Credit Unions Philosophy, Policy and Regulation

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Credit Unions Philosophy, Policy andRegulation

• NIS Policy Forum on Microfinance
• Law and Regulation
• Krakow, Poland
• June 21, 2001

• Normunds Mizis
• Regional Manager/Europe
• WOCCU
• Email nmizis_at_woccu.org

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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.

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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.

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Credit Unions in Europe

• Bulgaria
• Czech Republic
• Ireland
• Latvia
• Lithuania

• Moldova
• Poland
• Romania
• Russia
• Ukraine
• The United Kingdom

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Cooperative Financial Institutions in Europe

• Austria
• Belgium
• France
• Germany
• Hungary

• Italy
• Macedonia
• The Netherlands
• Spain

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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

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Credit UnionPhilosophy 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

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Comparison Credit Union versusBank/NGO

• Credit Union
• Open Entry/Exit of Member-Owners

• Bank/NGO
• Restricted Control of Owners

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Comparison Credit Union versusBank/NGO

• Credit Union
• Equal Rights, Responsibilities, and Treatment

• Bank/NGO
• Selective Rights, Responsibilities, and Treatment

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Comparison Credit Union versusBank/NGO

• Credit Union
• Democracy One Member, One Vote

• Bank/NGO
• Autocracy One Share, One Vote

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Comparison Credit Union versusBank/NGO

• Credit Union
• Business with Members only

• Bank/NGO
• Business with the General Public

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Comparison Credit Union versusBank/NGO

• Credit Union
• Non-Profit Mission Total Recovery of ALL Costs

• Bank/NGO
• For-Profit Mission Maximize Earnings for the
  Stockholders

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Comparison Credit Union versusBank/NGO

• Credit Union
• Institutional Capital Reserves are held Jointly
  and Indivisibly

• Bank/NGO
• Institutional Capital Reserves Allocated 100 to
  the Stockholders

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Comparison Credit Union versusBank/NGO

• Credit Union
• Limited Return on Member Shares, without Equity
  Appreciation

• Bank/NGO
• Unlimited Return on Dividends, with Equity
  Appreciation

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Comparison Credit Union versusBank/NGO

• Credit Union
• Liquidation of Assets without Profit to
  Member-Owners

• Bank/NGO
• Liquidation of Assets with distribution of
  proceeds to Stockholders

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Credit Union Governance Structure
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Key Membership Conditions

• Member must
• belong to the defined common bond
• purchase membership share
• accept and obey bylaws of the credit union

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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

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Sources of Credit Union Funds

• MEMBER SAVINGS
• MEMBER SAVINGS
• MEMBER SAVINGS
• Share Contributions
• Net Income
• Donations
• External Borrowings
• Other Liabilities

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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 (1818 - 1888)

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Sustainable Growth Formula

• The best means to guarantee the long-term
  growth and economic viability of the credit union
  is by promoting thrift through attractive
  incentives to deposit member savings in the
  credit union.

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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

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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

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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

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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

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Formal Regulation Ensuring Long-Term Viability
of CUS (contd)

• 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

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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

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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

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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

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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

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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)

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Non-regulated Cooperative Financial Institutions
in Europe

• Bulgaria
• Romania
• Russia
• Ukraine

• Armenia
• Azerbaijan
• Georgia

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Regulatory Initiatives In Central Asia

• Regulatory Initiatives supported by WOCCU
• Kyrgyzstan
• Uzbekistan

• Regulatory Initiatives not known
• Kazakhstan
• Tajikistan
• Turkmenistan

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The Czech Republic 1999-2000 The Aftermath

• Estimated credit union losses of Kc. 6 billion
  (US160 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 1996-97 be
  repeated as the Credit Union Crisis of 1999?

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What Went Wrong?

• How could the same malpractice that caused the
  Banking Crisis of 1996-97 be repeated as the
  Credit Union Crisis of 1999?

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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 Dept using experienced
  examiners).

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Lessons from Czech Republic

• Controversial bailout approved because
• EU observing Czech Governments actions
• Crisis of confidence and everyday Czechs
  continued lack of access to basic financial
  services (credit and asset-accumulation) has
  slowed countrys economic growth
• Banks not reaching down to ordinary people

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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

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In Conclusion (contd)

• 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

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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

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QUALITY CREDIT UNIONS FOR EVERYONE