The relationship between risk and return in loan decisions at credit unions JON. CENTRE CREDIT UNION CENTER Josef is entering the final year of a four-year sandwich programme, reading for a BSc in Banking and Finance. He spent his third year in an internship, gaining work expe- rience in a small credit union (CU) in Wales near to his parents' home. The CU has agreed to Josef volunteering to help in administration when he visits his parents' home during university holidays. Josef has to conduct a research project and chooses the topic of "Risk and return in loan decisions at credit unions". Josef intends to use the small CU as a case study Josef has learned about the relationship between risk and return that commercial, high street, retail banks assume when making personal loan decisions, so they vary interest rates according to (i) size of loan vis--vis borrower's income, (ii) the security - and concomitant reduction in risk - against which the loan is borrowed such as equity in a house and (iii) the number of defaults on borrowers' previous loans that may indicate increased risk on non- payment of a subsequent loan. Josef knows that as commercial organisations, getting loan decisions right affects banks' ability to attract investors and savers to generate additional funds. Josef knows that CUs are different from banks as they are mutual organisations that pro- mote self-help within communities through an ethos of thrift by encouraging members to save before borrowing. Josef also knows that the CU where he spent his internship provided finan- cial services to people who were too poor to obtain accounts with high street banks. However, he does not know how those differences affect risk and return policies. Josef applies to his uni- versity for ethical approval for his study using the title "Risk and Return in Loan Decisions at Credit Unions: A Case Study". He received permission to collect information through observa- tions, documents and interviewing the cu's paid worker and volunteers. Josef starts his preparations by writing what he learned about risk and return during his internship. He noted that one way of managing risk is by making people save by purchasing shares in the CU for eight weeks before borrowing. He also recalls a tiered policy of only lend- ing 500 more than savings for first loans, twice the savings for a second loan and a maximum of three multiples of savings for third and subsequent loans. However, he did not see how these policies were linked to dividend payments or to a tale he heard about when someone had defrauded the credit union of 10,000 and disappeared. Josef surveys the literature on CUs and finds that while Ferguson and McKillop (1997) class all Cus in Britain as broadly identical, Lee and Brierley (2017) propose a three tier classification. Using that classification, Josef decides that the CU that he knows is neither a Version 2 CU with legal authority to offer many financial products, nor a large Version 1 CU, but instead a small Version 1 CU. He changes the title of his project to "Risk and Return in Loan Decisions at a Small Version 1 credit union". During his Christmas holiday, Josef returns to Wales. While volunteering, he collects a range of documents including manuals on loan decisions, he observes how people advise members who enquire about loans and he interviews both the paid manager and other volunteers. He starts every interview by asking the interviewee to confirm what Josef thinks he already knows about the CU's policies. He finds the interview with the paid manager both interesting and frustrating. The manager confirms that the CU does not vary its interest rate according to notions of risk and that the dividends paid to members depends on the surplus at the year end, but members are not worried about dividends because the more affluent save with the Cu to help others. When Josef asks about the risk of fraud of 10,000, the manager says that will not happen again because the CU now recognises suspicious characters. When Josef prompts the manager about how, he receives only vague answers such as "you just know", or information not in the CU's manuals such as whether someone's relatives lived locally and were CU members, or whether it was the first time of applying for the maximum loan, or whether the reason for the loan could be verified. Josef shares a house with Briony, a Sociology undergraduate student. Josef tells Briony about the problem of no clear relationship between risk and returns at the small CU and that the manager only seemed to say "you just know whether someone is suspicious" when discussing risk-management. Briony introduces Josef to Polanyi's (1966) concept of tacit knowledge. Josef reads Polanyi's work and understands that while some knowledge may be formalised into codes and explained to others, people possess types of knowledge that entail knowing more than they can tell, so although knowledge is not codified, people may go through a rational, implicit question and answer process to surface concerns based on past experiences. Josef decides to use template analysis (see Chapter 13 for more details) to interpret the interviews. Josef uses two primary headings in the template; criteria for loan decisions in formal manuals; and informal criteria affecting loan decisions. He finds the latter most interesting. When writing up, he changes his project's title to "The Tacit Knowledge of Credit Union Work- ers when making loan decisions". He submits his project to his supervisor for initial review. The supervisor thinks that the methodology chapter needs strengthening. He recommends that Josef reads Lee and Saunders (2017) discussion of emergent case studies. Josef re-writes his methodology chapter to state how he conducted an emergent case study in an iterative way, by continually moving between the research and literature to develop and refine his argument. References Ferguson, C. and McKillop, D. (1997) The Strategic Development of Credit Unions, Chichester: Wiley. Lee, B. and Brierley, J.A. (2017) 'UK government policy, credit unions and payday loans', International Journal of Public Administration, Volume 40, Issue 4, pp. 348-360. Lee, B. & Saunders, M.N.K. (2017) Conducting Case Study Research, London: Sage. Polanyi, M. (1966) The Tacit Dimension, Chicago: University of Chicago Press. Questions 1 What methods of data collection did Josef employ? 2 How was Josef's approach to a case study different from a conventional or orthodox approach? 3 Will Josef be able to generalise' his findings to other credit unions? Does it matter whether he can or cannot do so? 4 Did Josef apply for ethical approval for his study at the correct point and what should he have done when changing his research