Modelling the Performance of Irish Credit Unions, 2002 to 2010

• Author: Donal G. McKillop,Barry Quinn,J. Colin Glass
• Date: 01 November 2014
• Published date: 01 November 2014
• DOI: http://doi.org/10.1111/faam.12041

Financial Accountability & Management, 30(4), November 2014, 0267-4424

Modelling the Performance of Irish

Credit Unions, 2002 to 2010

J. COLIN GLASS,DONAL G. MCKILLOP AND BARRY QUINN∗

Abstract: This study undertakes a modeling based performance assessment of

all Irish credit unions between 2002 and 2010, a particularly turbulent period in

their history. The analysis explicitly addresses the current challenges faced by credit

unions in that the modeling approach used rewards credit unions for reducing

undesirable outputs (impaired loans and investments) as well as for increasing

desirable outputs (loans, earning assets and members’ funds) and decreasing inputs

(labour expenditure, capital expenditure and fund expenses). The main findings are:

credit unions are subject to increasing returns to scale; technical regression occurred

in the years after 2007; there is significant scope for an improvement in efficiency

through expansion of desirable outputs and contraction of undesirable outputs and

inputs; and that larger credit unions, that are better capitalised and pay a higher

dividend to members are more efficient than their smaller, less capitalised, and lower

dividend paying counterparts.

Keywords: credit unions, efficiency, impaired loans and investments

INTRODUCTION

Credit unions are not-for-profit, member-owned, voluntary, self-help, demo-

cratic, cooperative financial institutions that provide financial services to their

members. In Ireland the credit union movement has one of the highest

penetration levels in the world with approximately 65% of the population a

member of a credit union. In 2010 there were 404 Irish credit unions with assets

of €14.1 billion serving approximately three million members which suggests

that credit unions are present in almost all communities in Ireland. Indeed,

credit union penetration in Ireland is higher than in any other country in the

∗The first author is from the Ulster Business School, University of Ulster, Cromore Road,

Coleraine, BT52 1SA, UK. The second and third authors are from the Queen’s University

Management School, Queen’s University Belfast.

Address for Correspondence: Professor Donal G. McKillop, Queen’s University Manage-

ment School, Queen’s University Belfast, Riddel Hall, 185 Stranmillis Road, Belfast, BT95EE,

UK.

e-mail: dg.mckillop@qub.ac.uk

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MODELLING THE PERFORMANCE OF IRISH CREDIT UNIONS 431

world. The World Council of credit unions (WOCCU) estimated that in 2011

there were 51,013 credit unions in 100 countries, with 196.5 million members

holding $1.56 trillion in assets.

From the mid-1990s to 2007, Irish banks significantly expanded lending

to the commercial and residential property sector. The collapse in prices

and activity in both these markets post-2007 coupled with the downturn in

general economic activity necessitated a major bailout for all Irish banks

which now rely substantially on liquidity support from the ECB and the Irish

Central Bank (McQuinn and Woods, 2012). The collapse of the banking sector,

stagnating property markets and fiscal austerity has put extreme pressure on

Irish households. Personal consumer expenditure fell by 1.1% in 2008, 6.9% in

2009, 0.8% in 2010, 2.5% in 2011 and 0.3% in 2012 while the unemployment

rate increased to 6.3% in 2008, 11.8% in 2009, 13.6% in 2010, 14.4% in 2011 and

14.7% in 2012 (IBEC, October – December 2013).

In that credit unions through legislation have not been permitted to engage in

mortgage lending they have been protected from the worst excesses of the Irish

financial crisis. Credit unions operate predominantly in the market for shorter

term loans (less than five years) to Irish households. The banks cover this market

and in addition the markets for long term loans to Irish households, loans to

non-residents, and loans to the non-financial Irish private sector (outstanding

value of €98 billion in September 2011). That said, post 2007, adverse economic

conditions have still impacted on Irish credit unions. In 2008 loans written off

were €41.85m, but rose to €87.95m in 2009 and €107.44m in 2010 (1.7% of gross

loans). It is also the case that the decline in the fortunes of Irish credit unions

is not wholly related to economic factors. Other contributory factors include the

business decisions of some credit unions and the deficiencies in the statutory

regulatory framework (Forsey, 2010).

Concern over the current position faced by credit unions as well as concerns

about their future development was such that the Irish Government established

a Commission in May 2011 to review the structural and regulatory landscape

within which credit unions operate. The Commission’s Report was published

in March 2012 and identified a number of areas where reform is required

ranging from the introduction of a new legislative framework to significant

sectoral restructuring. With respect to the latter, the Commission argued that

restructuring would involve moving from a situation where 404 credit unions

operate and act independently, to one where there is consolidation through

amalgamations and the development of close networks and shared services.

They viewed restructuring as a way of addressing the current weaknesses in the

sector as well as a business strategy for credit unions that want to achieve

the scale necessary to move to a more efficient and sophisticated business

model. Critical in the proposed plan is the identification of stronger credit

unions which would anchor restructuring with other (weaker) participating

credit unions.

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