4th Biennial International Conference on Business, Banking and Finance
Credit Unions in the ECCU—Opportunities
and Challenges
Yu Ching Wong
International Monetary Fund
June 22, 2011
Views expressed are those of the speaker alone and should not be
reported as representing the official position of the International Monetary Fund.
2
Outline
• Recent developments of credit unions in the
ECCU
• Are credit unions different from commercial
banks?
• Challenges in reducing vulnerabilities
• Policy recommendations and conclusions
3
Key questions/motivations
• Small as a percentage of assets in the financial system, the
credit unions have been expanding steadily in recent years ,
providing important financial intermediation, particularly for
middle and lower income groups
• Increasing overlapping of financial services with banks but
“credit unions are not banks”?
• Challenges faced by credit unions
▫ Spillover effects of the global financial crisis and economic
downturn and the BAICO/CLICO collapse on financial
sectors in the ECCU?
▫ Improving data disclosure; operational efficiency;
corporate governance
• What needs to be done in terms of strengthening regulation
and supervision to reduce vulnerabilities?
4
Credit union membership in the ECCU
is very high in global comparison
Share of credit union members to total population, 2008
(in percent)
90
84.1
79.6
80
67.3
70
60
52.8
50
46.0
ECCU average:42 percent
38.2
40
37.2
35.6
35.5
32.7
30
Global average:10 percent
29.6
28.8
27.8
26.7
23.0
22.5
BEN
SEN
20
10
0
MSR
DMA
IRL
BRB
VCT
LCA
GRD
BLZ
JAM
CAN
USA
KNA
ATG
TTO
Sources: World Council of Credit Unions, 2008 Statistical Report; World Bank, World Development Indicators 2010;
International Monetary Fund, World Economic Outlook 2010; and Fund staff calculations.
Note: Antigua and Barbuda (ATG), Barbados (BRB), Belize (BLZ), Canada (CAN), Benin (BEN), Dominica (DMA),
Grenada (GRD), Ireland (IRL), Jamaica (JAM), Montserrat (MSR), Senegal (SEN), St. Kitts and Nevis (KNA), St. Lucia (LCA),
St. Vincent and the Grenadines (VCT), Trinidad and Tobago (TTO), and United States (USA).
5
Membership increased steadily in most
ECCU jurisdictions despite a decline in
the number of credit unions
Number of credit union members in the ECCU, 2005-10
Number of credit unions
2005
2010
Number of members
2005
2010
Annual growth
(in percent)
Antigua and Barbuda
Dominica
Grenada
Montserrat
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grenadines
5
16
19
1
3
15
10
5
10
13
1
4
15
9
14,751
74,974
28,702
4,500
7,823
50,964
40,815
26,575
61,695
41,686
4,308
17,055
73,343
53,815
12.5
-3.8
7.7
-0.9
16.9
7.6
5.7
ECCU
69
57
222,529
278,477
4.6
Sources: World Council of Credit Unions; and Caribbean Confederation of Credit Union.
6
Steady growth of assets, deposits and
loans
Total assets size of the credit union sector
almost doubled…
…similar upward trends in deposits and
loans
ECCU: Total Deposits and Loans of Credit
Unions, 2005-10
ECCU: Total Assets of Credit Unions, 2005-10
750
20
700
In millions of US
650
In percent of GDP (right scale)
15
600
550
500
750
20
700
Loans (in millions of US$)
650
Deposits (in millions of US$)
600
Loans (in percent of GDP, right scale)
550
Deposits (in percent of GDP, right scale)
15
10
500
450
10
450
400
5
350
400
5
350
300
250
0
2005
2006
2007
2008
2009
2010
300
250
0
2005
2006
2007
2008
2009
2010
7
Large variations in concentration and
size
• The lack of timely data (e.g., capital, NPL level,
provisioning, liquidity) for individual credit unions, in
particular for the smaller ones, prevents us from
conducting empirical analysis at the firm level
• From aggregate data
▫ Dominica, St. Lucia, Grenada, and St. Vincent and the
Grenadines represent 80 percent of credit union
concentration (assets size) in the ECCU
▫ Dominica has the largest credit union sector-1/4 of the
region’s total assets and 40 percent of its GDP
8
ECCU: Selected Indicators of Credit Unions, end-2010
(In millions of U.S. dollars; unless noted otherwise)
ECCU
Antigua
and
Barbuda
Dominica
62
1.2
57
278,477
50
7.1
4.0
37
3.0
36
2.9
3
0.2
5
26,575
183
26.2
38.2
126
26.3
153
32.0
10
2.2
10
61,695
123
17.6
15.3
95
11.9
100
12.5
6
0.7
13
41,686
24
3.5
40.7
19
31.7
20
32.9
1
2.3
1
4,308
69
9.9
10.2
45
6.5
47
7.0
7
1.0
4
17,055
156
22.3
14.4
111
10.3
127
11.7
22
2.1
15
73,343
94
13.4
13.6
67
9.7
93
13.4
13
1.8
9
53,815
Average assets per institution
Average deposits per member (U.S.$)
Reserve/Assets (in percent)
Reserve/Loans (in percent)
12
2,065
8.9
12.4
10
1,345
5.5
7.3
18
2,484
5.7
8.3
9
2,394
4.7
6.0
24
4,538
5.6
7.2
17
2,781
10.2
15.8
10
1,727
14.4
20.1
10
1,719
13.4
18.6
Memorandum item:
Nominal GDP
5,317
1,245
479
801
59
680
1,082
690
Assets
(in percent of total)
(in percent of GDP)
Loans
(in percent of GDP)
Deposits
(in percent of GDP)
Reserves
(in percent of GDP)
Number of credit union
Members
698
100.0
13.1
500
9
575
Grenada Montserrat
St Kitts
and Nevis
St Lucia St Vincent
and the
Grenadines
Sources: World Council of Credit Unions; Caribbean Confederation of Credit Unions; ECCB and Fund staff estimates.
9
▫ The largest three credit unions account for about onethird of the total credit union asset size …comparable
in size to some of the indigenous banks
ECCU: Selected Indicators of Major Credit Unions, end-2009 1/
(In millions of EC dollars, unless noted otherwise)
Roseau CCU
Share in (in percent)
Dominica
Assets
Loans
Deposits
Statutory reserve
Members
260
170
211
12
24,542
60.9
62.5
56.1
55.2
42.1
Civil Service CCU
Share in (in percent)
ECCU
16.4
15.2
15.7
5.3
9.6
St. Lucia
131
91
108
15
12,237
37.8
36.8
45.0
10.6
18.6
ECCU
6.9
7.5
7.6
6.5
1.7
General Employee CCU
Share in (in percent)
St. Vincent
& the
ECCU
Grenadines
143
78
131
6
32,263
58.6
44.3
56.6
17.9
62.8
Sources: Annual Reports of Roseau Cooperative Credit Union (CCU); Civil Service Cooperative Credit Union; General
Employee Cooperative Credit Union; World Council of Credit Unions.
1/ Data for Roseau CCU are as of end-2008.
7.6
6.5
9.3
2.4
4.6
10
Are credit unions different from
commercial banks?
• Proponents of the credit union movement have long
viewed that credit unions are better suited in providing
smaller value uncollateralized consumer loans at lower
interest rates
▫ Credit unions are not-for-profit financial institutions; tax
exempted, owned by members from a restricted customer base,
focus on small consumer loans, source their funding from
member savings, and share their dividends among their member
shareholders
▫ Commercial banks pay taxes on profits, owned and controlled by
stockholders, open to the public, focus on lending to businesses
and consumers with collateral, and distribute their dividends to
their shareholders
11
In comparison with commercial
banks…
ECCU: Assets of Commercial Banks and Credit Unions
(in percent of GDP)
300
274
268
Assets of commercial banks
Assets of indigenous commercial banks
Assets of credit unions
250
237
200
190
200
171
152
150
144
131
127
124
106
100
75
79
68
59
41
38
50
13
0
ECCU
25
0
Anguilla
4
Antigua and Dominica
Barbuda
15
Grenada
38
10
14
Montserrat St. Kitts and St. Lucia
Nevis
Sources: Caribbean Confederation of Credit Unions; EECB; and Fund staff calculations.
14
St. Vincent
and the
Grenadines
12
ECCU: Credit Unions versus Banks
• Despite these differences,
credit unions and commercial
banks compete in the market
for deposits and consumer
loans
• Remarkable expansion of the
ECCU credit union sector
exceeding the growth of assets,
loans and deposits in
commercial banks
• Credit unions absorb close to
12 percent of total private
sector deposits and provided
about 10 percent of private
sector deposits
Credit Unions Versus Commercial Banks
(In percent of GDP; unless noted otherwise)
2005
Credit Unions
Assets
Loans
Deposits
Commercial Banks
Assets
Private Sector Loans
Private Sector Deposits
2010
Annual growth
(In percent)
9.1
6.4
7.6
13.1
9.4
10.8
12.4
12.8
12.0
148.8
68.0
78.7
171.0
87.8
83.3
7.3
9.9
5.6
Share of Credit Unions to Deposit-taking institutions
(In percent)
Assets
5.8
7.1
Loans
8.6
9.7
Deposits
8.8
11.5
Sources:World Council of Credit Unions; Caribbean
Confederation of Credit Unions; ECCB; and Fund staff
estimates.
13
Challenges: Strengthening Regulation
and Supervision
• Responsibility for the oversight of cooperatives are
under the purview of the registrar of cooperatives
▫ Suffers from resource constraints
▫ More focus on promotion than supervision
▫ Supervision of credit unions has been less than
effective compared with banks (which compete in
deposits taking and lending)
▫ Contingent liabilities to the government (i.e., the lack
of deposit insurance) represent a serious challenge
given the limited fiscal space and high debt public
levels in the ECCU
14
• Inadequately regulated credit unions could potentially
undermine financial stability
▫ Growth in membership and market share clearly indicated
that credit union supervision needs to be integrated from a
macro-prudential perspective
▫ Recent global financial crisis has shown that threats to
financial stability can emerge from any parts of the
integrated financial system and all financial services should
be adequately regulated to minimize spillover
▫ The lack of timely and detailed financial data on credit
union’s activities together with insufficient supervision
would also rule out the opportunity to implement timely
remedial measures
15
• The Caribbean financial crisis of 2009 caused by the
failure of the CL Financial Group exposed weaknesses in
the region’s regulatory framework for nonbank financial
institutions
▫ Question on the extent of the adverse impact of BAICO
and CLICO on individual credit union—exposure and
provisioning
▫ Risk of spillovers to banks and other countries (e.g.,
impact on banks through linkages with affected credit
unions)
▫ How to recapitalize or provide liquidity support to
credit unions?
16
• The BAICO and CLICO debacle has helped accelerate the
proposed prudential reforms of the ECCU credit union
sector
▫ Prudential supervision aims to protect the savings of the
general public and to maintain financial stability
▫ The new cooperative societies legislation aim to enhance
licensing requirements, establish prudential standards,
enhance reporting requirements and strengthen
enforcement actions
 Capital adequacy requirement
▫ Some progress is made in establishing a single regulatory
unit (SRU) within each ECCU member to regulate nonbank financial institutions and harmonizing NBFI
legislations
17
Progress in enacting new harmonized
legislation
ECCU: Status of Harmonized Legislation on Non-Bank Financial Sector 1/
Single
Regulatory Units
Act
Date of I
Credit Unions
Act
Date of
legislation
enacted
legislation s
enacted t
h
Anguilla
Antigua and Barbuda
Dominica
Grenada
Montserrat
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grenadines
√
√
√
√
√
√
√
x
n.a.
n.a.
n.a.
May-06
n.a.
Oct-09
Mar-11
-
Y
Insurance Act
x
√
√
√
x
x
x
x
Sources: The authorities; others.
Note: 1/ Enacted (√), Outstanding (x). As of end-March 2011.
n.a.
Mar-11
Dec-11
-
Money Services
Act
Date of
legislation
enacted
x
x
x
√
x
√
x
x
Mar-10
Mar-09
-
Date of
legislation
enacted
√
√
√
√
√
√
√
x
2009
Aug-07
Apr-10
Jun-09
Oct-08
Jul-08
2010
-
18
Some further considerations
• To transfer systemically important credit unions to the
ECCB
▫ Supervision by bank supervisory authority would have the
advantages of integrated supervision thus reducing information
arbitrage and making use of existing expertise in the supervision
of deposit-taking institutions
▫ Within the Caribbean, Belize, Bermuda, and Haiti have
integrated, whereas Jamaica and Trinidad and Tobago are in the
process of integrating the supervision of credit unions under the
central bank/regulator of banks
▫ For the ECCU, considerations including the large number of
credit unions may not be feasible for the ECCB to resume this role
▫ Nevertheless, consideration should be given to transferring lead
responsibility to the ECCB of systemic important credit unions
with significant membership penetration and balance sheet size
19
Some further considerations
• Overcome the capacity bottlenecks
▫ the establishment of a center of excellence for the sharing of
human resources
▫ creation of a regional regulatory authority for NBFI over the
medium term
20
Challenges: Reducing vulnerabilities
• Need to include the adaptation of international
standards and international best practices including
PEARLS and enhancing the scope and frequency of data
reporting
▫ PEARLS as a toolkit to improve operational efficiency
for credit union managers and as a supervisory tool by
regulators.
▫ Timely publication of these PEARLS indicators would
also facilitate data comparison and performance
assessment in comparison with the banks
21
Selected PEARLS Indicators
Key PEARLS Indicators
Standards of
Excellence
P1. Allowance for Loan Losses/Delinquency > 12 months
100%
P2. Net Allowance for Loan Losses/Delinquency of 1-12 months
35%
E1. Net Loans/Total Assets
70%-80%
E5. Savings Deposits/Total Assets
70%-80%
E6. External Credit/Total Assets
Maximum 5%
E9. Net Institutional Capital/Total Assets
Minimum 10%
A1. Total Loan Delinquency/Gross Loan Portfolio
<= 5%
A2. Non-Earning Assets/Total Assets
<= 5%
R7. Total Interest (Dividend) Cost on Shares/Average Member Shares
Market Rates>=
R5
R9. Total Operating Expenses/Average Total Assets
5%
R12. Net Income/Average Total Assets
Linked to E9
L1. ST Investments + Liquid Assets – ST Payables/Savings Deposits
Minimum 15%
S11. Growth in Total Assets
> Inflation
22
Conclusions
• To reduce the risks of spillover to the financial system in the event of
shocks, there is an urgent need to strengthen the regulation and
supervision framework
▫ by making operational the SRUs
▫ greater information exchange and collaboration between the
ECCB, SRUs, and other regulators
• In the short-term: supervision of systemically important credit
unions should be integrated with bank supervision
• Merger and consolidation of the smaller institutions would offer
benefits
• To make available comprehensive and timely data on credit unions
• Continued technical assistance from the IFIs, regional and
development partners, CARTAC
23
Thank you