Credit Union scare

After HCU crash, proposed new laws spread dread among unions

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Even as Kairi Consultants Ltd, in a study done for Tecu Credit Union, pointed to the “liquidity and insolvency crisis” of the Hindu Credit Union (HCU), Tecu has objected to the Central Bank’s proposed policy document (PPD) containing guidelines for new legislation to regulate the operations of credit unions.

Tecu Credit Union said regulation of the sector “cannot be a rationale for the elimination of other services provided by a co-operative to its members.”

In response to the Central Bank’s May 2007 Revised Policy Proposal Document for the Credit Union Act, Marabella-based Tecu commissioned Kairi to study the likely impact of the proposed regulations on T&T’s 130 active credit unions, with a 400,000-strong membership.

The 92-page August 2008 report, The Impact of Central Bank’s Policy Proposal Document on the Co-operative Credit Union Movement in T&T, was based on research conducted between February and July 2008.

A main objective of the proposed legislation is to transfer supervision of the credit unions from the office of the Commissioner of Co-operatives in the Ministry of Labour to the Central Bank.

The report said the Central Bank “claims to recognise the co-operative nature and democratic systems of governance of credit unions.”

Pointing to HCU’s liquidity and insolvency crisis, over which Commissioner of Co-operatives Charles Mitchell appointed a liquidator in July, the report stated:

“The intervention on the part of the Government imposes on it the requirement to ensure that such an eventuality does not reoccur (sic). It is imperative that the Co-operative Societies Act (1971) be revisited, given that its inherent weakness, and/or lack of regulatory infrastructure might have prevented an earlier intervention on the part of the Government.”

The report stated that the “putative development role” with regard to the promotion of credit co-operatives is not part of the proposed remit of the Central Bank as regulator, and “is likely to fall between the stools” of the Central Bank and the commissioner’s office.

Kairi stated that the PPD is “mute” on its likely impact on “co-operative endeavour” on the wider economy.

The report, declaring that credit unions have been “the bright spot” in the co-operative movement, expressed concern about the Central Bank’s ability to develop and promote credit unions.

“There is nothing to suggest that the Central Bank, in the role of regulator, would display any enthusiasm for the development role, nor is it equipped with the personnel with the appropriate preparation in co-operative studies and the like, beyond their professional degrees in law, economics and accounting,” the report stated.

New realm of operations

The report said the PPD’s second objective has been to correct for the problem of understaffing of the Department of Co-operatives, “which has created the conditions within which venal management in a few credit unions might have strayed well outside of the limits of sound financial operations.”

Departing from policy

Kairi stated that the PPD “represents some considerable departure” of the Government in its policy towards credit unions.

“Although there has been no formal enunciation of a new ideological paradigm, the PPD and other initiatives of the Government in respect of the financial services sector suggest a reversal or rejection of an earlier strategy of localisation of control over domestic finance,” the Kairi report read.

The report added that even if in the emerging scenario, credit unions may remain the only areas of domestic finance not open to control by foreign entities, the PPD will severely restrict credit unions in the services they provide and the investments they can make, and may result in the demise of some considerable number of them, given the demanding requirements they will be required to observe.

The Central Bank has proposed:

n a credit union would have to have a minimum level of institutional capital of 8.0 per cent of its total assets and would be restricted from paying dividends if it doesn’t have this capital

n a credit union’s credit exposure to a single member or related party or parties would be limited to 25 per cent of institutional capital

n limit to 15 per cent of institutional capital a credit union’s investment in any entity

n limit total investments of a credit union in other entities to a maximum of 20 per cent of institutional capital

n prohibit credit unions from providing non-financial services, but allow them to own up to 15 per cent of entities providing non-financial services

n credit unions would have to maintain a minimum liquid assets ratio of 15 per cent of total assets

n Central Bank would have the power to impose fines and seek criminal penalties against credit unions which break certain sections of the act

n credit unions will have to obtain a licence from the Central Bank

n credit unions which have been refused a licence will have the right to appeal to the Tax Appeal Board

n for the imposition of civil money penalties for late or inaccurate submission of statutory filings, audited statements or other information requested by the Central Bank, a credit union may challenge such penalties before the Tax Appeal Board

n those credit unions which have not been licensed will no longer be permitted to carry on business

n the Central Bank would have the power to wind up a credit union

The proposed legislation would restrict credit unions from directly or indirectly acquiring land “except where necessary for conducting its business or housing its officers or employees or for the satisfaction of debts due to it.

“Investing in real estate is considered speculative,” read the PPD.

The PPD stated the business of a credit union does not contemplate non-financial activities, that activities such as travel agency services and property development can pose operational and other types of risks for credit unions.

“In addition, these activities are not regulated by the Central Bank,” the report said.

Non-financial services

Kairi pointed to what it described as “another important deficiency” in the PPD as its failure to treat with the non-financial services, “merely suggesting these be excluded from the remit of credit unions, with their being given three years to get rid of these supposedly extraneous activities.”

Kairi described these activities as the management of real estate and the development of housing districts.

“The PPD seems to suggest to the membership of credit unions that they are not entitled to hold on to valuable assets that are now under their control through their co-operative credit unions.

“Some of these assets include properties in the prime business district of Port-of-Spain, where few but the traditional captains of industry and commerce in the country own large tracts of real estate,” read the report.

The report comments on the socio-economic effects of credit unions having to sell off their real estate.

“The official requirement on the credit union for sale of such real estate would be seen as the enforcement by the Government of the transfer of resources from a lower income group to the upper echelons of the society, in which phenotypical differences still tend to characterise the structure of ownership of key assets in the society.

“The PPD could become effectively an indirect tool for reversing the limited redistribution of wealth that might have occurred as a result of the initiatives of the credit union movement.”

A new realm

Kairi stated that the proposals which the PPD intended to convert to legislation will take credit unions into a new realm of operations, for which most of them may not be geared.

“The proposals are aimed at international norms and best practices, which other jurisdictions have or are implementing in respect of credit unions.”

Kairi said credit unions in Britain and Ireland are allowed to engage in the business of banking and operate current accounts.

“They are allowed to conduct a slew of financial activities. To restrict and circumscribe credit unions in the activities specified in the First Schedule, together with the tougher prudential requirements, would leave credit unions extremely vulnerable to failure.

“Further, there is no proposal in the PPD for the Government or the Central Bank to provide funding to assist the credit union in moving from infancy to maturity as financial institutions in one fell swoop,” the report stated.

The report said in 2004, the UK government committed £36 million from a Financial Inclusion Fund to support a growth fund for third sector lenders—credit unions—and increased it by £3 million in 2007-2008.

Ireland has a similar facility available to credit unions to assist them in meeting liquidity needs and to pay for premises and equipment, Kairi said.

The report said restrictions against banks and non-financial institutions are not as severe as those proposed for credit unions and it seemed that the credit unions were being made to comply with international accounting standards in one fell swoop without a gradual weaning from their existing standards.

The proposals are aimed at international norms and best practices, which other jurisdictions have or are implementing in respect of credit unions.






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