A  FORMER employee of a credit union which collapsed while holding £1.9m of savers’ cash has been arrested on suspicion of fraud.

The woman, whose name has not been released, was held by North Yorkshire Police on suspicion of fraud days after the North Yorkshire Credit Union was placed in liquidation.

The credit union, a not-for-profit co-operative which used its 5,000 members' savings to provide cheap loans, went bust due high levels of bad debts on loans to members and "inadequate credit referencing and credit control".

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Detective Inspector Ian Wills said the arrest related to two loans and two cheques with a total value of £3,130 and that a file had been handed to the Crown Prosecution Service.

The former employee of the credit union, which was open to anyone who lived, studied or volunteered on a regular basis in the county, has been released on police bail until January 17.

The Financial Services Authority is holding a separate investigation into what went wrong at the credit union, which was established in 2006.

The credit union’s customers have been told they will have their investments returned by the Financial Services Compensation Scheme.

North Yorkshire County Council, which gave a loan of £200,000 to the credit union when it was launched, said it would be holding an inquiry to find out what went wrong.