Credit unions around the country look set to finally start lending for social housing, after years of lobbying and discussion. Such a move would ramp up lending for much-needed development in the housing sector, while also helping credit unions beat negative rates.
The Irish Times understands that the Irish League of Credit Unions (ILCU), which represents some 226 credit unions with €18 billion in assets, is set to follow in the footsteps of the Credit Union Development Association (CUDA), by linking up with an investment partner to form a structured vehicle to invest in the sector.
Last summer, CUDA announced plans to launch a social and affordable housing fund backed by up to 50 of its member credit unions. In conjunction with Initiative Ireland, it expects to lend up to €300 million a year to deliver more than 1,000 new homes annually, and, according to the association, it is working on deploying the fund.
Given the difficulties facing credit unions across the country, in terms of demand for retail lending and the growth in deposits for which they are now being charged by banks, demand for the new lending scheme from the ILCU is expected to be significant. Lending to social housing is also seen as a means to fulfill the ethos of credit unions in lending to help build their local communities.
A spokesman for the ILCU said it was “continuing to engage with a number of stakeholders in respect of the development of a solution that will enable credit unions to provide funding for social housing”.
ILCU affiliated credit unions could put north of €100 million into the vehicle initially, with future funding possible. Such an approach could also be used to ramp up SME lending and mortgages. It’s understood that the ILCU is setting its sights on a launch later this year, as it finalises an agreement with a potential partner.
Credit unions have been lobbying the Central Bank of Ireland for many years to be allowed lend for social housing. In March 2018, the regulator finally gave the sector the nod, which means that credit unions can lend, through a regulated investment vehicle, to Tier 3 approved housing bodies (AHBs), such as Clúid, Respond and Tuath, for the provision of housing.
The Central Bank has put a limit of about €650 million on the scale of credit union lending to the sector.
However, the process has been delayed on a number of fronts. Firstly, AHBs are funding from the Housing Finance Agency (HFA) at rates of about 2-2.5 per cent over 25 years, so they are not urgently seeking money. This approach means that loans are on the State’s balance sheet whereas borrowing from credit unions would move them off. It would also diversify their funding options.
Secondly, credit unions need to have a partner to structure their investment vehicle, or ICAV (Irish collective asset-management vehicle) and this process has taken longer than expected.
The return on lending for credit unions won’t be significant, but it will offer another stream of business. Lending at the rate AHBs currently pay – of between 2-2.5 per cent – would mean lower rates of return to credit unions, given that the costs of running such a vehicle would be between 0.7-1 per cent. This would offer a net return to credit unions of between 1.3-1.8 per cent. However, this is significantly higher than the negative rate many are facing on their deposits from banks, albeit at a higher level of risk.