Credit Unions Philosophy, Policy and Regulation

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1 Credit Unions Philosophy, Policy and Regulation NIS Policy Forum on Microfinance Law and Regulation Krakow, Poland June 21, 2001 Normunds Mizis Regional Manager/Europe WOCCU

2 Credit Union Defined A credit union is a cooperative financial organization owned and operated by and for its members, according to democratic principles, for the purpose of encouraging savings, using pooled funds to make loans to members and providing related financial services to enable members to improve their economic and social condition.

3 Footnote to the Definition The Credit Union is not a social welfare agency. To the contrary, it is a private, non-profit business that seeks to recover all of its operating costs, while at the same time, providing the highest quality products and services.

4 Credit Unions in Europe Bulgaria Czech Republic Ireland Latvia Lithuania Moldova* Poland Romania Russia Ukraine The United Kingdom

5 Cooperative Financial Institutions in Europe Austria Belgium France Germany Hungary Italy Macedonia The Netherlands Spain

6 Credit Union Philosophy and Operating Principles Open Entry/Exit of Member-Owners Equal Rights, Responsibilities, and Treatment One Member, One Vote Business with Members only Non-Profit Mission: Total Recovery of ALL Costs

7 Credit Union Philosophy and Operating Principles Institutional Capital Reserves are held Jointly and Indivisibly Limited Return on Member Shares, without Equity appreciation Liquidation of Credit Union Assets without Profit to Member-Owners

8 Comparison Credit Union versus Bank/NGO Credit Union Open Entry/Exit of Member-Owners Bank/NGO Restricted Control of Owners

9 Comparison Credit Union versus Bank/NGO Credit Union Equal Rights, Responsibilities, and Treatment Bank/NGO Selective Rights, Responsibilities, and Treatment

10 Comparison Credit Union versus Bank/NGO Credit Union Democracy: One Member, One Vote Bank/NGO Autocracy: One Share, One Vote

11 Comparison Credit Union versus Bank/NGO Credit Union Business with Members only Bank/NGO Business with the General Public

12 Comparison Credit Union versus Bank/NGO Credit Union Non-Profit Mission: Total Recovery of ALL Costs Bank/NGO For-Profit Mission: Maximize Earnings for the Stockholders

13 Comparison Credit Union versus Bank/NGO Credit Union Institutional Capital Reserves are held Jointly and Indivisibly Bank/NGO Institutional Capital Reserves Allocated 100% to the Stockholders

14 Comparison Credit Union versus Bank/NGO Credit Union Limited Return on Member Shares, without Equity Appreciation Bank/NGO Unlimited Return on Dividends, with Equity Appreciation

15 Comparison Credit Union versus Bank/NGO Credit Union Liquidation of Assets without Profit to Member- Owners Bank/NGO Liquidation of Assets with distribution of proceeds to Stockholders

16 Credit Union Governance Structure General Assembly Supervisory Committee Board of Directors Educational Committee (optional) Credit Committee (if feasible) General Manager Administrative staff Loan officers Collections staff Marketing staff

17 Key Membership Conditions Member must: belong to the defined common bond purchase membership share accept and obey bylaws of the credit union

18 Credit Union Common Bond Avoiding Traditional Constraints The greatest common bond of any credit union is the diverse financial needs of open membership and commitment to help one another

19 Sources of Credit Union Funds MEMBER SAVINGS MEMBER SAVINGS MEMBER SAVINGS Share Contributions Net Income Donations External Borrowings Other Liabilities

20 Back to the Beginning Credit Unions must not confine themselves to granting loans. Their main objectives should be to control the use made of money, and to improve the moral and physical values of people, and also, their will to act by themselves. F. W. Raiffeisen ( )

21 Sustainable Growth Formula The best means to guarantee the longterm growth and economic viability of the credit union is by promoting thrift through attractive incentives to deposit member savings in the credit union.

22 Credit Union Services Full Service Credit Unions Savings Products: Checking/Current Accounts Direct Deposit Term Deposits Term Deposits with option to increase balance before the end of the term Special Savings (vacation, Christmas club, etc.) Debit Cards Indexed Savings/Deposits Foreign Currency Savings/Deposits

23 Credit Union Services Full Service Credit Unions Loan Products: Consumer Loans (incl. education, health, etc.) Micro/Small Business Loans Agricultural Loans Home Improvement Loans Mortgage loans Credit Lines/Overdrafts Credit Cards Loan Counteroffers Unsecured Loans*

24 Credit Union Services Full Service Credit Unions Other Financial Services: Bill Payment Facility Payroll Deductions Transfers/Remittances Credit Life Insurance Savings/Deposit Guarantees Financial Counseling Other Financial Services

25 Formal Regulation Ensuring Long-Term Viability of CUS Key Legislative/Regulatory Requirements: Defining CU as Cooperative Financial Institution Clearly Defining Roles and Responsibilities of Governing Bodies and the Management Setting Minimum Professional Qualifications for the Chairman and CEO Requiring Minimum Standards to be Included in the Bylaws (Model Bylaws) Requiring Adequate Operating Policies and Procedures Approving Formal Regulator to Enforce Legal Provisions

26 Formal Regulation Ensuring Long-Term Viability of CUS (cont d) Key Legislative/Regulatory Requirements: Setting Minimum Capital Adequacy Standard Setting Minimum Liquidity Requirements Requiring Adequate Assessment of Asset Quality and Protection of CU Assets Restricting Risk Exposure to One/Related Borrowers Restricting Total Amount of Loans to Officials Eliminating Preferential Treatment Requiring Accountability from BOD and Management

27 Current Legislative/Regulatory Constraints for CUs in the Region Closed/restricted common bonds Inappropriate legislation Inadequate regulation Limited growth Unclear/inadequate accounting Antiquated products and services Forced savings Liquidity constraints/credit rationing Unprofessional management Heavy social orientation Misuse of credit union name

28 Regulations Must Reflect Model Credit Union Needs Open common bond Maximum outreach Full service credit unions Specialization in financial intermediation Modern and competitive products and services Disciplined financial operations Transparent accounting Democratic governance Professional management Formal regulation and supervision Developed credit union system

29 Sustainable Development Concept of Financial Systems Sustainable Economic Progress Requires a Sound Financial System. Sound Financial System Needs Sound Cooperative/CU System to Minimize Monopoly Effects in the Financial Services Sector Sound Cooperative/CU System Requires Adequate Legislation, Regulation and Supervision

30 Regulated Cooperative Financial Institutions in Europe Austria Belgium Czech Republic* France Germany Hungary Ireland Italy Latvia Lithuania Macedonia Moldova* The Netherlands Poland Spain The United Kingdom

31 CU Regulatory Trends Among Countries Seeking EU Accession: Latvia (Bank of Latvia) Lithuania (Bank of Lithuania) Hungary (Supervisory Commission & NBH) Macedonia (Central Bank) Poland (Full and Professional Self-Regulation) Czech Republic* (MOF for CUs; CB & MOF for other financial institutions)

32 Non-regulated Cooperative Financial Institutions in Europe Bulgaria Romania Russia Ukraine Armenia Azerbaijan Georgia

33 Regulatory Initiatives In Central Asia Regulatory Initiatives supported by WOCCU: Regulatory Initiatives not known: Kyrgyzstan* Uzbekistan* Kazakhstan Tajikistan Turkmenistan

34 The Czech Republic : The Aftermath Estimated credit union losses of Kc. 6 billion (US$160 million) in 20 CUs with 82,000 members. Another 73 credit unions (legitimately) serving 45,000 members are struggling in the post-crisis environment. What went wrong? How could the same malpractice that caused the Banking Crisis of be repeated as the Credit Union Crisis of 1999?

35 What Went Wrong? How could the same malpractice that caused the Banking Crisis of be repeated as the Credit Union Crisis of 1999?

36 Lessons from Czech Republic Lack of effective regulation and supervision allowed the very same crooks from the banking crisis to prey on senior citizens memory and trust of pre-communist kampelicka. Legislation named regulatory body and assured deposit insurance, but: Regulations and supervisory framework were not developed. Plan to capitalize deposit insurance fund was not developed. CU Supervisory Office named but not effective until 2000 (MOF Dep t using experienced examiners).

37 Lessons from Czech Republic Controversial bailout approved because: EU observing Czech Government s actions Crisis of confidence and everyday Czechs continued lack of access to basic financial services (credit and asset-accumulation) has slowed country s economic growth Banks not reaching down to ordinary people

38 In Conclusion Challenges for CUs in the Region: Lack of proper legislation Unleveled playing field for NBFIs and Commercial Banks Banking Crisis in mid 90s and following mistrust by public in the financial sector Struggle to become part of formal financial sector EU Banking Directives for Credit Institutions

39 In Conclusion (cont d) Opportunities for CUs in the Region: Large groups of population still lacking full access to financial services Inability of competition to deliver microfinance products at a reasonable cost Increased awareness of governments about the potential role of financial cooperatives Success of CU systems in the Region

40 Finally - Legislative and Regulatory Priorities in CEE/NIS Law for Credit Unions Model Bylaws Becoming part of formal financial sector Adequate and non-restrictive regulatory and supervisory framework Qualified and professional specialists employed by the Regulator

41 The World Council of Credit Unions QUALITY CREDIT UNIONS FOR EVERYONE