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Credit unions must be given powers to charge more and take bigger deposits so they can become a real alternative to high-cost lenders such as payday firms, a think tank has argued.

Civitas is urging the Government to go further than its recently-announced plans to raise the cap on interest rates that credit unions are able to charge to borrowers in order to help the sector grow. New legislation will increase the maximum interest rate credit unions can charge on loans from 2% to 3% a month, with effect from April 1 next year.


The new rules aim to make it easier for credit unions to offer short-term loans as current rules mean that they often end up making a loss on loans under £1,000 due to the admin costs involved.

But Civitas said that the "burdensome" regulation should be lifted further, to allow credit unions to pass on their processing fees, which are typically £8, to the borrower in full. Even with the added cost, a short-term loan would remain much cheaper than the alternative options for consumers, it argued.
"Ultimately, credit unions cannot be expected to combat payday lenders if they are continually forced to make a negative or non-existent return on the same loans," it said in a report titled Credit Unions: A Solution to Poor Bank Lending?

A £10,000 limit on the amount of money that businesses can place with credit unions should also be removed so that they can attract bigger deposits, the think tank said.

Civitas researcher Joseph Wright said that the limit "removes the choice of entering into business with larger corporations from the individual credit union, which is in a far better position to understand its own financial institutions".

Credit unions are mutual financial co-operatives that take deposits and give loans to members. The sector in Britain is still relatively small compared with countries such as the United States and Canada. Credit unions in the US serve almost a third of the country's population.

A recent Government report said that up to seven million low income earners who pay a ''poverty premium'' for credit from lenders including loan sharks and the payday lending industry could be helped by the growth of credit unions.

The Government is encouraging the sector's growth to help people who often find themselves shut out of mainstream borrowing.

© 2013 Press Association