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