Credit unions need funding to build infrastructure and permission to charge higher interest rates if they are to become sustainable quickly, according to a report released by the Department for Work and Pensions.
The report was produced by the steering committee of the DWP’s credit union expansion project for Lord Freud, the minister for welfare reform, and Steve Webb, the pensions minister.
The committee was asked to advise on "whether it is possible to provide suitable financial services for up to a million more consumers on lower incomes in a way that will enable credit unions to modernise, expand and become sustainable within five years".
It found that up to seven million people used high-cost credit services and could benefit from credit union services, and that 60 per cent of the 4,500 people it consulted said they would use credit union services.
The report says that credit unions are not working efficiently and are reliant on grants to continue. It says funding is needed to build up the capacity of credit unions and to support a "major programme of holistic change and modernisation", but does not put a figure on how much is required.
Improvements recommended by the report include automating credit unions’ processes, creating a shared database for all credit unions to use, a national marketing campaign and closer links with registered social landlords and the Post Office.
It says these measures could make credit unions "something close to" sustainable within 10 years. This could be reduced to five to seven years if economic controls on credit unions were loosened, it says, including changing the maximum monthly interest rate they could charge from 2 per cent a month to 3 per cent a month.
Mark Lyonette, chief executive of Abcul, the umbrella body for credit unions, said: "We are pleased that the report identifies the need for credit unions to become more convenient to use, more efficient and attractive in order to serve millions more consumers.
"We also agree that increasing collaboration between credit unions is the best way to do this."
He said that increasing the interest rates credit unions could charge should not be done without weighing up all the implications.
"But if, as the report suggests, hundreds of thousands of people will save hundreds of pounds in interest payments to high-cost lenders because of the increased availability of credit union loans, then it is something that the sector needs to seriously consider," he said.