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How does web technology adoption affect the performance of Irish credit unions?

Irish credit unions are now entering a period of substantive structural change which will in part be based around technological improvements. One of the conditions of the EU/IMF/ECB financial support package for Ireland was the requirement that credit unions are restructured. A Credit Union Re-Structuring Board was established in 2012 to facilitate amalgamations and the creation of strong ‘anchor’ credit unions capable of developing more sophisticated and more sustainable business models. €250 million has been allocated for this process some of which will be used to enable ‘anchor’ credit unions upgrade their ICT systems.  It was against this back drop, in our forthcoming paper[1], that we assessed the performance implications of web technology adoption in Irish credit unions over the 2002-2010 period.

Here are some key excerpts from the paper.

Figure 1 illustrates a steady increase in web adoption over the period although in 2010 53% of credit unions still did not have a web-based facility.  Further survey evidence from 2010/2011 suggests that these adopters are relatively unsophisticated technological capabilities, with less than 10% offering ATM and or phone banking. This could be related to two factors.  The first is that Irish credit unions have been unable to create a sophisticated integrated technology solution across credit unions and secondly credit unions are constrained by legislation and the regulatory authorities in the range of services that they provide

Figure 1

webadoptionCUs

Figure 2 presents a preliminary visualisation of some performance and cost metrics grouped by whether the credit union has adopted a website or not. The graphical analysis reveals some distinct difference with web adopters experiencing lower spreads on average (driven it seems by lower average loans rates), a marginally higher pay-out ratio and higher average labour and capital expenditures. The latter finding is consistent with the initial encroachment on costs of the adoption of a new technology, while the former finding suggests that credit unions are passing any benefit accrued from this new technology to their membership. The graphical analysis suggests that both saving members and borrowing members benefit but that the majority of the benefit accrues to borrowers.

Figure 2

Adoptioneffects

That said, care must be taken when drawing any causal inference on the effect of adoption from these graphs as to do so infers that the non-adopters and adopters have no other differences other than the adoption of a website.  Using an exhaustive econometric panel data analysis to account for both observable and unobservable difference between adopters and non-adopters, we find consistent statistical evidence of a reduction in spread ( driven by a fall in the loan rate) due to the adoption of web technology.  This effect is persistent over a two and three year period and translates into a cost benefit for borrowing members.

Overall our study highlights that the adoption of a website, even with limited functionality, can provide cost reductions and performance enhancement. This points to the potential of additional benefits accruing from more sophisticated levels of technological advance.  We feel this paper provides timely and important evidence to the Irish credit union sector, which is now entering a period of substantial structural change which is partly base around technological improvement.

1. McKillop, Donal G., and Barry Quinn. 2015. “Web Adoption in Irish Credit unions:Performance Implications.” Annals of Public and Cooperative Economics 86(3).

Performance of Irish Credit Unions 2002 to 2010

Modelling the performance of Irish credit unions, 2002-2010

by Professor Colin Glass, Professor Donal McKillop and Barry Quinn

Abstract

This study employs the Cuesta et al. (2009) translog enhanced hyperbolic distance function to examine the performance of Irish credit unions. The modeling approach rewards credit unions for reducing undesirable outputs (impaired loans and investments) and for increasing desirable outputs and decreasing inputs. A number of findings emerge. Credit unions are subject to increasing returns to scale, technical regression occurred in the years after 2007, there is significant scope for an improvement in technical efficiency through expansion of desirable outputs (18.48%) and contraction of impaired loans and investments and inputs (16.6%) with larger, better capitalised, credit unions identified as more technically efficient. These findings are particularly pertinent given the restructuring proposals for Irish credit unions centred around amalgamations, (see, Irish Commission on Credit Unions, 2012)

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Forthcoming  in Financial Accountability and Management in March 2015

Cooperative Banking Efficiency in Japan

Cooperative Bank Efficiency in Japan: A Parametric Distance Function Analysis

J. Colin Glass, Donal G. McKillop, Barry Quinn & John O.S. Wilson

Abstract

This study employs an extension of the Cuesta et al. (2009) translog enhanced hyperbolic distance function model toexamine the relative performance of Japanese financial cooperatives. The modeling approach rewards financial cooperativesfor reducing undesirable outputs as well as for increasing desirable outputs and decreasing inputs. The empiricalimplementation of the model yields a rich set of results some of which contradict those found elsewhere in the literature.Our analysis finds that, Japanese financial cooperatives are subject to increasing returns to scale; they have securedsignificant levels of technical progress; they have experienced a decrease in technical inefficiency; those financialcooperatives which are larger, more diversified, with a greater proportion of their funds on loan, which have a lower returnon assets and a lower capital adequacy ratio are more efficient and; regulatory pressure to reduce ‘bad’ loans has a substantial adverse impact on output and performance.

JEL classification: G21

Keywords: Japanese Cooperative Banks; Efficiency; Regulatory compliance

Published in the European Journal of Finance 2013 . Click http://drbq.co/Pub2013 for a copy.

Efficiency Study for Report of the Commission on Credit Unions March 2012

Irish Commission on Credit Unions, March 2012

 

APPENDIX 4: Efficiency Study by Professor Donal McKillop and Barry Quinn

Abstract

This study investigates Irish credit union performance over the period 2002 to 2010. The empirical analysis uses a two-stage approach. The first stage measures efficiency by a data envelopment analysis (DEA) estimator, which explicitly incorporates the production of undesirable outputs such as bad loans in the modelling process. In modelling the productive process of credit unions, each credit union is viewed as employing a set of inputs (capital expenditure, labour expenditure and interest paid on deposits and dividends paid on shares) to produce a set of desirable outputs such as various types of loans and investments as well as shares and deposits. Unfortunately some loans and investments turn out to be ‘bad’ loans and ‘bad’ investments which must be written off as bad debt. Producer-specific performance measures which permit credit unions to be credited for the reduction of undesirable outputs as well as for increasing desirable outputs and decreasing inputs are thus obtained 36. The performance measure (efficiency score) obtained for each credit union ranges from 0 (highly inefficient in transforming inputs into outputs) to 1 (highly efficient in transforming inputs into outputs). In the second stage of the analysis how certain factors influence the efficiency scores of credit unions is examined. Factors that prove important are capital strength, liquidity, asset size and common bond type.

Table 2 : Factors Influencing Performance

Parameter estimates and bias corrected confidence intervals

Regressors Estimated Coefficients Lower 5% Upper 5%
Capital ratio 0.199*** 0.18 0.25
Liquidity ratio 0.051*** 0.048 0.073
Surplus funds/asset ratio -0.0623 -0.04 0.18
Dividend rate -0.0547 -0.03 0.12
Asset size 0.415** 0.36 0.62
Asset size squared -0.121*** -0.13 -0.1
Occupational dummy 0.041*** 0.027 0.054
Time trend -0.015*** -0.016 -0.013

(i)The regressand is the bootstrap-based bias-corrected DEA estimate of the unobserved efficiency score of each credit union with a higher score value indicating greater efficiency. A positive estimated coefficient thus implies that an increase in a explanatory factor increases efficiency.
(ii) ***, **, * denote significance from zero at the 1%, 5% and 10% levels using the bootstrap-estimated confidence intervals.
(iii) The truncated regression estimation with bootstrap is based on Simar and Wilson (2007), Algorithm 1, using 1,000 bootstrap replications for the confidence intervals of the estimated truncated regression coefficients.

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Internet Based Technology in Irish Credit Unions

CU Focus Autumn 2010

INTRODUCTION

Technological change has impacted heavily on the structure, operations and economics of the financial services industry. Information technology (IT) alters the ways in which customers access services, mainly through automated distribution channels such as the internet, phone-based and other banking access channels. IT can also yield cost savings associated with the management of information (collection, storage, processing and transmission), and by substituting paper-based and labour-intensive procedures with automated processes.

 

Consumer uptake of IT innovation in financial services is of course dependent upon the IT sophistication of the customer base as well as their access to technology.   In Ireland the IT infrastructure has been steadily improving. In 2004, the Irish Government sponsored infrastructure project Fibre Optic Metropolitan Area Networks was introduced aimed at permitting open access to private enterprise of ‘always on’ broadband.  Phase I of this project saw the installation of fibre optic networks in 27 provincial towns with Phase II planned to add a further 66 towns[1]. That said a recent OECD survey suggests that Ireland still lags behind the OECD average for broadband subscribers per capita.

 

Against the background of an increasingly conducive environment within which to offer IT based products and services we now present summary findings from two surveys designed to gauge the level of such provision by Irish credit unions.

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[1]Since July 2009, Area Networks in Tralee, Killarney, Castleisland, Listowel, Navan, Bundoran, Ballyshannon, Blarney and the combined Carrigaline/Ringaskiddy /Passage West network have been activated.

McKillop and Quinn (2010) ‘Internet Banking and Irish Credit Unions ‘

Internet Banking and Irish Credit Unions

co-authored with Donal McKillop

Abstract

The purpose of this paper is to examine IT adoption by Irish credit unions. Using probabilistic models, we explore one aspect of IT, that of internet banking technology, and assess the degree to which characteristics specific to the credit union and to its potential membership base influence adoption. Our analysis suggests that asset size, organisational structure being a member of the Irish League of Credit Unions and the loan to asset ratio are all important credit union specific drivers of internet banking adoption. We also find that characteristics of the area from where the credit union captures its members are important. Factors such as the percentage of the population that is employed, the proportion of the population in the age bracket 35 to 44, the proportion of the population that have access to broadband and the level of familiarity with a local ATM facility are all identified as influencing the probability of adopting internet banking.

 forthcoming in the International Journal of Co-operative Management July 2012

Keywords: Credit unions, technology, probabilistic models

McKillop D.G. and Quinn B (2010) ‘Usage of Internet Based Technology by Irish Credit Unions’

McKillop D.G. and Quinn B (2010) ‘Usage of Internet Based Technology by Irish Credit Unions’  forthcoming in winter edition of CU Focus, a quarterly publication produced by the Irish League of Credit Unions.

Technological change has impacted heavily on the structure, operations and economics of the financial services industry. Information technology (IT) alters the ways in which customers access services, mainly through automated distribution channels such as the internet, phone-based and other banking access channels. IT can also yield cost savings associated with the management of information (collection, storage, processing and transmission), and by substituting paper-based and labour-intensive procedures with automated processes.

 Consumer uptake of IT innovation in financial services is of course dependent upon the IT sophistication of the customer base as well as their access to technology.   In Ireland the IT infrastructure has been steadily improving. In 2004, the Irish Government sponsored infrastructure project Fibre Optic Metropolitan Area Networks was introduced aimed at permitting open access to private enterprise of ‘always on’ broadband.  Phase I of this project saw the installation of fibre optic networks in 27 provincial towns with Phase II planned to add a further 66 towns[1]. That said a recent OECD survey suggests that Ireland still lags behind the OECD average for broadband subscribers per capita.

 Against the background of an increasingly conducive environment within which to offer IT based products and services we now present summary findings from two surveys designed to gauge the level of such provision by Irish credit unions….



[1]Since July 2009, Area Networks in Tralee, Killarney, Castleisland, Listowel, Navan, Bundoran, Ballyshannon, Blarney and the combined Carrigaline/Ringaskiddy /Passage West network have been activated.

McKillop D.G. and Quinn B (2010) ‘A Performance Overview of Irish Credit Unions’

McKillop D.G. and Quinn B (2010) ‘A Performance Overview of Irish Credit Unions’ published in spring edition of CU Focus, a quarterly publication produced by the Irish League of Credit Unions.

Introduction

Credit unions are structured around a well defined membership; they are not subject to shareholders’ profit expectations; and by legislation cannot provide high risk structured financial products. For these reasons credit unions can be expected to be insulated from the worst excesses of the current turmoil in financial markets. There are however clouds on the horizon. Bad debts[1] and loan arrears are on the rise due in part to the general economic downturn but also due to poor investment decisions made by some credit unions. These poor investments decisions have been exacerbated due to the inexorable rise in the share of investments in many credit union portfolios.  The average loan to asset ratio for Irish credit unions has declined from 56.97% in 2002 to 47.16% (2005) to 47.38% (2007) and there has been a commensurate increase in investments as a percentage of assets from 37.65% in 2002 to 48.12% in 2005 and to 48.25% in 2007…



[1] In 2002 bad debt write-off as a percentage of gross loans was approximately 0.38%, rising to 0.56% in 2005 and to 0.60% in 2007. While this percentage level of bad debt is low compared to other retail financial institutions it is an accumulating problem.

Irish Credit Union’s Cost Efficiency

 

McKillop D.G. and Quinn B., (2009) “Cost Performance of Irish Credit Unions” Journal of Cooperative Studies, VOL 42, 1 , P22-36(14).

 

ABSTRACT

There are 424 credit unions in Ireland with assets under their control of €14.3bn and a membership of 2.5m which equates to about 66% of the economically active population, the highest penetration level of any country. That said, the Irish movement sits at a critical development stage, well behind mature markets such as Canada and the US in terms of product provision, technological sophistication, fragmentation of trade bodies and regulatory environment. This study analyses relative cost efficiency or performance of Irish credit unions using the popular frontier approach which measures an entity’s efficiency relative to a frontier of best practice. Parametric techniques are utilised, with variation in inefficiency being attributed to credit union-specific factors. The stochastic cost frontier parameters and the credit-union specific parameters are simultaneously estimated to produce valid statistical inferences. The study finds that the majority of Irish credit unions are not operating at optimal levels. It further highlights the factors which drive efficiency variation across credit unions and they include technological sophistication, ‘sponsor donated’ resources, interest rate differentials and the levels of bad debt written off.

 

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