Thursday 21st April 2005


Growing pains

Government, credit unions tackle supervision

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A composite photo of Rhand Credit Union and Eastern Credit Union, two of the country’s largest credit unions in terms of assets.


In the old days, people started sous sous, known in Tobago as lend hand, in their villages, in the market, in their offices, to help with bills.

To meet the bigger bills—buying a secondhand car, changing the roof of your house or buying a computer—you approach your bank. The bank examines your credit rating, wants statements of savings, collateral, outstanding loans. Your loans officer does some calculations and calls you with bad news: you don’t qualify.

Next option: the credit union, long been regarded as the answer to the working-class person’s money woes.

The larger credit unions, though, have grown from small outfits offering short-term loans and mortgages to financial institutions with hundreds of millions in assets, trading in foreign currencies and funding development projects. They also offer certificates of deposit, make mortgage and commercial loans, provide credit and debit cards to be used in automatic teller machines and travel agency services.

Credit unions’ healthy bottom lines have not escaped the attention of the Ministry of Finance and the Central Bank, which are working to bring those with assets of $100 million-plus under the Central Bank’s supervision.

There are seven credit unions with assets of $100 million-plus.

Gary Cross, president of the 83-member-strong Co-operative Credit Union League, wants all credit unions to move as one body.

Today, the Business Guardian gives the views of Cross, Central Bank Governor Ewart Williams, and Hyder Ali, acting commissioner for co-operative development, in the Ministry of Labour and Micro Enterprise Development.

Central Bank Governor Ewart Williams

Different treatment

There’s no disagreement between the Ministry of Finance and the Central Bank on the need for stricter regulation of credit unions, said Central Bank Governor Ewart Williams.

“We’re talking and trying to find the best medium for this. One recognises there are larger and smaller credit unions and there needs to be some differentiation in treatment,” Williams said.

“At one stage, the differentiation was on an institutional basis, that one regulator would do the large ones, and another the smaller ones.”

Williams said there’s the notion that selecting some credit unions for stricter regulation will undermine the unity of the movement, but a way is being sought to not undermine them but still recognise their differences.

“One way of dealing with this is looking at the differences in terms of risk,” Williams said.

“The larger institutions are likely to have greater or take greater risks and need greater monitoring. Small institutions are likely to be more traditional.”

Williams said the Ministry of Labour and Small Micro Enterprise Development will continue to monitor credit unions’ development.

“We need to work out that role. Once the division of labour is clarified, that will be used as the basis for legislation. At one stage, we thought all we had to do was amend the Financial Institutions Act,” Williams said.

“It’s getting clearer that will not deal with the issue. Either we see what we can do with the present Co-operatives Act, or there’s a Co-operatives Bill done under an IDB programme on credit union strengthening—work with both these documents to get workable legislation. It’s not either, but both.”

Speaking at Eastern’s 31st AGM last month, Williams said self-regulation of credit unions has never worked on a sustainable basis anywhere.

“It is usually effective only when those who are inclined to obey the rules, not for those that need it most,” he said. “And I can assure you that there are credit unions, both large and small, that are not operating in accordance with sound prudential principles.”

Non-performing loans in the industry average between 20 and 25 per cent while commercial banks have a three per cent delinquency ratio, Williams said.

“From my vantage point, the case for stricter credit union supervision is compelling.”

Gary Cross, president of the Co-operative Credit Union League

One regulator is enough

The credit union movement subscribes to one regulator, said Gary Cross, president of the Co-operative Credit Union League.

“We see the move to isolate credit unions based on asset size as a deliberate decision to fragment and fracture a movement with an excellent record of service to the poor, marginalised and disadvantaged in the society,” Cross said.

In an interview at Eastern Credit Union’s La Joya complex in St Joseph, Cross said the credit unions proposed for Central Bank supervision have invested in traditional areas: the UTC, commercial banks.

The former Eastern president said the credit union injected $5 million in a Udecott housing project in San Fernando.

“We have fairly safe investments. I don’t think the project financing exceeds $10 million and it’s relatively short-run financing—three to five years,” Cross said.

He doesn’t disagree with the Government or the Central Bank, but advocated that any legislative framework cannot separate the movement.

“If we are to go to the Central Bank, we go together,” Cross said. “We have no difficulty with the rigours of impending legislation, but do not isolate or fragment the movement.”

There hasn’t been a significant failure of credit unions, Cross said, but admitted that sheer growth demands “more robust supervision.”

“We are not major financial players. We subscribe to all the fit and proper rules, but don’t consider ourselves major players.”

Hyder Ali, acting commissioner for co-operative development

Significant savings

Hyder Ali, acting commissioner for co-operative development, said savings mobilised through credit unions are significant.

“A lot more people are putting their money in the credit union movement sector than any other simply because tax legislation is encouraging that kind of activity,” Ali said.

Given credit unions’ rapid growth, Ali said somebody has to ensure their rigid supervision to ensure strict adherence to the law.

“If one credit union fails, the entire image of the sector is tarnished. Eight per cent of working people invest in credit unions. Government must have a responsibility to ensure their money is protected,” Ali said.

He said the Co-operatives Department within the Ministry of Labour and Micro Enterprise looks at governance while the Central Bank looks at financial matters.

“They’re concerned with dollars and cents,” Ali said. “Our responsibility here would be to protect members’ rights and privileges and how credit unions set up their institutions to do business.”

Conrad Enill, Junior Finance Minister

Dealing with the issues

Conrad Enill, Junior Finance Minister, said the Co-operative Societies Act “does not deal with financial-type issues.”

“From my perspective, the issue has, in fact, been resolved. That is to say over two years now, everybody’s been working on credit union legislation to deal with prudential standards,” Enill said. “The act came out of the Agricultural Societies Act and was never intended to deal with some of the things you are required to with financial institutions.”

He said having sorted out the regulation of insurance companies by Central Bank, it’s recognised that the larger credit unions operate with very sophisticated products and services.

“The complexity of credit unions’ operations had surpassed the capabilities we could bring to the table,” Enill said.

“In those circumstances, we found ourselves in a situation where we needed an institution like Central Bank that had the capacity to hire the right level of expertise to deal with that kind of situation.”

Enill said a high-powered World Bank (WB) and Inter-American Development Bank (IDB) delegation visited Trinidad last month to conduct a financial sector assessment programme. That study includes banking, mutual funds, insurance, small businesses, micro enterprise and credit unions.

“The reason is to determine as we move forward any system risks we need to protect ourselves against,” Enill said.

The WB/IDB team is to return to Trinidad in July and submit a report to Enill by September.

The big six

Following is a list of the top six credit unions’ assets and some of the investments they have made:

1. Hindu Credit Union—$1,030,680,694

2. TECU Credit Union—$752,397,068

3. Eastern Credit Union—$588,012,415

4. Teachers’ Credit Union—$290,577,228 (2003 financial year)

5. Rhand Credit Union—$246,121,303

6. Police Service Credit Union—$234,884,241

There are now about 131 credit unions in T&T, whose assets have been estimated at $4 billion.

Credit unions have invested in real estate, fixed deposits, mutual funds, local and foreign debt issues and equity shareholdings, travel agencies, guest houses, insurance brokers, security companies and furniture.

What the law has to say...

The Credit Union Supervision Act seeks, inter alia, to:

provide a framework for the supervision and regulation [of the financial operations] of credit unions so as to [maintain/contribute to] public confidence in the financial system and [to ensure] the protection of the savings of credit union members and depositors.

The act proposes to establish a Credit Union Supervisory Office to:

(a) supervise credit unions in order to determine whether they are in a sound financial condition and are complying with their governing legislation and supervisory requirements under that law, this act and the regulations

(b) advise the management and boards of directors of credit unions of non-compliance under the law governing credit unions, this act, the regulations or guidelines and require that they take corrective measures determined by the director to deal with the situation in an expeditious manner

(c) establish prudential norms and standards of sound business conduct for credit unions

(d) promote the adoption by credit unions of policies and procedures to control and manage risk

(e) monitor and inspect credit unions for compliance with supervisory requirements and prudential norms

(3) Duties. For the purpose of carrying out its objects under subsection (2) the office shall —

(a) adopt guidelines to be followed by credit unions in relation to safety and soundness, appropriate standards of conduct and performance and sound business practices

(b) take such steps as are necessary to ensure that safety and soundness, appropriate standards of conduct and performance and sound business practices are maintained in credit unions in accordance with this act, the regulations, any guidelines made hereunder or any relevant Act

(c) subject to Section 15, consider applications by credit unions for licences to conduct specified classes of business under this act, and grant or refuse to grant or suspend, cancel or revoke any such licence

(d) implement measures designed to reduce the possibility of a credit union being used for any purpose connected with an offence involving fraud, theft or money laundering

The act also states that the office will be an agent of the government and shall have a board of directors consisting of a chairman, a director, the permanent secretary of the Ministry of Finance or his delegate, the Central Bank Governor or his delegate and the commissioner for co-operative development.





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