Credit Unions provide financial services to low income groups

The government has started a three-month consultation on possible reforms to the sector, to allow it to compete better with the banks.

It will look at whether the law should be changed to make it easier for unions to attract members and savers.

Generally, credit unions provide financial services in deprived areas.

Compete effectively

One of the major areas for consultation will be whether credit unions should be able to pay interest in order to attract higher deposits from savers.

At present, they are only allowed to reward savers with a retrospective dividend.

In addition, reform of how credit unions are funded is being considered.

Ed Balls, economic secretary to the Treasury, said that he wanted to see the credit union sector able to compete more effectively.

"Apart from the provision of financial and other services, the sector has an important role to play in helping to deliver government policy on financial and social inclusion and helping to build financial capability," Mr Balls said.

The government originally announced its intention to launch a consultation last November.

The seven-month delay in launching the consultation had dismayed credit unions, but now it has got under way, the Association of British Credit Unions (ABCUL) said it was a "once-in-a-generation opportunity".

"The importance of getting it right cannot, in my view, be overestimated, as the ground rules that are laid down now will define the way in which we can operate for many years to come," said ABCUL chief executive Mark Lyonette.