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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 Email: nmizis@woccu.org
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.
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.
Credit Unions in Europe
• Bulgaria • Czech Republic • Ireland • Latvia • Lithuania
• Moldova* • Poland • Romania • Russia • Ukraine • The United Kingdom
Cooperative Financial Institutions in Europe
• Austria • Belgium • France • Germany • Hungary
• Italy • Macedonia • The Netherlands • Spain
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
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
Comparison Credit Union
versus Bank/NGO
Credit Union • Open Entry/Exit of
Member-Owners
Bank/NGO • Restricted Control
of Owners
Comparison Credit Union
versus Bank/NGO
Credit Union • Equal Rights,
Responsibilities, and Treatment
Bank/NGO • Selective Rights,
Responsibilities, and Treatment
Comparison Credit Union
versus Bank/NGO
Credit Union • Democracy:
One Member, One Vote
Bank/NGO • Autocracy:
One Share, One Vote
Comparison Credit Union
versus Bank/NGO
Credit Union • Business with
Members only
Bank/NGO • Business with the
General Public
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
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
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
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
Credit Union Governance Structure
Supervisory Committee
Credit Committee(if feasible)
Administrative staff Loan officers Collections staff Marketing staff
General Manager
Board of Directors Educational Committee(optional)
General Assembly
Key Membership Conditions
Member must: • belong to the defined common bond • purchase membership share • accept and obey bylaws of the credit union
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
Sources of Credit Union Funds
MEMBER SAVINGS MEMBER SAVINGS MEMBER SAVINGS Share Contributions Net Income Donations External Borrowings Other Liabilities
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)
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.
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
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*
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
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
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
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
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
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
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
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)
Non-regulated Cooperative Financial Institutions in Europe
• Bulgaria • Romania • Russia • Ukraine
• Armenia • Azerbaijan • Georgia
Regulatory Initiatives In Central Asia
Regulatory Initiatives supported by WOCCU:
• Kyrgyzstan* • Uzbekistan*
Regulatory Initiatives not known:
• Kazakhstan • Tajikistan • Turkmenistan
The Czech Republic 1999-2000: 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 1996-97 be repeated as the “Credit Union” Crisis of 1999?
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?
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).
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
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
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
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
The World Council of Credit Unions
QUALITY CREDIT UNIONS FOR
EVERYONE
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