comparative analysis of credit unions’ movements in europe and central asia strengthening...

Comparative Analysis of Credit Unions’ movements in

Europe and Central Asia

Strengthening Financial Cooperatives in Eastern Europe and Central Asia

Baku, Azerbaijan, November 10-11, 2004

Igor Gorashov, Consultant, World Bank

Objectives

The objectives of this presentation are:

• to observe and state commonalities and differences in national CUs’ movements of those countries proposed for analysis

• to determine the main obstacles in movements’ past development and learn from each other experience of their solving

• to identify weaknesses in current developments and propose ways for future cooperation between the movements, local and central governments and other stakeholders

Outline

1. Overview of CUs movement

2. History of the movement

3. Current development

4. Member profiles

5. Products and services

6. Legal framework

7. Institutional framework

8. Trends and issues

Commonalities in the history of the movements

• Previous credit unions’ history starting from the 19th century;

• During World Wars and during soviet times in majority of these countries the credit unions’ movement, formally, ceased to exist (exception – Romania);

• Collapse of the Soviet system – the credit unions revived

• Very few re-started with external donor support (except Albania, Lithuania and Moldova) and when this assistance appeared it was often quite fragmented with a weak donor coordination there

• Almost all (except Albania, Lithuania and Moldova) revived based on a solid legal framework prior actual implementation

• With few exceptions (Albania, Lithuania and Moldova), all the others have suffered from atomization of the network and required an important effort to move toward its federalization

Lessons learned

Adequate legislation is one of the key of successful and long term sustainable CU development

Important role of the State in national strategies, legislation, supervision and No interference in the CUs daily activities

Effective accounting and reporting system with strong supervision

Need for high professionalism of CUs management Commercial Banks and CUs - partners instead of competitors Strong and viable CUs network institutions as condition for a

strong and viable network Weak transfer of knowledge to businesses as a serious obstacle

for successful development and operations’ extension

7 Main Common Characteristics

1. Modern history of less than 10 years2. Predominantly serve physical persons3. Pro-poor focus4. Cover less than 1% of countries’ population5. Extremely fast growing speed6. Mostly credit oriented, weak savings mobilization7. Strong willingness for further development

Country Albania Azerbaijan Georgia Lithuania Moldova Population (mln.) 3,54 7,86 4,69 3,61 4,45 GDP per capita $4,500 $3,400 $2,500 $11,400 $1,800 Nr. CUs 134 52 58 531 Nr. of members 14,980 3,474 32,000 71,042 Share capital (mln.$) 0.92 1,17 3.95 3.07 Loans disbursed (mln.$) 11,86 3,23 32,18 39,472 Average loans size $1,628 $1,281 2,724 $250 Savings accumulated (mln.$) 0.64 n/a 35,34 0.26 Average savings account $250 n/a 2,804 $197 Movement coverage (% of population) 0.42 0.74 0.89 1.60

Overview of selected countries and their CUs’ movements

Overview of selected countries and their CUs’ movements

(continuation)

Country Romania Russia Ukraine Uzbekistan Population (mln.) 22,35 143,78 47,73 26,41 GDP per capita $7,000 $8,900 $5,400 $1,700 Nr. CUs 3,618 329 133 14 Nr. of members 1,444,632 180,364 265,000 6,990 Share capital (mln.$) 0.21 - n/a 0.17 Loans disbursed (mln.$) 0,40 42,78 2,30 Average loans size $288 $1500 $500 $717 Savings accumulated (mln.$) - 60.00 42.78 0.713 Average savings account - n/a $161 $621 Movement coverage (% of population) 6.46 0.13 0.56% 0.03%

Current developmentsGrowth of the CUs’ system (2000 – 2003)

Country 2000 2001 2002 2003 Albania Nr. of CUs n/a n/a n/a 134 Nr. of members n/a n/a n/a 14,980 Loans n/a n/a n/a n/a Savings n/a n/a n/a n/a Azerbaijan Nr. of CUs n/a n/a n/a 52 Nr. of members n/a n/a n/a 3,474 Loans n/a n/a n/a 3,236,135 Savings n/a n/a n/a n/a Georgia Nr. of CUs Nr. of members Loans Savings Lithuania Nr. of CUs 38 41 53 57 Nr. of members 5,722 10,280 20,126 31,654 Loans 3,263,630 7,801,370 16,994,778 32,187,259 Savings 3,812,074 9,820,037 20,931,333 35,335,000 Moldova Nr. of CUs 293 359 484 510 Nr. of members 25,144 37,766 52,600 71,042 Loans 1,909,693 3,347,751 4,426723 7,964,929 Savings 13,857 49,723 95,647 258,745

Current developmentsGrowth of the CUs’ system (2000 – 2003)

(continuation)

Country 2000 2001 2002 2003 Romania Nr. of CUs 4,304 4,107 3,895 3,618 Nr. of members 1,571,928 1,570,424 1,526,073 1,444,632 Loans 235,647 263,907 313,739 375,244 Savings - - - - Russia Nr. of CUs 200 n/a n/a 329 Nr. of members 48,000 n/a n/a 180,364 Loans n/a n/a n/a n/a Savings n/a n/a n/a n/a Ukraine Nr. of CUs 105 122 126 133 Nr. of members 76,665 111,053 177,601 265,000 Loans 3,574,111 6,601,778 13,798,889 26,312,593 Savings 2,713,000 5,069,926 10,525,130 20,065,778 Uzbekistan Nr. of CUs n/a n/a n/a 14 Nr. of members n/a n/a n/a 6,990 Loans n/a n/a n/a 941,000 Savings n/a n/a n/a 713,000

Albania Azerbaijan Georgia Lithuania Moldova Romania Russia Ukraine Uzbekistan

Capital adequacy 10.80% 42.0% n/a 19.8% 10.51% 7.56% n/a n/a 15%

PAR 1.0% n/a n/a 2,95% 3.76% 1.00% n/a 4.7% n/a

Write-offs 0.02% n/a n/a 0.22% 0.69% 0.002% n/a n/a n/a

ROE 20.8% n/a n/a 6.6% 6.5% 9.3% n/a n/a 4.0%

ROA 2.2% n/a n/a 0.7% 2.0% 7.9% n/a n/a 23.5%

CountryIndicator

Performance indicators

Current developments

CU’s Members

Credit union members - in different countries, different requirements regarding membership:

• Only natural persons (countries)

• Both natural and legal persons (countries)

Common key membership conditions:

• belong to the defined common bond;

• pay membership share;

• accept and obey bylaws of the credit union.

Besides ordinary members, some CUs’ may have also associate members (Lithuania).

Associate members enjoy the same rights of a CU member, except

• the right to vote

• the right to be elected to the management and control bodies of a CU.

Services offered by CUs


Only lending

Loan / savings Full financial services Non-financial services Zoning (rural, urban) R R/U R/U R U U U R/U

Clientele (poor, middle, rich) P P/M M P P M M M

Network integration: atomized or federated

F A F F A A A A

Increase in membership (2003/2002)

n/a n/a n/a 57,3% 35,1% 7,1% n/a 49.2% 71,7%

CountryServices

Services offered by CUsLending services


Short-term loans n/a Medium-term loans n/a

Long-term loans n/a

Business n/a

Consumption n/a

Mortgage n/a Increase of loan portfolio (2003/2002)

n/a 11.0% n/a 89.4% 79.8% 19.6% n/a 90.6% n/a

PAR 1.00% n/a n/a n/a 3.76% 1.00% n/a 4.70% n/a

CountryTypes

Services offered by CUsNon-financial services


Training - Representation / lobby Accounting / reporting -

Consulting Trade support, marketing

Other

CountryServices

Key legislative/regulatory requirements (by countries)


Law on Credit Unions Financial Prudential Norms Sample CU’s statutes Accounting Standards Reporting Standards Ministry of Finance Instructions

Tax bylaws

Other

CountryNorm

Supervision mechanism

Four types of credit unions’ systems:

• State supervision mechanism set up by law and performed by the Central/National Bank (Albania, Azerbaijan, Lithuania, Uzbekistan)

• State supervision mechanism set up by law and performed by the Ministry of Finance or a specialized supervisory body (Moldova)

• State supervision mechanism set up by law delegated to the National or Regional Association/Federation (Romania)

• Un-formal supervision mechanism performed by the National or Regional Association/Federation (Russia)

Other institutions of CU’s network


Supervision Body Lobby Body / Federation / Association

-

Training Center Central Finance Facility / Liquidity Pool

Deposit Insurance Scheme / Fund Stabilization Fund Insurance Company Clearing Center Development Agencies Credit Bureau

Loan Guarantee Scheme / Fund

Other

CountryInstitution

Weaknesses

Insufficient capacity of the State Supervisory Body to ensure adequate supervision of CU network

Often excessive reliance of CUs on external funds Low CUs sustainability due to the small size and boundary

limitation Lack of loan portfolio diversification Limited capacity and competence of CU staff Insufficient internal control and lack of external audit Lack of deposit insurance mechanism

Trends and issues in sustainable development of CUs

• Adjustment of the legislation to new realities and more pro-banking standards, but not loosing the CU’s origins and advantageous achievements

• Establishment of a proper supervision system

• Search for alternative and/or additional financial resources

• Need for training function institutionalization

• Portfolio diversification and more attractive savings offer

• Promotion of the “one system – different pockets” principle

• New technologies (on-line services, plastic cards, etc)

• Donor dependence exit strategy development

• Others

Challenges (strategic)

Elaboration of National Strategy on Micro-finance Sustainable Development and its eventual implementation

More than finance – financial (micro financial) + business develop providers

Provision of support to encourage mobilization of long term savings

Encouraging active involvement of local commercial banks

Provision of support on sustainable development of main micro-finance institutions

Challenges (legal framework)

Amending the CU Law to eliminate impediments to future development

Development of legal framework on deposit insurance Development of legislation framework with combined

membership of natural persons and legal entities Improving legislation on collateral, including movable Develop mortgage and leasing legislation Preparing an Overall Legal Frame for MFIs

Challenges (institutional building)

Institutional consolidation of the State Supervisory Body with provision of stable and sufficient funding

Ensuring operation of the National Federation as a self-financing and sustainable institution

Transformation / formation of the Central Finance Facility into a fully operational commercial bank

Establishment of a Cooperative Insurance Company by CUs and other MFIs

Establishment of Savings Insurance Agency to provide insurance of CU member savings

Challenges (implementation) Vision Strategy Consistency Insistency Patience

Thank You and Good Luck!

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