Summary Country Report Ireland

Ireland's business banking sector exhibits similar features of concentration as that of the United Kingdom. With encouragement and pressure from the Irish Government at the end of the 1980's and start of the 1990's Irish banks have supported Government initiatives in business start-ups and small business development and tailored some of their own products to build on these initiatives.

With a buoyant Irish economy and unemployment running at less than 4% of the total labour force credit extension to assist the unemployed into business may seem peripheral in generating economic activity. Nonetheless, there remain pockets of high unemployment in Ireland both in Dublin and some rural areas, with three generations of unemployment not being uncommon. Lending to assist such person move into self-employment is often regarded as social lending by banks and outside their legitimate sphere of activity since the loss rates are too high to bear from a regulatory and investor standpoint if undertaken in significant quantity. Other alternatives are required.

The four year tapering welfare support program to assist a person move from unemployment into self-employment has seen an increasing number of unemployed people seek self-employment. Whilst the long support period might be seen as a subsidy to a business which will not succeed, its term is more realistic of the measures required to change a culture of dependence into self-employment. It has also permitted banks to feel more secure in lending to some people on these programs.

Competing with banks for lending to the unemployed, if not the biggest lenders to the unemployed for business creation, are credit unions, the co-operative savings and loans organisations. Exempt from the Banking Directives they have their own body of regulation as savings and loans organisations for a social purpose which ensures relevant prudential supervision. Their extensive growth in Ireland has created a IR£2.8 billion savings and loans network encompassing 1.8 million people, nearly one in two of the population of the Republic of Ireland.

101 credit unions in Ireland had assets greater than the minimum capital requirement under Irish banking law. Whilst their primary activity is lending for consumer purposes with an interest rate limited to 12.68 APR, they are engaged in lending to individuals for business purposes which was estimated at IR£125 million in 1996.

Credit unions themselves do not make a specific distinction between this lending and lending for consumer purposes. Whilst banks also treat much small business lending as personal lending it can be argued that some special expertise is required for this lending and that identifying this lending would be a first step to raising experience in it.

Credit union growth has been fostered by being exempt from Banking legislation. Prudential supervision has been maintained by a separate body of law and separate regulator. Proposals for a single financial services authority in Ireland may lead to credit union regulation moving closer to that of banks. Whilst some credit unions wish to expand their services it will be important to adapt bank regulation so as to make it relevant for credit unions. Credit unions have a social purpose established by law. There is a danger that the social purpose of credit unions becomes more difficult to achieve if they are regulated more like banks.

There is a case for strengthening the social audit reporting of credit unions and banks. For credit unions it will assist the registrar in assessing the extent to which they are complying with their legal obligations. For banks it will permit an examination of their complaints that credit unions receive special treatment. If banks are engaged to the same extent as credit unions in social lending then arguably there is no special case for exempting credit unions from banking act regulation. At the moment there is insufficient information about bank lending to evidence such a case.

It is possible that a different approach to co-operation between credit unions is required in order to increase quality standards. Irish credit union legislation does not envisage credit unions federating in groups so as to share back-office facilities. This, however, has been a successful model for co-operative financial models elsewhere, for example, France, Germany and Canada. It may be more in sympathy with the retention of the ideal of local autonomy and decision making but at the same time permit closer links between credit unions. This model of credit union co-operation should be more closely examined.

A strong case is made for the transitional exemption for credit unions in the Banking Directives to be made permanent and for similar opportunities to be given in other member states. This would ensure that there will remain an opportunity for competition to exist in the provision of savings and loans services for social purposes. Without such organisations competition in banking services for the accounts of the socially excluded is unlikely to come about voluntarily or at least without the threat of specific legislation being introduced for that purpose, such as a Community Reinvestment Act as exists in the United States.

There are limits to bank and credit union lending for social purposes where a non-profit lender has a role. First Step and Inner City Enterprise are examples of companies which have received charitable status from the Revenue Commissioners engaged in micro-finance lending to the unemployed. A special tax relief was introduced in Ireland to permit tax relief on corporate donations to First Step. This has been a major source of funding for First Step. This tax relief for business was expanded in 1988 to permit limited corporate donations to organisations with charitable status, such as Inner City Enterprise. Such an extension of tax relief may be one way of assisting the sustainability of such lending organisations who enter the market when banks and credit unions become risk averse.

There may be a need for organisations to continue with loan funding to the new business starter who still find it difficult to secure bank lending. A special business credit union drawn from among clients of First Step or a social investment industrial and provident society may be routes which might be explored.

Credit extension for social purposes in Ireland is in many ways quite extensive as a result of the existence of credit unions. The welfare support system for enterprise creation has permitted banks to have some engagement in this market. With limited exceptions such as First Step the lessons of the experience of that lending do not appear to be widely disseminated or shared which may present problems for such lending in an economy in recession where such lending is riskier.