Business Loans Driving Credit Union Development in Netherlands

Small to medium-sized businesses in the Netherlands are being refused financing by banks, and they are turning to the country's nascent credit union movement for member business loans.

The problem is that few, if any, credit unions are currently licensed, creating significant economic void in helping the European Union member country grow its economy.

Despite the lack of member institutions, however, two credit union trade groups are working with the country's political and economic leaders to urge credit union formation and licensure solely for business lending purposes.

The decline in bank financing first emerged four years ago when the ongoing financial crisis caused banks to reduce their lending to small businesses, according to Roland Lampe, head of financial consulting firm Lampe & Associates and working on behalf of the Association of Credit Unions of the Netherlands.  

Banks claim that business loans for amounts of less than 250,000 euros cost 4,000 euros each to administer, an amount too costly to justify in the face of minimal returns. By declining the loans, banks have been leaving the country's small and medium-sized businesses with limited access to capital.

Only Qredits, a Netherlands-based microfinance organization, has been offering small business loans, and then only to a 50,000 euros maximum. The agency currently has 80 million euros in outstanding business loans, with an average loan of just 17,500 euros. The small amount illustrates just how wide an economic gap the country's small-to-medium-sized enterprises face.

Lampe estimates that small and medium-sized enterprises account for some 864,000 enterprises and constitutes almost 99% of all businesses in the Netherlands. ACUN is one of two organizations to promote the formation of credit unions as a solution to fill the capitalization gap. However, the credit union approval process has been slow despite the banking industry's reluctance to serve the market, something with which the competing credit union trade group agreed.

“The loans are expensive for banks because the administrative handling and risk provision required for loans by the banking laws make additional costs too high to be carried by the revenue from small loans,” said Georgina Friederichs, director of the Association of Cooperating Credit Unions, an ACUN competitor formed in March 2013. “Furthermore, the bank's research and handling costs are the same as for a large loan, but the revenue is smaller and not attractive for banks.”

Read more: A potential 3.5B euros market per year …

Friederichs estimates that 46% of all Netherlands entrepreneurs fall into the funding gap that looms between bank financing and microloan capabilities. Specifically, small enterprises needed an estimated 4.5 billion euros in 2012, of which 42% was refused by banks, she said. Medium-sized enterprises need 6.5 billion euros, of which 26% was refused.

“This creates a potential 3.5 billion euros market per year for credit unions,” Friederichs said. Despite that – or perhaps because of it – banks in the Netherlands do not support credit union formation, she added.

The World Council of Credit Unions, the international trade association based in Madison, Wis., has been providing assistance to the Netherlands credit union movement and input to government officials, but no comprehensive credit union regulatory structure has yet been developed, according to Michael Edwards, World Council vice president and chief counsel.

At issue for Netherlands credit unions under the current regulations is the need for a banking license to operate, and under Basel III's capital requirements directive CRD IV a minimum of 5 million euros on deposit to open their doors. But there is a European Union member-state option under the Basel rule that can exempt credit unions from the capital requirement if the member state creates a credit union rulebook that defines operations at the national level, Edwards said.

“It's hard to reach a minimum 5 million euros in initial capital because a new credit union starts with no retained earnings,” Edwards explained. “The requirements of full CRD IV/Basel III compliance are both very expensive and overkill for a small credit union that only does savings and loans.”

In addition to capital concerns, staff capability and expertise issues come into play when business loans are concern, Edwards said.

“The main safety and soundness concern for business-lending credit unions such as those in the Netherlands is whether the credit unions have personnel with business lending experience,” said Edwards, “either on staff or as a consultant, in order to ensure strong underwriting practices.”

Read more: Problems with regulators, too …

But greater issues exist for the Netherland's nascent movement before staff expertise can be measured. The country's Central Bank is wary of approving alternate banking structures due to past bad experiences with other models, Lampe said. After three years of lobbying, the Central Bank allowed credit unions to issue “perpetual” member certificates as a way to develop funding that would allow them to open. The only other option, Lampe said, was for credit unions to apply for a formal banking license.

“This is rather absurd for a beginning credit union with 2.5 million euros in assets and 1.5 FTEs on the payroll,” Lampe said. “In my opinion it is ethically not right to ask entrepreneurs to perpetually dispose of their savings money.”

Instead, Lampe worked with MP Eddy van Hijum of the Christian Democratic Party who, in turn, drafted a proposal to revise regulations that would more easily enable the formation of credit unions. The legislation, issued in July and discussed in November, will be put to a vote with the goal of clearing the path for the widespread formation of credit unions by late 2014.

Currently, there are 104 credit union applications pending, Lampe said. What's more, two credit unions are expected to open their doors next month, one to serve automotive workers and other to provide business loans to small entrepreneurs in the province of Zeeland.

The Netherlands' pending initiatives echo an earlier time in the U.S. credit union movement, when credit unions granted loans to support their members by supporting their members' business, said Edwards.

“Many early U.S. credit unions were chartered specifically for business lending, such as providing agricultural loans or loans to tradesmen for the purchase tools and other business equipment,” said Edwards. “The 12.25% business cap imposed on most U.S. credit unions in 1998 as part of the (Credit Union Membership Access Act) has led many people to believe that credit unions are supposed to be primarily for consumer lending, but the history of credit unions in the U.S. is fully consistent with small business lending.”