They should be allowed to charge more and take bigger deposits if they are to become a viable alternative to high-cost lenders, says Civitas.
Credit unions are financial co-operatives that operate in local areas, offering small loans to members.
The government has been encouraging growth in the sector as an alternative to expensive payday lenders.
From April next year, the maximum interest rate that can be charged by the unions on loans will be increased from 2% to 3% a month.
Currently credit unions often make a loss on loans under £1,000 because of the admin fees involved, reports The BBC.
Civitas, or the Institute for the Study of Civil Society, says the “burdensome” regulation should be lifted even more and that they should be allowed to pass on their processing fees. According to the think tank, this would still make them cheaper than other options.
“Ultimately, credit unions cannot be expected to combat payday lenders if they are continually forced to make a negative or non-existent return on the same loans,” its report said.
It also argued that a £10,000 cap on the amount of money that businesses can place with credit unions should be removed so they can attract bigger deposits.
The limit “removes the choice of entering into business with larger corporations from the individual credit union, which is in a far better position to understand its own financial institutions,” said Civitas researcher Joseph Wright.
The report added that there should be better education for consumers about the role of credit unions so that more people consider using them as a place to deposit their money.
The industry is still relatively small in Britain compared to the US, where credit unions serve almost one-third of the country’s population.