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Credit Unions: a community of value?

by Simon Longstaff

Contents:

• Introduction
• Credit unions, ethics and the community
• Understanding the 'ethical dimension'
• Ethics and the importance of 'community'
• Australia's first, comprehensive national framework for business ethics
• It's not just pious sentiment, the maintenance system will have teeth!
• Conclusion
• References

Introduction

Credit unions are at a critical point in the evolution of their role in society. But I see the occasion of this address as having a wider significance. I believe that we are living through a time that is of profound importance to the evolution of both credit unions and society. Indeed, I want to suggest that there is an intimate link between the fate of both.

Such a suggestion is not offered as a mere rhetorical flourish. I am deeply serious about this matter. My concern flows from a recognition that, in many ways, our sense of community is being eroded by untamed market forces. There are many who have lost any proper sense of purpose in economic activity. Instead of seeing markets as a means to the end of promoting the public good they offer a distorted vision in which the unbridled pursuit of self-interest is elevated to the status of a kind of sacramental good. This is anything but rational economics. Rather, an ideology that confuses selfishness with self-interest is based on an irrational disregard of the public interest. A thorough-going form of laissez-faire, in which individuals shrug off social concerns in the pursuit of material reward, is confused with the idea of a free market - which has its own internal logic and ethical standards.

The very idea of community is put at risk by a narrow form of economic calculation that is totally at odds with the precepts of the founder of the discipline, Adam Smith. People tend to forget that Smith was a philosopher and that he held the Chair of Moral Philosophy at the University of Glasgow. It is true that he spoke of the ‘invisible hand’, but as Ian Castles(1) has demonstrated, he also wrote in the Wealth of Nations that the interest of merchants and manufacturers "is always in some respects different from, and even opposite to, that of the public' ; and so their proposals required "the most suspicious attention' because they:

had generally an interest to deceive and even to oppress the public, and (they) accordingly have, upon many occasions, both deceived and oppressed the public.

This judgement is probably a bit harsh. It must be weighed in the balance with another of Smith's key insights; namely, that it is only by the wealth generating activities of merchants and manufacturers that society can expend resources on social programmes. Some people like to say that people in business bake the pie that others then distribute. There is some truth in this. But the thing to remember is that the whole community contributes ingredients for the commercial mixture. Business would be impossible without the social, political, legal and practical infrastructure that the community provides.

If one understands and accepts this, then one can understand and accept the sometimes surprising truth that Adam Smith only proposed his economic theories because he sincerely believed that their implementation would improve the conditions for ordinary people. Economic theory should face that same test today - will its application, in current conditions, advance the interests of the community?

It's easy enough to recall economists to the founding question of their discipline. But we are living in a time when ideas about the nature of community seem to be growing weaker. We hear lots of talk about individual rights and very little about obligations owed to others. Frequent appeals are made to the principle of liberty but there is often a profound silence about the requirements of justice.

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Credit unions, ethics and the community

Now what might this have to do with credit unions, ethics and the community? I want to suggest that credit unions are a pretty good indicator of the health of the community. This is because they are an active expression of a community's commitment to ideals of self-help and co-operation. Credit unions never make a profit. Rather they use their surpluses to lower costs to members or extend the opportunity for membership to others. This is why the recent debate about the tax treatment of credit unions has been so important. At present the retained earnings of credit unions are their only source of capital. If these earnings are reduced by a third, then there is a real risk that credit unions will cease to exist as we now know them. As Graham Loughlin, from CUSCAL, pointed out in his submission to the Senate Standing Committee on Finance and Public Administration(2):

...they won't be mutually-owned, co-operative institutions, limited in membership by their common bonds, and promoting their common bonds, and promoting the democratic participation, the economic and the social welfare of their members. They will instead be forced to adopt the same objective of maximising profit, in order to service stockholders, as any main street financial institution.

Now some people might ask, "So what, why should we care about the special character of credit unions? Let them become like any other financial institution. Let the market decide!". But what else might be lost with the disappearance of the distinctive character of credit unions? Could their demise indicate a further failing in our sense of community and its values?

I am particularly concerned to raise this question here in Tasmania. I first came to the State as a visitor in 1979. I intended to stay for a long weekend. Instead, I left some seven years later! One of the things that attracted me so strongly was the palpable sense of community that I experienced. There was nothing quite like it to be found in the major cities of the mainland. Consequently, I know that in speaking to an audience of Tasmanians I am addressing people who will appreciate what is at risk.

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Understanding the 'ethical dimension'

At risk, in particular, is our sense of the ethical. Ethics is becoming a 'hot topic' for many in business and the professions. The trouble is that very few people have a clear appreciation of the issues to be considered. This is because there are some fundamental misunderstandings about the very nature of ethical reflection. Some think that ethics is all about arcane philosophical theories. Others think that it is about special rules of behaviour - akin to the application of the law or rules of professional etiquette. Others think that ethics is the same as morality. All of these views miss the essential point of ethics which is, at its heart, about answering a very ancient, very simple but powerful question asked by the Greek philosopher, Socrates.

Socrates asked some brilliant questions. He was a real gad-fly, testing prevalent ideas at work in his native city-state of Athens. Unfortunately, his persistent questioning was considered by some to be a form of impiety and likely to corrupt the youth of his time. In the end, the citizens of democratic Athens sentenced Socrates to death.

He is gone but his questions remain. And they are as challenging as ever. In setting off the debate about ethics in the West, Socrates began by asking, "What ought one to do?". He didn't ask a theoretical question, he didn't ask about the nature of good and evil and right and wrong. Instead he asked a practical question that every person confronts whenever a decision is to be made. In answering this question we are forced to go to the heart of each matter and confront our own understanding of what a good life would be. That is, each of us is called to look at ourselves and ask whether the actions we propose to take are consistent with living a life that we think to be valuable.

There is no escaping Socrates' question, unless of course we sacrifice any sense of personal responsibility. Some choose to do this and, I believe, live a poorer life for doing so. They are the kind of people who can't cope with the burden of their own freedom. They look to some other authority to decide every question. They never have to look too far. There are plenty of people prepared to take up the 'challenge' of controlling the lives of others. Governments are especially susceptible to the siren call from people for "someone to do something".

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Ethics and the importance of 'community'

This emphasis on personal responsibility should not be allowed to draw us into thinking that ethics is all about the choices made by individuals living in isolation. If ethics is about anything, it is about relationships. One of the members of the Board of the Centre, the noted social researcher Hugh Mackay, recently wrote in the Australian Financial Review (3) that:

If we accept that disintegrating communities kill off our moral sensibilities, it is clear that an urgent priority is to rebuild our sense of being a community. In the workplace, in the retail environment, in the neighbourhood at large, the challenge is to find new ways of putting people back into closer personal contact with each other.

The current surge of interest in ethics is a necessary reaction to our growing realisation of what has happened to us, but there is a real danger of putting the cart before the horse. Unless we feel like members of a community, our capacity to respond to the philosophical arguments in favour of ethics will remain severely limited.

Perhaps we are beginning to realise that we need to take a closer look at what makes communities function, so that we can do a better job of designing environments where humans can more easily act like social - and therefore moral - creatures.

Credit unions have always been founded as a practical expression of the community impulse that makes the leading of an ethical life a genuine and meaningful possibility. This is why their significance outstrips any explanation rooted in the application of market theory. But there are recent developments in the life of the credit union movement that take the ethical dimension of its development to an altogether higher plateau.

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Australia's first, comprehensive national framework for business ethics

In November of this year, representatives of most credit unions in Australia will assemble in Hobart for their National Convention. At their Annual General Meeting they will be asked to vote on a number of proposals designed to establish what I believe to be Australia's first ever, comprehensive national framework for business ethics. It should be recalled that there are 329 credit unions with 3.1 million members and savings of $12 billion. 27% of Tasmanians belong to credit unions. Credit unions operate across the country and have built a truly national system based on the principle of co-operation. 83% of these credit unions will be represented in Hobart. So this is a significant development.

Credit unions will be asked to adopt the Philosophy and Principles document formulated on their behalf by the Membership Council. The Membership Council is an elected body charged with responsibilities which include the development and maintenance of the movement's distinctive ethos. The Philosophy and Principles document includes the first two tiers of a tripartite framework of ethical guidelines and rules of conduct. The first tier is a Code of Ethics that will bind all credit unions and their special service providers. The second tier is a set of Duties to Stakeholders. It identifies the various groups who enter into relationships with credit unions and sets out core reciprocal obligations. To date, this is as far as the movement has proceeded. The third tier on the structure will be a Code of Conduct containing more detailed rules of behaviour. While taking account of requirements reflected in the Banking Code, there will be special commitments that credit unions make to each other and to the community at large.

Reference to the content of the Code of Ethics provides an indication of the types of principles that have been chosen by the movement. And it is important to understand that these principles have been chosen! They are not the result of deliberations by a committee. Rather, they are a compilation of principles suggested during extensive consultation with the movement's base. In fact, consultation was so extensive that a number of people complained that the Membership Council should "just get on with the job".

In addition to the normal contents of such a Code, there are a number of distinctive elements that single out the credit unions from other financial institutions. For example, the code commits credit unions to:

• Be willing to support members in their search for solutions to their problems
• Act within the spirit of justice and equity
• Encourage thrift amongst their members as an example to the general community, and so on.

In a like vein, credit unions recognise that they have special duties to stakeholders. For example, in relation to their members credit unions will, "Be conscious of the need to protect members from financially over-extending themselves".

There aren't many other financial institutions encouraging thrift! Indeed, a great weight of indebtedness bears down on hundreds of thousands of people who were targeted in marketing campaigns and enticed to borrow vast sums during the last decade.

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It's not just pious sentiment, the maintenance system will have teeth!

There are many organisations in the public and the private sectors with Codes of Conduct. There are relatively few with the comprehensive three-tiered approach outlined above. Hardly any would be prepared to bed the Code down on the basis of a comprehensive maintenance programme. Credit unions will be asked to do just that. The proposals go beyond their giving assent to some noble platitudes. They envisage the establishment of a system of maintenance with elements ranging from a programme of education to a cycle of mediation and arbitration. The details are still to be determined. At this point, the movement is only being asked to approve the framework. This will then provide the basis for comprehensive proposals to be put forward at the 1994 Annual General Meeting.

The point is that credit unions will be invited to take a huge step forward by committing themselves to ethical principles against which they will be fully accountable. Credit union members and the public at large will be able to determine whether or not the core values are applied in practice. These values are those of:

• co-operation
• moral integrity
• trust
• financial prudence
• caring for members
• social responsibility

In short, credit unions will be quite unable to behave in a manner similar to Gough Whitlam's description of a politician...

Credit unions live out the ideals embodied in their core values in a variety of ways. For example, they play an important role in educating people about the nature of credit. In a more immediate sense, some credit unions offer special low-interest loans to people who would otherwise be denied access to funds. It's a case of members lending a helping hand to the less fortunate. It's not just the bottom line that counts. Members of credit unions organise themselves in recognition of the fact that there are some things of value that don't have a price, that not every aspect of a relationship can be reduced to the status of a transaction.

Tasmanian credit unions are reaching out to the community in a variety of ways. Recent social commitment activities include:

• Housing and motor vehicle seminars for the general public
• The production of the Youth and Credit video and the extension of information on budgeting to all Tasmanian high school students
• The provision of financial counselling services, and so on

Not every credit union does everything - it's the combination of their activities that count!

I see credit unions up close, warts and all. I'm not saying that they are perfect, that they never make mistakes. But I am wanting to suggest that their practical commitment to ethics is of immeasurable benefit to the community in which they reside. We need to nurture rather than grind them down in a vain, and sometimes disingenuous attempt, to stamp out a 'level playing field". Squeezing the competition by whatever means is a proven strategy. We should see it for what it is and not pretend to be appealing to some selectively applied notion of fairness. Those doing the stomping rarely care about equity when their interests are in the balance.

So I want to conclude by throwing down something of a challenge.

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Conclusion

In the current social environment there are many who would argue that a genuine commitment to ethics is an unrealisable ideal. Many think that sound ethical principles are fine in theory but that they can't really be applied in practice. To try to do so is to be nostalgic. They say that to promote virtue is to be old fashioned, to hark back to ideas only useful in a different era. They ask us to be 'realistic' and to embrace the 'modern' way of doing things. This plea is often nothing more than an ill disguised plea to allow for the survival of the fittest. Perhaps such people are right. Perhaps a dog-eat-dog world will be the most efficient. And perhaps efficiency is the only value that we need to embrace in the search for a worthwhile life. Or perhaps efficiency is only one of a number of important values that we must learn to juggle across an unpredictable landscape.

Credit unions must face up to this challenge. After all, what if their critics in the market place are right? But this is to beg the question that we began with. Credit unions may only make partial sense when compared to the standard type of financial institution. Their full sense might only be appreciated when viewed against a background of community. Credit unions depend on the existence of a society and not just an enterprise association.

Most people have a fairly good feel for what it means to live in a ‘society’. But what about an ‘enterprise association’? John Casey has tried to describe the latter(4):

We might imagine a city founded purely as a trading post. The laws of the city will reflect its original purpose, and have to be understood in relation to this purpose. Contracts will be vigorously enforced however unreasonable or unjust, because it is of the highest importance to retain the confidence of those with whom the city trades. Indeed, the notion of a contract being 'unjust' will have no meaning. All education will be subordinated to the need to produce an ‘enterprise culture’, and no subject will be studied as an end in itself. The rulers of the city will regard themselves essentially as the managers of the enterprise. Their tasks will be to maximise wealth and promote trade.

Is this so very far away from what we now experience? Some may say that this is an accurate and even attractive picture. But does such a view of our relationships miss something of vital importance? For example, do we exist simply to "facilitate the exchange of commodities" or is there something more? Is there, for example, a need to value friendships, to realise that other people can make a claim on us? Is living in a society only possible when we recognise that each person is bound to others within a network of formal and informal relationships?

The challenge facing us today is to make a choice about which alternative we want. Do we want a society of citizens in which something like credit unions make sense? Or do we want the enterprise association in which each of us is little more than a purveyor or consumer of commodities? The latter consigns us to a place where the ideals of co-operation, moral integrity, trust, financial prudence, caring for members and social responsibility seem strange and alien - just a shadow of a once remembered past?

At their best, credit unions are a reflection of an important aspect of ourselves. They are part of a long tradition of institutions that confront us with the reality of what it means to acknowledge the ethical dimension of our lives. Many of those institutions find themselves under attack - the church, the family, the law, the professions, schools, and so on. Although not completely condemned by their critics, their continued relevance is seriously questioned. But against what standard should the 'relevance' of such institutions be assessed?

Credit unions may be considered a little quaint but at least they are sticking to their last and adopting a new range of commitments. In this they act as a singular reminder of what can be done when there is a community of value.

Ethics is about choices. In Tasmania, as in so many other places, it is about choosing whether or not we want to foster a real sense of community. The choice is ours. So how will we choose? And when we have chosen, what will we do?

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