SME Lending: a new role for credit unions?

INTRODUCTION
Credit unions have a relatively long history, although the first modern day credit union was established in the United Kingdom (UK) in the mid-1960s (Birchall, 2013). The original purpose of credit unions was to provide banking facilities for the financially excluded and hence many credit unions can be found in economically disadvantaged areas of the UK (e.g. Northern Ireland (French and McKillop, 2014)). Founded on the principle of mutualism, membership is limited by the requirements of a ‘common bond’, meaning that members either have to live within a certain geographic area or have other common association such as an occupation or a religious grouping. The idea is that a bond would ‘strengthen the security of the union with members connected by more than financial ties’ (Wright, 2013, p. 5). While the original rules of governance for credit unions specifically debarred credit unions from lending to corporations, recent changes in legislation facilitates lifting this restriction. In theory, this is a plausible policy initiative, as increased centralization of decision-making by financial institutions has exacerbated information asymmetries between small and medium-sized enterprises (SMEs) and lenders.