have a relatively greater proportion of their assets tied up in this liquid form. It should be noted that this liquidity constraint on smaller credit unions necessarily reduces the proportion of funds available for on lending to members. Information is provided both on the total £ value of this item and liquid assets as a proportion of total assets. Investments The range of investments open to credit unions is extremely narrow and this is reflected in the fact that the £ value of items under this categorisation is zero for many credit unions. Provision for bad and doubtful debts A credit union has a lien on the shares of a member for any debt due to it by the member or for any debt which the member has guaranteed, and may set off any sum standing to the member's credit, including any shares, interest rebate and dividends, in or towards payment of such debt. The database provides information on both the £ value of provision for bad and doubtful debts as well as provision for bad and doubtful debts as a percentage of total assets Total assets Total assets in part consist of loans due by members (less provision for bad and doubtful debts), cash on hand plus current and deposit accounts, as well as investments (both listed and unlisted). Data is provided upon each of these elements. It should however be noted that the following elements are also included in total assets – fixed assets (land and buildings at cost plus equipment, fixtures and fittings at cost) and other assets including prepayments and sundry debtors. These latter components have not been individually documented but are incorporated in the total asset value presented. Interest from loans to members The majority of credit unions adopted a policy of charging the maximum allowable under the 1979 Credit Union Act, that of 1 percent per month (annual percentage rate of 12.68 percent). The rate recommended by an individual credit union's board of directors may not, however, give a true reflection of the cost of the loan in that the board of directors may also recommend a rebate of interest provided that a dividend of 3 percent or more is paid. For example in 1998 approximately 50 credit unions recommended a rebate of interest. This rebate was calculated as a percentage of the total interest payment made by a credit union's membership over the course of the year. The rebate varied between 1 and 15 percent. Even without loan rebates or rates levied beneath the maximum allowable, credit unions provide an extremely low cost loan service for their members with interest rates well below the average percentage rates charged by the high street financial institutions. Credit unions are able to charge such low rates of interest not only because they have low overheads but also because of the security, in the form of a member's savings, that is held to offset the risk of default on a loan. Interest from investments Compared to the category interest from loans to members this income component is relatively small and reflects the fact that only a small component of credit unions’ assets are tied up in the from of investments (approximately 10%). Interest from bank deposits Again interest from loans to members dominates this income component. This category may also be viewed as contributing to credit union liquidity in that funds upon which interest is generated are held in both time and current accounts. Consequently these funds can be called upon at relatively short notice. In addition it should be noted that smaller credit unions which in the main tend to have low reserve ratios in part compensate for this lack of capital adequacy by holding above average levels of funds with retail banks. Consequently the proportionate contribution of interest income to total income for small credit unions is high. Total income Total income in part consists of interest from loans to members, interest from investments (gross) and bank deposit interest. Data is provided upon each of these elements. It should however be noted that the following elements are also included in total income – interest from loans to other credit unions, bad debts recovered, entrance fees and other income. These latter components have not been individually documented but are incorporated in the total income value presented. Staff costs The remuneration value documented is defined to include salaries, wages and national insurance. It should be noted that staff costs as a proportion of total management expenses declines with a fall in credit union size. This highlights the fact that small credit unions rely much more on volunteer labour than their larger counterparts. The database provides information on both the £ value of staff costs as well as staff costs as a percentage of total management expenses. Office costs This is a further element of management expenses and it is defined to include rents and rates, repairs and renewals for and to the following: premises, equipment, fixtures and fittings. Again higher business volume necessarily means that larger credit unions are faced with the need to purchase or lease premises which means that this expenditure category will be relatively greater in absolute and percentage terms for larger credit unions. The database provides information on both the £ value of office costs as well as office costs as a percentage of total management expenses Insurance costs Two insurance components are included in this category. They are loan and share insurance with the figure presented in net terms and general insurance. Management expenses Management expenses in part consists of staff costs, office costs and insurance costs. Data is provided upon each of these elements. It should however be noted that the following elements are also included in management expenses – printing, stationery and advertising; travelling expenses; conference/convention expenses; regional committee/chapter expenses; bank charges; audit fee; accountancy fee and expenses; promotion and training expenses. These latter components have not been individually documented but are incorporated in the total management expenses value presented. The ratio management expenses as a percentage of total expenditure is also presented. Non-management expenses Included in this expenditure category are items such as depreciation of fixtures, fittings and equipment; interest payable on loans (secured), other loans (unsecured) and mortgages; loans written off as bad debts; and provision for taxation. The £ value of non-management expenses is detailed as well as non-management expenses as a percentage of total expenditure. Surplus This represents the credit union’s ‘profit’ for the year. In terms of the application of the generated surplus the credit union has a number of options. First, it may transfer a proportion to general reserve. Indeed, if at the end of any year of account the amount standing to general reserve is less than 10 percent of total assets, the credit union is obliged to transfer to general reserve not less then 20 percent of its surplus for that year. Secondly, the generated surplus may be employed to pay a dividend on members' shares. The £ value of the surplus is detailed as well as surplus as a percentage of total assets. |
