Credit unions, dealt a blow last week when a watchdog censured two industry members, are confident they will continue to grow as increasing numbers of cash-strapped Britons find themselves shut out by the country's top banks.

The Association of British Credit Unions Ltd (ABCUL) said the most recent figures from the Financial Services Authority (FSA) regulator showed that credit unions were managing 703 million pounds worth of savings on behalf of more than 950,000 people, as of the end of September 2011.

They also had 570 million pounds worth of loans, representing an increase from 690 million pounds worth of savings and 560 million pounds out on loan as of the end of June, although the sector is still only used by around 3 percent of the population.

The sector suffered a hit last week when the FSA censured two Glasgow-based credit unions.

It said Pollok Credit Union had jeopardised its own solvency and the interests of its members by making large loans to a non-member, while Shettleston & Tollcross Credit Union made loans to its directors on terms better than those given to others.

ABCUL Chief Executive Mark Lyonette defended the industry in light of the FSA's censure, saying it still played a vital role to the broader community in giving out loans to those often refused credit by mainstream banks.

A public censure has been accepted by the credit union for making a loan which it did not have the power to grant. During the subsequent investigation the credit union co?operated fully with the FSA and acted quickly to rectify its actions, he said.

IN FAVOUR WITH POLITICIANS

Regulators have raised concerns over the so-called shadow banking sector - a term used to refer to companies which do not have bank licenses but often undertake the same activities as them, for example in issuing loans.

One area where politicians have pushed for tougher regulation is payday loan companies, which critics say risk dragging ordinary people down into a debt spiral.

But credit unions have had a more favourable reaction from politicians, who pushed through legislation at the start of this year to broaden their range of services, such as by allowing them to pay interest on savings instead of just a dividend.

MP Damian Hinds, who chairs an all-party parliamentary group on credit unions, said politicians were keen to see the sector grow.

They have an ethos. They're community-based and they're generally trying to do a little bit of good in the world, said Conservative Party MP Hinds.

Credit unions differ from mutually-owned savings societies such as Nationwide in that they have a far smaller mortgage business and typically offer much smaller loans than are readily available from larger banks and building societies.

The majority of the money they lend comes from members' savings and they tend not to tap financial markets for capital. The biggest credit union is the Glasgow Credit Union, while the British capital has the London Mutual Credit Union.

Despite the FSA's censure last week on the two Glasgow unions, independent financial adviser Robert Ward - who is business development manager at Bank House Investment Management Limited - said he would be happy to recommend them to clients.

We wouldn't hesitate in recommending a smaller credit union that was offering a decent deposit rate, so long as you could see the safety net behind it.

Anything which gives competition on the High Street to the major banks has to be a good idea.

(Reporting by Sudip Kar-Gupta; Editing by Mark Potter)