The UK banking sector is dominated by a few big commercial banks. To everyone in the UK this is all pretty normal and the way it has always been. However, elsewhere in the world it is very different and Stakeholder Banks have a big part to play.
For the most part, business owners in the UK are unaware what Stakeholder Banks are, let alone what benefits they offer in terms of options and alternative business finance sources.
Bonjour, Guten Tag
Take a quick trip over the channel, either in a Southerly or Eastern direction and the make up of banks in France and Germany is very different.
The make up of the banking sectors is very different in two of our closest European partners. The UK is very much unique in how the banking sector is made up, this has offered advantages historically but the UK has also seen the downside in recent years.
The big question most people have about Stakeholder Banks is what they are. So here are the 4 main types of Stakeholder Bank, the differences and what they each mean.
The 4 Types of Stakeholder Bank
The 4 types are ‘Public Savings Banks’, ‘Credit Unions’, ‘Community Development Finance Institutions (CDFI)’ and ‘Co-Operative Banks’. Each are slightly different and you may well recognise some of the structures. There is an increasing presence of these institutions within the UK business lending sector.
Public Savings Banks
Often set up as philanthropic ventures, these banks will typically have a local focus and local market. They will have a dual social and financial mission. The roots of these banks are often within poorer areas, they will provide banking facilities, loans and SME finance within their localities. Public Savings Banks do not borrow on wholesale markets, deal in investment banking or other derivative trading. In general these banks will lend from their own deposits.
The UK used to have Public Savings Banks if you go back a few years, however legislation allowed these banks to become private and eventually they were either acquired or consolidated into larger commercial banks. You could trace TSB’s roots back this way, remember that this was originally the ‘Trustee Savings Bank’.
We are starting to see these banks re-emerge within less affluent areas of the UK, typically lending smaller amounts to those excluded from standard commercial banks.
If you want to see a great story about Grameen bank then have a read. Grameen was set up in Bangladesh lending to small communities where risk was deemed too high, their default rate says something completely different. See how Grameen’s lending has improved life quality within small local communities.
Credit Unions operate under, and are regulated by, different legislation to normal banking institutions within the UK. They are non-profit entities that focus on the financially excluded. We are starting to see UK Credit Unions provide mortgage loans, SME finance and more varied facilities.
Credit Unions expanded during the great depression of early 1900’s in America, it is therefore little surprise to see a resurgence in Credit Unions in the UK over the last few years.
Their market is low income, disadvantaged or the financially excluded. Loan amounts are typically lower, however default rate appears to be in-line with larger bank rates, interesting… There is a school of thought here similar to Grameen bank in that lending to one person benefits another within the community, it is almost a micro economy in itself.
In 2011 there were over 51,000 Credit Unions operating in over 100 countries. There are an increasing number of Credit Unions in the UK, see this Credit Union search site or the visit one of the national Credit Union bodies. These stats are taken from ABCUL’s site, it makes interesting reading about how Credit Unions have grown in the UK over the last decade;
- The unaudited figures from the September 2014 quarterly returns of 362 credit unions in England, Scotland and Wales show that in the decade since 2004, credit union membership and lending have more than doubled, with savings and assets almost trebling
- Total membership (including juvenile depositors) stood at 562,577 in September 2004, and has increased by 109% to 1,173,299 in the latest figures
- Where credit unions were lending just over £314 million in September 2004, this had increased by 119% to almost £688 million in September 2014
- Meanwhile, the amount saved in credit unions has leapt by 175% from just over £381 million in 2004 to almost £1.05 billion a decade later
- Similarly, British credit union assets have grown by 187% from £432 million in 2004 to almost £1.24 billion in September 2014
This definition is provided by CDFA;
Community Development Finance Institutions (CDFIs) are social enterprises that support communities by providing affordable finance that would otherwise not be available. By making loans, they are able to recycle this finance again and again into neighbourhoods where it is most needed.
CDFIs lend money to those unable to get finance from high street banks. They fill the gaps in mainstream lending, addressing market failures and offering an affordable alternative to high interest doorstep lenders.
CDFI’s (or CDFA’s is you wish) are stepping in and supporting businesses and SMEs that have been declined by mainstream banks. Do not think this means small, failing or poor businesses as it doesn’t. Lime Consultancy have several clients who have used CDFI provided finance to grow, one has obtained CDFI finance along with a grant from UKTI to enable more export business to be done. They can provide real benefits to UK SMEs, if you want to see who is operating in your area then use ‘Finding CDFI Finance‘.
In the 3rd quarter of 2014 CDFI’s lent £26.4m to SMEs, individuals and social ventures across the UK.
These are very similar to Credit Unions and CDFIs. A Co-Operative is an entity owned by it’s partners on the basis of one person one vote. Co-Operative banks are growing in developing regions of the world, especially in India where the entrepreneurial drive sits alongside an overall lower standard of living.
In the UK there are Co-Operatives in many different sectors, banking is no different. The main difference between Co-Operative banks and Credit Unions is that often Co-Operative Banks are regulated by both banking regulators and Credit Unions legislation.
In practical terms, Co-Operative banks typically have more ‘corporate structures’ than Credit Unions or CDFIs in that a board will exist alongside a hierarchy management structure.
In the UK the growth of Co-Operative banks is slower, probably due to the legislative requirements proving a barrier to entry, however elsewhere in the world they are growing fast.
Stakeholder Banks & SME Finance – The UK
In the UK the big positive for SMEs looking for business finance is that there are now more options for companies to consider when raising finance. The growth in Stakeholder banks sits alongside alternative business finance providers, they are different but they all share a similar ethos.
With the UK being a closed market for new entrants for so long, it finally looks like the UK banking sector is starting to see some change.
By Dave Farmer
Dave Farmer is founder of the award winning business finance specialist, Lime Consultancy.
If you have any comments about this post then please add them above.