4 th Biennial International Conference on Business, Banking and Finance Views expressed are those of the speaker alone and should not be reported as representing.

4th Biennial International Conference on Business, Banking and Finance

Views expressed are those of the speaker alone and should not be reported as representing the official position of the International Monetary Fund.

Yu Ching WongInternational Monetary Fund

June 22, 2011

Credit Unions in the ECCU—Opportunities and Challenges

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Outline

•Recent developments of credit unions in the ECCU

•Are credit unions different from commercial banks?

•Challenges in reducing vulnerabilities

•Policy recommendations and conclusions

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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?

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Credit union membership in the ECCU is very high in global comparison

84.179.6

67.3

52.8

46.0

38.2 37.2 35.6 35.532.7

29.6 28.8 27.8 26.723.0 22.5

0

10

20

30

40

50

60

70

80

90

MSR DMA IRL BRB VCT LCA GRD BLZ JAM CAN USA KNA ATG TTO BEN SEN

Share of credit union members to total population, 2008(in percent)

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).

ECCU average:42 percent

Global average:10 percent

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Membership increased steadily in most ECCU jurisdictions despite a decline in the number of credit unions

2005 2010 2005 2010 Annual growth(in percent)

Antigua and Barbuda 5 5 14,751 26,575 12.5Dominica 16 10 74,974 61,695 -3.8Grenada 19 13 28,702 41,686 7.7Montserrat 1 1 4,500 4,308 -0.9St. Kitts and Nevis 3 4 7,823 17,055 16.9St. Lucia 15 15 50,964 73,343 7.6St. Vincent and the Grenadines 10 9 40,815 53,815 5.7

ECCU 69 57 222,529 278,477 4.6

Sources: World Council of Credit Unions; and Caribbean Confederation of Credit Union.

Number of credit union members in the ECCU, 2005-10

Number of membersNumber of credit unions

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Steady growth of assets, deposits and loansTotal assets size of the credit union sector almost doubled…

…similar upward trends in deposits and loans

0

5

10

15

20

250

300

350

400

450

500

550

600

650

700

750

2005 2006 2007 2008 2009 2010

ECCU: Total Assets of Credit Unions, 2005-10

In millions of US

In percent of GDP (right scale)

0

5

10

15

20

250

300

350

400

450

500

550

600

650

700

750

2005 2006 2007 2008 2009 2010

ECCU: Total Deposits and Loans of Credit Unions, 2005-10

Loans (in millions of US$)

Deposits (in millions of US$)

Loans (in percent of GDP, right scale)

Deposits (in percent of GDP, right scale)

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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

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ECCU Antigua Dominica Grenada Montserrat St Kitts St Lucia St Vincentand and Nevis and the

Barbuda Grenadines

Assets 698 50 183 123 24 69 156 94 (in percent of total) 100.0 7.1 26.2 17.6 3.5 9.9 22.3 13.4 (in percent of GDP) 13.1 4.0 38.2 15.3 40.7 10.2 14.4 13.6

Loans 500 37 126 95 19 45 111 67 (in percent of GDP) 9 3.0 26.3 11.9 31.7 6.5 10.3 9.7

Deposits 575 36 153 100 20 47 127 93 (in percent of GDP) 2.9 32.0 12.5 32.9 7.0 11.7 13.4

Reserves 62 3 10 6 1 7 22 13 (in percent of GDP) 1.2 0.2 2.2 0.7 2.3 1.0 2.1 1.8

Number of credit union 57 5 10 13 1 4 15 9 Members 278,477 26,575 61,695 41,686 4,308 17,055 73,343 53,815

Average assets per institution 12 10 18 9 24 17 10 10 Average deposits per member (U.S.$) 2,065 1,345 2,484 2,394 4,538 2,781 1,727 1,719 Reserve/Assets (in percent) 8.9 5.5 5.7 4.7 5.6 10.2 14.4 13.4 Reserve/Loans (in percent) 12.4 7.3 8.3 6.0 7.2 15.8 20.1 18.6

Memorandum item:Nominal GDP 5,317 1,245 479 801 59 680 1,082 690

Sources: World Council of Credit Unions; Caribbean Confederation of Credit Unions; ECCB and Fund staff estimates.

ECCU: Selected Indicators of Credit Unions, end-2010 (In millions of U.S. dollars; unless noted otherwise)

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▫The largest three credit unions account for about one-third of the total credit union asset size …comparable in size to some of the indigenous banks

Dominica ECCU St. Lucia ECCUSt. Vincent

& the Grenadines

ECCU

Assets 260 60.9 16.4 131 37.8 6.9 143 58.6 7.6Loans 170 62.5 15.2 91 36.8 7.5 78 44.3 6.5Deposits 211 56.1 15.7 108 45.0 7.6 131 56.6 9.3Statutory reserve 12 55.2 5.3 15 10.6 6.5 6 17.9 2.4Members 24,542 42.1 9.6 12,237 18.6 1.7 32,263 62.8 4.6

1/ Data for Roseau CCU are as of end-2008.

ECCU: Selected Indicators of Major Credit Unions, end-2009 1/(In millions of EC dollars, unless noted otherwise)

Sources: Annual Reports of Roseau Cooperative Credit Union (CCU); Civil Service Cooperative Credit Union; General Employee Cooperative Credit Union; World Council of Credit Unions.

Roseau CCU Civil Service CCU General Employee CCUShare in (in percent) Share in (in percent) Share in (in percent)

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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

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In comparison with commercial banks…

ECCU Anguilla Antigua and

Barbuda

Dominica Grenada Montserrat St. Kitts and Nevis

St. Lucia St. Vincent and the

Grenadines

0

50

100

150

200

250

300

171

268

152

127 131

237

274

190

106

75

200

5968

25

124144

79

38

130 4

38

15

41

10 14 14

ECCU: Assets of Commercial Banks and Credit Unions(in percent of GDP)

Assets of commercial banksAssets of indigenous commercial banksAssets of credit unions

Sources: Caribbean Confederation of Credit Unions; EECB; and Fund staff calculations.

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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

2005 2010 Annual growth(In percent)

Credit UnionsAssets 9.1 13.1 12.4Loans 6.4 9.4 12.8Deposits 7.6 10.8 12.0

Commercial BanksAssets 148.8 171.0 7.3Private Sector Loans 68.0 87.8 9.9Private Sector Deposits 78.7 83.3 5.6

Share of Credit Unions to Deposit-taking institutions (In percent)

Assets 5.8 7.1Loans 8.6 9.7Deposits 8.8 11.5

Credit Unions Versus Commercial Banks(In percent of GDP; unless noted otherwise)

Sources:World Council of Credit Unions; Caribbean Confederation of Credit Unions; ECCB; and Fund staff estimates.

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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

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• 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

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• 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?

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• 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 non-bank financial institutions and harmonizing NBFI legislations

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Progress in enacting new harmonized legislation

Date of legislation enacted

Is th

Date of legislation enacted

Date of legislation enacted

Date of legislation enacted

Anguilla √ n.a. x - x - √ 2009Antigua and Barbuda √ n.a. √ n.a. x - √ Aug-07Dominica √ n.a. √ Mar-11 x - √ Apr-10Grenada √ May-06 Y √ Dec-11 √ Mar-10 √ Jun-09Montserrat √ n.a. x - x - √ Oct-08St. Kitts and Nevis √ Oct-09 x - √ Mar-09 √ Jul-08St. Lucia √ Mar-11 x - x - √ 2010St. Vincent and the Grenadines x - x - x - x -

Sources: The authorities; others.Note: 1/ Enacted (√), Outstanding (x). As of end-March 2011.

ECCU: Status of Harmonized Legislation on Non-Bank Financial Sector 1/

Single Regulatory Units

Act

Credit Unions Act

Insurance Act Money Services Act

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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

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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

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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

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Selected PEARLS IndicatorsKey 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

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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

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Thank you