Charity Bank and its largest shareholder Charities Aid Foundation say they have considered but ruled out merging the bank with CAF Bank.

However, the two banks have agreed to work much more closely together in the future, even sharing sales and customer service teams so that charity customers have a single point of contact for deposits and lending.

CAF set up Charity Bank – a registered charity - in 2001 and owns just over 40 per cent of the share capital. Charity Bank takes deposits from members of the public and uses these to make loans to charities and social enterprises.  Its balance sheet at the end of 2010 showed total assets of £68.1m.

CAF Bank is a wholly-owned for-profit subsidiary of CAF.  It provides bank accounts to charities and currently holds over £1bn in cash on behalf of more than 16,000 charity customers. However, it does not make loans.

Earlier this year, the two organisations looked at the tough economic climate facing charities and examined how they might come up with a bigger response to the sector’s needs.

Charity Bank chief executive Malcolm Hayday told civilsociety.co.uk: “You have a spectrum from ‘no we can’t do anything more’ to ‘can we merge the two banks?’ But in reality, merging a for-profit bank with a charity is difficult. And it also doesn’t necessarily solve the problem because there’s a danger that you tend to the lowest common denominator really, rather than driving the business in new directions.”

Maintain separate brands

So what the two boards agreed instead, Hayday said, is to remain as separate organisations with their own brands, trustees and shareholders but to find better ways of working together.

CAF chief executive John Low, who sits on the board of Charity Bank, added: “We recently agreed to work much more closely together because we are concerned about the sector at the moment financially and CAF Bank and Charity Bank have to do everything we can to lever all our resources and management skills to have the biggest positive impact we can for the sector right now.”

Asked what this will mean in practice, Low said it would likely manifest itself in joint working on some projects, sharing of some products and the two banks’ sales functions working more closely together.

Hayday added: “I hope we will get to the point where customers can come to one point of contact to talk about a loan or bank accounts or anything else.”  Memoranda of understanding will be drawn up between the two organisations to outline the terms of the collaboration, he said, but this has not yet started. “This is still at a very  early stage and requires quite a lot of thinking about.”

Two banks 'at different places on risk curve'

Low confirmed that a full merger was not on the cards.  “We decided it is sensible to continue with two banks because CAF Bank is a deposit-taker, it’s a very low-risk bank, a place where charity money is very safe and secure, and it doesn’t have any lending of any size to the sector.

“Charity Bank is quite different - it doesn’t aim to take deposits from charities, it takes them from private individuals who want the money to be then lent on good terms to charities and social enterprises.  It’s a way of getting new money into the sector that wouldn’t be there otherwise.

“It’s a different way of working and at a different place on the risk curve, so they’re different banks and they can work closely together and benefit the sector by doing that.  But there isn’t a need for them to be merged and it’s not something we’re planning to do at the moment.”

Low denied that the move to consider closer working was prompted by the Financial Services Authority’s decree that Charity Bank no longer complies with the new EU banking rules for capital adequacy, as reported by civilsociety.co.uk yesterday.

He said: “Our decision to work more closely has not come about as a result of the regulatory issue, no - we were having those discussions before that. It was driven by synergies - there’s a lot of need in the sector and we thought that by working more closely we could achieve more. We could lend more, raise more money, do a better job by joining up a bit more closely.”