Public Policy and Legal prerequisites for Financial Services Cooperatives: Political, strategic and technical pre-conditions for their Effective Regulation

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Public Policy and Legal prerequisites for
Financial Services CooperativesPolitical,
strategic and technical pre-conditions for their
Effective Regulation

• June 18-20 2009, Sobey School of Business, Saint
  Mary's University
• by Peter van Dijk, Micro-Finance Consultant

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Objectives

1.  Tour du monde , some experiences with
   financial cooperatives in different countries
2. What is Micro-finance and what is its role in
   financial sector development, poverty
   alleviation
3. What is the Role of Government?
4. Different interpretations of cooperative
   principles
5. Risks of public support, by government, foreign
   donors
6. Possible steps to design a local process for the
   sustainable development of financial coops.

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I. Situation, public policy challenges of/for
financial coops in some parts of the world

• East Africa (Kenya, Rwanda, Tanzania, Uganda)
• - long history of Saccos and Coop and Sacco
  authorities
• - weak authorities, few reliable data,
  documented weak performance.
• French-speaking West African UEMOA region
• - creation of Saccos as consequence of one
  foreign donor project with BCEAO
• - large organisations, high penetration rate
• - influx of foreign support of Saccos leading
  to stressed relationship between regulator
  (BCEAO), supervisor (FinMin-y dep-t), MFIs,
  donors
• - worrying trends on large foreign debt, social
  investments, bad loan portfolio quality, stagnant
  savings and slow growth (particular members).
• Southern Africa (South Africa, Madagascar)
• - creation and support of many different local
  and foreign bodies
• - no shared mindset, principles, no central
  public leadership
• - weak, small, limited potential for
  sustainability and growth.

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Situation, public policy challenges of/for
financial coops in some parts of the world
(continued)

• Cambodia, Laos
• - Bad aftertaste of past political experiments
  influenced by totalitarian regimes, local and
  foreign
• - Different foreign donor agencies creating
  Saccos without centralised effective supervision
  (some cases regulation written by foreign
  experts)
• Pakistan
• - Long history of government Sacco program ,
  with bad collaboration between central and
  provincial authorities, as well as Credit focus
• - Misappropriation, politicisation, fraud,
  theft, closure of Saccos, Coop Banks
• Indonesia
• - Many government, civic society and foreign
  projects in MF, many MFIs created as cooperative
  societies
• - Weak collaboration between central bank and
  finance ministry on MF/FSD and a Cooperatives
  Ministry with few reliable data.

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Table of Conclusions
Regions Origin, Performance Public policy issues, challenges
East Africa Protectorate Great Britain Widespread support program for Coops, Saccos Recognition and understanding of Cooperative Society as legal form Lack of ex-/-internal coordination
West Africa Donor project, DID Canada Coop dominant MFI status Advantage of one expert donor working with one auth-y unregulated influx foreign donors
Southern Africa Many different support initiatives Small in nr, scale of oper-s Lack of local government leadership politicisation credit focus lack of common mindset
Cambodia, Laos Bad aftertaste communist initiatives Foreign donor projects Antipathetic culture lack of local understanding no integration of foreign aid into MF/FSD strategy
Pakistan Large Government program Nearly all closed by 2008 Politicisation lack of internal coordination abuse, criminality
Indonesia Government and foreign projects Most are small Lack of government leadership, forging common mindset and coordinating all efforts
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II.Please Government, what is Microfinance?

• A tool for building inclusive, stable,
  self-sustainable financial sector?
• A part of the social safety net, providing
  politicised loans to different target clients?
• Although the overall goal of both is the
  emancipation of poor citizens, these activities
  need to be clearly separated!! Because-
• Strategy demands a common mindset based on full
  understanding of the realities of finance and the
  complexity of all influences on it
• Achieving strategic objectives demands a coherent
  policy framework and a regulatory framework
  ensuring full compliance
• Socio-political objectives and subsidies have a
  damaging effect on financial sector development,
  making a transparent performance based market
  impossible and causing unfair competition.
• Only in a clear, coherent environment can
  Cooperative societies find their proper role in
  achieving the above-mentioned first definition.

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III. Developing a strategy, policy, a regulatory
framework, and ensuring their implementation and
full application are very expensive activities,
especially when safety of money needs to be
ensured

• Need for specific triggers for when to regulate
  institutions that provide financial services-
• Do they bear risks for the stability of the
  financial system?
• Do they put at risk deposits and savings of the
  general public?
• Do they affect a market process (data,
  transparency, fair comp.)?
• Financial coops are often small and concern the
  money of members who agree on rules and who
  control the organisations. As they are often
  small, operate in remote areas and under specific
  rules, it requires specific expertise, efficient
  coordination and adequate resources to regulate
  them and ensure full compliance.

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IV. Identical rules of Financial Services
Cooperatives

1. Member ownership (shares, capital value, control)
2. Savings oriented (deposits, longer term savings)
3. Common Bond, Solidarity
4. Non-profit Objective (sustainability, use of
   profits)
5. Obligatory reserves (statutory reserves)
6. Voluntarism (free will, own initiative)
7. Rigorous Governance structure, rules
8. Small markets, non-competition
9. Different levels of Cooperative societies
10. Gradual transformation into banks
11. Specific Regulation, Supervision.

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Some remarks on important Sacco Rules

• Member ownership
• As other investors, state or private, are
  committed to put money in Financial Institutions
  for poor rural citizens, the latter need to
  organise themselves. That means they have to
  contribute a sum of money that is affordable as
  well as important for them to be actively
  involved in these organisations. Active
  membership means real ownership, real control,
  with shares that compare to the total value of
  the organisation.
• Savings oriented
• The second important factor that determines a
  Saccos sustainable health, growth is that they
  are deposit- savings oriented. That means that
  loan capital does not come from any other source
  than from member deposits (apart from capital)
  and their longer term specific savings products.
  Capital savings ensure that members are active
  owners and controllers.

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Remarks on Sacco rules (continued)

• Non-profit Objective
• MF and cooperative supporters often do not fully
  understand the legal status of a cooperative
  society that provides financial services. They
  want it to be sustainable but they also do not
  want it to make profits. That misunderstanding is
  often due to two issues 1) the non-profit
  objective of cooperative soc-s means that they
  can (and should as commercial companies) make
  profits but that these profits are in principle
  not distributed between owners, shareholders, but
  re-invested in the coop 2) net income over total
  costs are often called surplus by cooperants
  and not profit as lawyers and economists do.
• Obligatory reserves (legal statutory reserves)
• Minimum capital requirements and provisions are
  basic conditions for banks. In cooperative
  regulations these items are included under
  regulatory reserves. Statutory reserves are
  additional reserves of which training (and
  growth) is most important, considering that
  members have had little education and certainly
  not on controlling financial institutions.

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Remarks on Sacco rules (continued)

• Voluntarism
• Saccos are created out of free will, own
  initiative of individuals. Their creation, growth
  cannot be dictated by political strategies or
  donor projects. This principle also means that
  member activities, especially in control
  functions are non-remunerated and need to be well
  managed. If not, the cost advantage and common
  bond that Saccos success rely upon, will be
  lost.
• Small markets, non-competition
• Again to ensure common bond and effective
  control, Saccos, especially in start phases and
  underdeveloped environment, should be small.
  Growth will necessitate the creation of more
  different levels of cooperative societies. To
  allow their growth they should not compete
  between each other.
• Gradual transformation into banks
• The basic signal of good Sacco performance is
  their growth. That means that its organisation
  and regulation aim at gradual integration into
  the banking sector.

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IV. Benefits Pitfalls of foreign donor aid

• A lack of local government understanding and a
  multitude of foreign donors creating Saccos and
  providing technical financial assistance, often
  resulted in weak and failing Saccos
• However, as many governments have little own
  know-how of Saccos, have limited resources and
  an uneducated public, foreign assistance can
  help
• The worlds leading MF/FSD Donors have under CGAP
  and the declarations of Monterrey, Paris and Doha
  promised to strengthen donor coordination and
  make their aid more effective
• Local governments should integrate foreign aid
  into their national programs and promote
  accountability, focusing on their strategies,
  definitions and local processes.

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V. How to design an appropriate local development
process for financial coops?

1. National Financial Sector Development Strategy
   developed, coordinated supervised at the
   highest executive level (National FSD/MF
   Council)
2. National Microfinance Strategy that is in
   included under the FSD Strategy
3. A FSD/MF Policy framework that ensures that all
   flanking policies are in coherence
4. Financial Cooperatives chapters in FSD/MF policy
   fwk
5. An FSD and MF Regulatory framework that ensures
   implementation of strategies and compliance with
   laws
6. Public promotion education campaign on Saccos

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V. How to design an local development process for
financial coops? (continued)

1. Creation of a competent national Coop Authority
   with adequate resources to effectively regulate
   and supervise all Saccos (registered, and with
   capacity to identify unregistered org-s that
   should register)
2. A specific Database on the performance of
   registered Saccos, created with assistance of
   the central bank with a comparable system and
   format
3. All national and foreign support to Saccos needs
   to be known to the Coop Auth-y and all such
   organisations need to be member of the FSD/MF
   Council, respecting local rules and procedures.

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Any questions, doubts ?

• Thank you for your attention
• Peter van Dijk
• petrusvandijk_at_yahoo.com
• Home base Jakarta, Indonesia