Presentation to Credit Union Workshop
St. Vincent and the Grenadines
By
Shelton Nicholls
Resident Adviser on Financial Stability, CARTAC
1.
Credit Unions in the Caribbean Financial System (Stylized FACTS)
2.
Framework for Developing Financial Soundness Indicators
3.
1. CAMELS and PEARLS Framework
2. CAMELS/PEARLS COMPARISON
Financial Soundness Indicators:
1. Core /Enhanced (Deposit-Takers)
2. Pearls Ratios
3. CAMELS/PEARLS COMPARISON
4.
Reporting Regime for Credit Union Financial Indicators
5.
Application of PEARLS to a Caribbean Credit Union
6.
Database Development for Credit Unions: Often Neglected Area!
7.
Imperatives for Enhanced Regulation of Credit Union Sector.

Domestic On-shore Financial Sector is quite
large relative to the size of the regional
economy.
◦ Total financial assets amount to around 131% of
regional GDP (IMF estimate, WP/13/175)(p.7)
 Banking System Assets (95% of regional GDP)
 Non-Banking System Assets (36% of regional GDP)
 Insurance Companies (20% of regional GDP)
 Security Firms (9% of regional GDP)
 Credit Unions (7% of regional GDP)


Share of Indigenous institutions
in the
Caribbean on-shore financial sector in
decline.
Foreign Banks dominate
Caribbean Financial Sector
landscape
of
◦ 60% of regional banking assets held by Canadianbased banks.

Credit Union Sector has grown in several
Caribbean countries:
Financial Assets to GDP
 Dominica (39% of national GDP)
 Belize (21% of national GDP)
 Barbados (17% of national GDP)
 Grenada, St. Vincent and St. Lucia range between 13%
and 19% of GDP of these respective countries.
Financial
Institution
Commodity –
Based Producers
ServiceBased
Producers
ECCU
Area
Total
Caribbean
Banks
14
67
40
81
Credit
Unions
154
163
61
317
60
218
61
278
-
143
na
143
200
614
200
818
Insurance
Companies
Offshore
Banks
Total
Credit Unions

CAMELS FRAMEWORK
◦ Revolves around the following six groups of
indicators that focus on the health of financial
institutions.
C
A
M
E
L
S






Capital Adequacy
Asset Quality
Management Soundness
Earnings and Profitability
Liquidity
Sensitivity to Market Risks
Capital
Adequacy
Asset
Quality
M’gmt
Soundness
• Determines how well financial institutions manage shocks to their
balance sheets by focusing on capital position of institution to
support loan portfolio growth and potential deterioration in assets.
• Judges overall quality of assets by looking at exposure of assets in
institutions portfolio to various risks.
• Judges overall soundness and effectiveness of management of the
institutions by looking at governance, human resources, processes,
controls and audit.
• Judges the Institution’s ability to generate to absorb losses by
building an adequate capital base, finance expansion and pay
Earnings &
dividends to its share holders.
Profitability
Liquidity
• Judges ability of Institution to meet its present and anticipated cash
flow needs including funding loan demand, share withdrawals and
liabilities and expenses.
• Judges the sensitivity of loans and deposits to sudden changes in
interest and exchange rates.
Sensitivity to
Mkt Risks

P
E
A
R
L
S
PEARLS FRAMEWORK
◦ Adopted by WOCCU in 1994;
◦ Revolves around the following six groups of indicators
that focus on the health of financial institutions.
Proposes a system of 44 financial ratios that deal with:






Protection
Effective Financial Structure
Asset Quality
Rates of Return
Liquidity
Signs of Growth
Protection
Effective
Financial
Structure
Asset
Quality
• Assesses extent to which credit unions can provide a safe
environment to protect their members’ money.
•Gauges financial structure of credit unions by assessing sources and uses of
funds. Financial structure is effective when assets, financed by savings
deposits, generate sufficient income to pay market rates on savings, cover
operating costs and maintain capital adequacy.
• Assesses overall quality of assets and identifies impact of nonearning assets on credit union income.
Rates of
Return &
Costs
Liquidity
Signs of
Growth
• Monitors the return on all types of assets (uses of funds) as well as
the costs of each liability. Looks at how yields and costs affect the
growth of the credit union.
• Judges ability of Institution to meet its present and anticipated cash
flow needs including funding loan demand, share withdrawals and
liabilities and expenses
• Judges the growth of various areas in credit unions with a view to
assessing member-client satisfaction as well as to help
management maintain an effective financial structure.
MAIN AREAS
CAMELS
PEARLS
REGULATORY/SUPERVISORY
FRAMEWORK
SUPERVISORY
TOOL
INDUSTRY
BENCHMARKING TOOL
INFORMATION USED
MIX OF
QUANTITATIVE
AND
QUALITATIVE
INFORMATION
LARGELY QUANTITATIVE
INDICATORS
NATURE OF SUPERVISORY
EXAMINATION
REQUIRES ONSITE AND
OFF-SITE
EXAMINATION
ON-SITE
EXAMINATION NOT
REQUIRED
CAMEL-BASED AND PEARLS-BASED



Conceptual Framework and Classification for
Financial Soundness Indicators developed by
IMF
around
2001
with
input
from
international bodies.
Financial Soundness Indicators Compilation
Guide published in 2006.
New Compilation Guide with a focus on nonbanks being prepared.
Institutional
Sector
•Financial
Corporations
Deposit-takers
•Commercial banks
•Investment banks
•Mortgage Banks
•Development Banks
•Savings and Loans Assoc.
•Building Societies
•Credit Union/Co-operatives
•Micro-Finance Institutions
•Other Financial
Corporations
Engaged in Financial
Intermediation (but
Non-Deposit Takers)
•Insurance Corporations
•Pension Funds
•Investment Funds
•Securities Dealers
KEY INDICATORS
CAMEL FRAMEWORK
•
•
Regulatory capital to risk -weighted assets
Regulatory tier 1 capital to risk -weighted
assets
•
•
•
Non-performing loans to total gross loans
Non-performing loans net of provision to
capital
Sectoral distribution of loans to total loans
Earnings and Profitability
•
•
•
•
Return on Assets
Return on Equity
Net interest margin to gross income
Non-interest expenses to gross income
Liquidity
•
•
Liquid assets to total assets
Liquid assets to short-term liabilities
•
Net open position in foreign exchange to
capital
Capital Adequacy
Asset quality
Sensitivity to market risk
19
KEY INDICATORS
Deposit-Takers
• Capital to assets
• Large Exposures to capital
• Geographical distributions of loans to
total loans
• Gross asset position in financial
derivatives to capital
• Gross liability position in financial
derivatives to capital
• Trading income to total income
• Personnel expenses to noninterest
expenses
• Spread between reference lending and
deposit rates
• Spread between highest and lowest
interbank rate
• Customer deposits to total loans
• Foreign currency-denominated loans to
total loans
• Foreign currency-denominated liabilities
to total liabilities
• Net open position in equities to capital
KEY INDICATORS
Other Financial Corporations
• Assets to total financial system assets
• Assets to GDP
Nonfinancial Corporations
•
•
•
•
Households
• Household debt to GDP
• Household debt service and principal
payments to income
Market Liquidity
• Average bid-ask spread in the securities
market
• Average daily turnover ratio in the securities
market
Real Estate Markets
• Real estate prices
• Residential real estate loans to total loans
• Commercial real estate loans to total loans
Total debt to equity
Return on equity
Earnings to interest and principal expenses
Corporate net foreign exchange exposure to
equity
• Number of applications for protection from
creditors

Although not mentioned in FSI Compilation
Guide (2006), PEARLS has emerged as a
prudential standard for credit unions
operating worldwide.
◦ Provides standardised financial ratios for individual
credit unions.
◦ While meeting specific needs of credit unions,
complements
existing
financial
soundness
indicators based on other frameworks (CAMEL).
P - Protection Ratios
P1. Loan Losses Allowances / Delinq. Loans >12 Mo.
P2. Net Loan Loss Allowances / World Council Allowance
Required for Delinq. 1-12 Mo.
P3. Complete Loan Charge-off of Delinq. > 12 Mo.
P4. Annual Loan Charge-offs / Average Loan Portfolio
Goals (Excellence)
100%
35%
Yes
Minimized
P5. Accum. Charge-offs Recovered / Accum. Charge-offs
> 75%
P6. Solvency (Net Value of Assets/Total Shares & Deposits)
≥ 111%

P1. Loan Losses Allowances / Delinquent Loans
>12 Months.
◦ Purpose: To measure the adequacy of the provisions for loan
losses when compared to all delinquent loans over 12 months .
◦ Items Required: A-Allowance for Loan Loss (Balance Sheet); BPercentage of Allowance Required to cover delinquent Loans > 12
months and C – Loan Balances of all delinquent loans > 12
months.
◦ Formula : (A)/(B*C).

P6. Solvency Ratio.
◦ Purpose: To measure the degree of protection that credit union
has for members’ deposits and share savings in the event of
liquidation.
◦ Items Required: A- Total Assets; B- Allowance for Risk Assets; C –
Balance of Delinquent Loans >12 mnths; D- Balance of Delinquent
Loans <12 mnths; E – Total Liabilities; F – Problem Assets (losses
to liquidate); G –Total Deposit Savings; H – Total Shares

Formula: – [(A+B)-(C+.035(D)+E+F-G]/(G+H)
E - Effective Financial Structure
E1. Net Loans / Total Assets
E2. Liquid Investments / Total Assets
E3. Financial Investments / Total Assets
E4. Non-financial Investments / Total Assets
E5. Savings Deposits / Total Assets
E6. External Credit / Total Assets
Goals (Excellence)
70-80%
≤ 16%
≤ 2%
0%
70-80%
0-5%
E7. Member Share Capital / Total Assets
≤ 20%
E8. Institutional Capital / Total Assets
≥ 10%
E9. Net Institutional Capital / Total Assets
≥ 10%

E1. Net Loans / Total Assets
◦ Purpose: To measure the percentage of total assets that are
invested in the loan portfolio, or to ascertain what percentage of
assets the members have borrowed.
◦ Items Required: A – Total Gross Loan Portfolio Outstanding); BTotal Loan Loss Allowances; C – Total Assets.
◦ Formula : (A - B)/(C).

E5. Saving Deposits/ Total Assets
◦ Purpose: To measure the percentage of total assets financed by
savings deposits.
◦ Items Required: A – Total Saving Deposits; B – Total Assets.
◦ Formula : (A )/(B).

E9. Net Institutional Capital */ Total Assets
◦ Purpose: To measure the real level of institutional capital, after
adjusting the allowances for risk assets to meet the standards of
P1&P2, and covering any other potential losses.
◦ Items Required: Items Required: A- Total Assets; B- Allowance for
Risk Assets; C– Balance of Delinquent Loans >12 mnths; DBalance of Delinquent Loans <12 mnths; E- Problem Assets
(losses to liquidate); F – Total Assets;
◦ Formula : [(A+B ) – (C + 0.35(D) +E)]/(F).
*Institutional
Capital comprise all legal and non-distributable reserves, nonwithdrawable members’ share capital; capital donations and non-distributable
reserves (from surplus).
A - Asset Quality
Goals (Excellence)
A1. Total Loan Delinquency / Gross Loan Portfolio
≤ 5%
A2. Non-earning Assets / Total Assets
≤ 5%
A3. Net Zero Cost Funds / Non-earning Assets
≥ 200%

A1. Total Loan Delinquency / Gross Loan Portfolio
◦ Purpose: To measure the total percentage of delinquency in the
loan portfolio, using the criterion of outstanding delinquent loan
balances instead of accumulated delinquent loan payments.
◦ Items Required: Items Required: A- Total Loan Delinquent
Balances; B – Total Gross Loan Portfolio;
◦ Formula : (A)/(B).

A2. Non-Earning Assets* / Total Assets
◦ Purpose: To measure the percentage of the total assets that are
not producing income.
◦ Items Required: Items Required: A- Total Non-Earning Assets; B –
Total Assets;
◦ Formula : (A)/(B).
*Examples of Non-Earning assets include Cash on hand and floats, non interest bearing current accounts, accounts receivable, fixed assets and
prepaid expenses, assets in liquidation.
R - Rates of Return and Costs
Goals (Excellence)
R1. Net Loan Income / Average Net Loan Portfolio
Entrepreneurial
Rate
R2. Liquid Inv. Income / Avg. Liquid Investments
Market Rates
R3. Fin. Investment Income / Avg. Fin. Investments
Market Rates
R4. Non-fin. Inv. Income / Avg. Non-fin. Investments
R5. Fin. Costs: Savings Deposits / Avg. Savings Deposits
R6. Fin. Costs: External Credit / Avg. External Credit
≥ R1
Market Rates >
Inflation
Market Rates
R - Rates of Return and Costs
Goals (Excellence)
R7. Fin. Costs: Member Shares / Avg. Member Shares
Market Rates, > R5
R8. Gross Margin / Average Assets
ˆE9=10%
R9. Operating Expenses / Average Assets
≤ 5%
R10. Provisions for Risk Assets / Average Assets
ˆP1=100%,
ˆP2=35%
R11. Other Income or Expense / Average Assets
Minimized
R12. Net Income / Average Assets (ROA)
ˆE9=10%

R9. Operating Expenses / Average Assets
◦ Purpose: To measure the cost associated with the management
of all the Credit Union assets. This metric is an indicator of the
degree of operational efficiency or inefficiency.
◦ Items Required:
A- Total Operating Expenses (exclusive of
Provisions for loan losses); B- Total Assets of Current year-end;
C-Total Assets as of Last year-end.
◦ Formula : (A)/[(B+C)/2].

R12. Net Income / Average Assets (ROA)
◦ Purpose: To measure the adequacy of earnings and also, the
capacity to build Institutional Capital.
◦ Items Required: A- Net Income (After dividends); B- Total Assets
of current year-end; C-Total Assets as of last year-end.
◦ Formula : (A)/[(B+C)/2].
Liquidity
Goals (Excellence)
1. Liquid Assets - ST Payables / Total Deposits
15-20%
2. Liquidity Reserves / Total Savings Deposits
10%
3. Non-Earning Liquid Assets / Total Assets
< 1%

L1. [Liquid Assets – Short-term Payables ]/ Total
Deposits
◦ Purpose: To measure the adequacy of the liquid cash
reserves to satisfy deposit withdrawal requests, after paying
all immediate obligations <30 days.
◦ Items Required: A- Total Earning Liquid Investments; B-Total
Non-Earning Liquid Assets; C-Total Short-term Payables <30
days; D- Total Savings Deposits;
◦ Formula : (A + B -C)/(D).
Signs of Growth (Annualized Rates)
Goals (Excellence)
1. Net Loans
ˆE1=70-80%
2. Liquid Investments
ˆE2 ≤ 16%
3. Financial Investments
4. Non-financial Investments
ˆE3 ≤ 2%
ˆE4=0%
5. Savings Deposits
ˆE5=70-80%
6. External Credit
ˆE6=0-5%
7. Member Shares
8. Institutional Capital
9. Net Institutional Capital
ˆE7 ≤ 20%
ˆE8 ≥ 10%
ˆE9 ≥ 10%
10. Membership
≥ 15%
11. Total Assets
> Inflation + 10%

S11. Growth in Total Assets
◦ Purpose: To measure the year-to-date growth of Total
Assets.
◦ Items Required: A- Total Current Assets; B-Total Assets as of the
Last year-end;
◦
◦ Formula : [(A/B)-1]*100.
PEARLS RATIO
P1. Loan loss allowances/ Delinq
Loans> 12.
ACRO
NYM
COMMON
GROUND
P
ACRO
NYM
C
CAMELS
RATIOS
Capital/Risk-Weighted Assets
P6. Net Val. Assts/Total Shares &
Deposits (Solvency)
E1. Net Loans / Total Assets.
E.9. Net Institutional Capital / Total
Assets
A1. Total Loan Delinquency / Gross
Loan Portfolio.
E
A
Net Income/ Average Total Assets
(ROA)
Liquid Assets – Short- term
Payables/Total Deposits
Return on Assets.
A
E
R
M
Rating (1 -5)
L
L
Liquid assets to total assets
A2. Non-Earning Assets/Total
Assets.
Operating Expenses/Total Assets
Non-Perf. Loans/Total Gross Loans
Growth in Total Assets
S
??
S
Return on Equity.
Net open position in foreign
exchange to capital
PEARLS


CARTAC has developed a useful reporting
regime that can help Credit Unions
Regulators collect information from the
sector.
The reporting forms have been deployed and
adapted in various CARTAC member States,
including OECS, Jamaica and Suriname.
Form Number
Main Contents
CU1
Assets and Liabilities
•CU1
•CU1
•CU1
•CU1
•CU1
•CU1
•CU1
–
–
–
–
–
–
–
Supp
Supp
Supp
Supp
Supp
Supp
Supp
A
B
C
D
E
F
G
•Deposits
•Borrowing
•Loans
•Investments
•Receivables and Payables
•Interest Rates
•Deposit &Loans by Interest Rate &Size.
CU2
Economic Activity
CU3
Income Statement
CU 4
Credit Quality
CU 5A
General and Specific Reserves
CU 5B
Reconciliation of Allowance for Loan
Losses and Change in Equity
CU SUMMARY
KEY PEARLS RATIO

SWITCH TO PROVIDE A VIEW OF THE
REPORTING FORMS IN EXCEL (OECS EXAMPLE)
COK SODALITY CO-OPERATIVE
CREDIT UNION LIMITED
COK Credit Union
2013
2012
ASSETS (J$’000s)
EARNING ASSETS
6,369,128.0
6,327,710.0
4,600,561.0
4,125,625.0
25,472.0
32,775.0
Loan Loss Allowance (-)
110,733.0
120,114.0
Liquid Assets
876,844.0
1,081,200.0
Financial Investments
976,984.0
1,208,224.0
NON-EARNING ASSETS
748,188.0
773,989.0
Liquid Assets
Property Plant and
Equipment
Other Non-Earning
Assets
112,910.0
85,744.0
231,043.0
256,272.0
404,235.0
431,973.0
Loans to Members
Credit Card Advances
TOTAL ASSETS
7117316.00
7101699.00
COK Credit Union
2013
2012
LIABILITIES (J$’000s)
Interest-Bearing Liabilities
6,594,477.0
6,556,733.0
Savings Deposits
4,062,005.0
4,045,737.0
Voluntary Shares
2,185,326.0
2,167,227.0
Deferred Shares
300,000.0
300,000.0
External Credits
47,146.0
43,769.0
Non-Interest Bearing
Liabilities
185,117.0
216,065.0
177,104.0
204,895.0
8,013.0
11,170.0
6,779,594.0
6,772,798.0
Payables and Accruals
Other Non-interest
Liabilities
Total Liabilities
COK Credit Union
2013
2012
TOTAL LIABILITIES & EQUITY (J$’000s)
TOTAL EQUITY
337,722.0
328,901.0
Permanent Shares
380,613.0
361,865.0
(609,086.0)
(610,981.0)
462,466.0
462,466.0
5,923.0
5,877.0
-
-
97,806.0
109,674.0
7,117,316.0
7,101,699.0
Non-Institutional Capital
Institutional Capital
Investment Revaluation
Reserve
Loan Loss Reserve
Pension Reserve
TOTAL LIABILITIES AND
EQUITY
COK Credit Union
2013
2012
NET INTEREST INCOME (J$’000s)
INTEREST INCOME
794,507
761,084
Loans to Members
648,885
564577
Investments and Deposits
145622
196507
-210,890
-210,500
(160,211.0)
(196,241.0)
(50,679.0)
(14,259.0)
INTEREST EXPENSE
Members' Deposits
External Credits
NET INTEREST INCOME
Provisions for Loan Losses
583,617
550,584
(51,363.0)
(101,212.0)
Loans to Members
(40,667.0)
(91,324.0)
Interest Receivable
1,065.0
9,875.0
(11,761.0)
(19,763.0)
Other Assets
COK Credit Union
2013
Profit/Loss (J$’000s)
2012
NET INTEREST INCOME (writeoffs and Loan Loss Provisions)
532,254.0
449,372.0
NON-INTEREST
INCOME/(EXPENSES)
266,782.0
228,916.0
GROSS MARGIN
799,036.0
678,288.0
Operating Expenses
793,845.0
804,325.0
5,191.0
(126,037.0)
Other Comprehensive
Income/Loss
(16,323.0)
7,509.0
Total Comprehensive Loss
(11,132.0)
(118,528.0)
Surplus/Deficit
DELINQUENT LOANS
Period Overdue
2013 (J$’000s)
Num in
Arrears
Loans in
Arrears
Provision
(ratio) Loan Loss Provision
1-2 Months
3,500
298,151
0
0
2-3 Months
956
27,389
0.1
2,739
3-6 Months
665
45,811
0.3
13,743
6-12 Months
824
63,909
0.6
38,345
5,945
435,260
198
53,661
1.0
53,661
6,143
488,921
1.0
108,489
Between 1-12 Months
Over 12 Months
Total
54,828
DELINQUENT LOANS
Period Overdue
2012 (J$’000s)
Num in
Arrears
Loans in
Arrears
Provision
(ratio) Loan Loss Provision
1-2 Months
2,764
236,874
0.0
0.0
2-3 Months
705
27,562
0.1
2,756
3-6 Months
712
63,566
0.3
19,070
6-12 Months
794
63,891
0.6
38,335
4,975
391,893
429
55,174
1.0
55,174
5,404
447,067
1.0
115,335
Between 1-12 Months
Over 12 Months
Total
60,161
COK Credit Union
Benchmark
2013
2012
PEARLS
RATIO
PEARLS RATIO
100%
100.00%
100.00%
35%
12.60%
15.35%
Net Loans/Average Total Assets
80%
63.08%
56.40%
Savings Deposits/Total Assets
80%
57.07%
56.97%
PROTECTION
Provision
months
for
Provision for
months
Loans
Loans
Delinquent
Delinquent
>12
<
12
EFFECTIVE FINANCIAL STRUCTURE
COK Credit Union
Benchmark
2013
2012
Total Delinquency/Gross Loan Portfolio
Max 5%
10.63%
10.84%
Non-Earning Assets/Total Assets
Max 5%
10.51%
10.90%
5%
11.89%
12.74%
2%
7.49%
6.32%
Min 15%
20.01%
23.78%
Min 10%
0.22
-0.29
ASSET QUALITY
RATES OF RETURN
Operating Expenses/Average Assets
Net Income/Average Total Assets
LIQUIDITY
Liquid Assets – ST Payables/ Deposits
SIGNS OF GROWTH
Growth in Total Assets

SWITCH TO PROVIDE A VIEW OF THE COK
FINANCIALS IN EXCEL (IF TIME PERMITS).

What Conclusions would you draw about COK
given the PEARLS Ratios?

Discussion?

Building an Effective Database for Credit
Union Requires:
◦ Setting up a functional reporting regime.
◦ Mapping and Developing Workflows necessary to support
information gathering, analysis and dissemination.
◦ Choosing an effective, affordable, flexible and scalable database
system. Good Examples include:
 Sungard’s FAME/MARKET MAP (Data Warehouse)
 http://financialsystems.sungard.com/solutions/market-data/marketmap/analytic-platform
 Vizor (Newly available system specifically for financial sector
regulators).
 http://vizorsoftware.com.
 http://www.youtube.com/watch?v=ksR3TgFbnaU (DEMO OF VIZOR)

SWITCH TO PROVIDE A VIEW FAME and VIZOR
(IF TIME PERMITS).

Building an Effective Database for Credit
Union Requires:
◦ Building a reliable IT Platform.
◦ Keeping current with IT innovations and
database enhancements and that can
impact the sector positively.

Organize Reporting Regime & Database System;

Invest in and Upgrade IT Resources;


Push for Infusion of Expertise in Finance,
Accounting, Economics, Law and IT in Credit
Union Regulatory Bodies;
Intensify Regional and International Collaboration
on Credit Union Regulatory Matters;


Pay
Attention
to
Developments Globally.
Financial
Stability
Leverage assistance, where necessary and
appropriate from CARTAC and other bodies.
END OF PRESENTATION