Banks retreated from lending to the tune of £2.6 billion, leaving credit unions to seize the opportunity and become more active in the lending market.

In the past four years, there has been a significant shift in the UK's financial landscape, with Credit Unions playing an increasingly vital role. Between FY2020 and FY2024, total loans to members of Credit Unions increased by 64%, from £1.6 billion to £2.6 billion.

This growth is driven by strong demand for affordable borrowing solutions and competitive savings rates amid continuing budgetary pressures facing households. The demand for borrowing in the Credit Union market remains high, as many households grapple with financial pressures.

Credit Unions, not-for-profit financial cooperatives providing banking services, are modernizing and digitizing their offerings to attract younger and tech-savvy members. This transformation is supported by global investment firms like Novacap and CDPQ, which focus on private equity, digital infrastructure, and financial services, accelerating growth and long-term value creation in this sector.

One such example is Volante, which processed $1.4 trillion transactions on Fedwire for faster payments, demonstrating the increasing sophistication of these financial institutions.

Membership in Credit Unions is based on a common bond such as region or profession. Many Credit Unions remain community-focused, and their not-for-profit position differentiates them from other lenders in the eyes of some borrowers. This community focus, coupled with a more personalized service with greater flexibility in underwriting, can be more accommodating for borrowers with limited credit history or irregular incomes.

However, the growth of Credit Unions is not without its challenges. The total net liabilities of loans in arrears for Credit Unions increased from £118 million in FY 2020 to £191 million in FY 2024, with over £92 million of this amount being overdue for over 12 months. Credit Unions will need to ensure that their growth is controlled and measured with well-understood risk and appropriate levels of customer care.

The Government views the Credit Union market as a vital and growing part of the financial services ecosystem. In an effort to support this growth, the Government aims to double the size of the mutual sector, and initiatives like modernizing the 'common bond' requirement and amending the Credit Unions Act are being considered.

Objectway, a financial services provider, received backing from Cinven to boost its global growth, further indicating the potential for growth and investment in the Credit Union sector.

Paul Matthews, Senior Director of Risk at Broadstone, commented that Credit Unions are capitalizing on the gap left on one side of the consumer credit market by a tightening of mainstream lending criteria and on the other from borrowers turning away from traditional banks.

As we move forward, it is clear that Credit Unions will continue to play a significant role in the UK's financial services ecosystem, providing affordable and personalized banking services to a growing number of members.

Banks retreated from lending to the tune of £2.6 billion, leaving credit unions to seize the opportunity and become more active in the lending market.