Credit unions blur banks lines

Governor of the Central Bank, Ewart Williams said the case for stricter credit union supervision by the Central Bank is compelling. Larger credit unions, he noted, now offer certificates of deposits, make mortgage and commercial loans, provide credit and debit cards to be used in automatic teller machines and also provide cambio and travel agency services. Williams said that as far as he was concerned, the case for stricter credit union supervision is compelling. “It is based on the amount of resources now being intermediated and the business models of the larger credit unions which encompass more complex and riskier operations,” he told members of the credit union and other stakeholders at Eastern Credit Union’s 31st annual general meeting at La Joya complex.

“These factors require that greater attention be paid to risk-management by the unions themselves and that there be a formal supervisory framework for credit unions to protect members’ savings, and to help maintain the integrity of the financial system,” he said. President of Eastern Credit Union, Gary Cross, made it clear though that credit unions are not banks, or near banks, so there was no competition. He said he saw the move by the Government 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. But looking at data available for 2003, Williams noted that the six largest credit union with assets ranging from $200 million to $800 million, accounted for about half of total credit union assets, while the largest 17 credit unions accounted for three quarters of the industry’s assets.

He noted too that the smaller institutions raised resources from shares and savings deposits and make small loans for consumer purposes. “These are essentially run as co-operative societies and are based on principles of volunteerism,” he said. In the case of the large credit unions, “we have a new paradigm involving products and services more readily associated with the commercial banks,” he said. He observed that some people have argued for self-regulation, to be done by the Co-opereative Credit Union League. But he also stressed that self-regulation had never worked on a sustainable basis anywhere, because it was usually effective only with those who were inclined to obey the rules — “not for those that need it most.” He assured that there were credit unions, both large and small that are not operating with sound prudential principles.

He conceded though that formal arrangements for the  regulation of credit unions are a relatively recent phenomenon. Williams also disclosed that in Jamaica, legislation shifting the regulation of credit unions to the bank of Jamaica, was passed in 2004, but the operating details were still being worked out. And in Barbados, starting last year, the five largest credit unions accounting for 80 percent of total credit union assets he said, are supervised jointly by the Central Bank and the Registrar of Credit Unions. Williams acknowledged that it may be more complicated than originally envisaged to adapt what the Government has in mind — amending the Financial Institutions Act to bring large credit unions under the regulatory control of the Central Bank.

“The rationale,” he said, “was that these institutions were essentially conducting business of a banking nature and should be regulated as banks, while the other credit unions involved in more traditional activities would continue to be supervised elsewhere.” “Our research shows that legislation intended for commercial banks is generally inappropriate for credit unions, whose purpose is to provide co-operative financial services to members who are their depositors, their borrowers and their owners.” He noted that credit unions were different from commercial banks, because of a number of essential features.  Noting that the part of the Government’s proposal that prompted the strongest reaction was the proposal to split credit union supervision between two regulators, based on institution size.

He said: “It is difficult to disagree with the Credit Union League that splitting regulation between two regulators, runs the risks of fragmenting the movement and stunting its development.” Perhaps it makes sense that all credit unions should be regulated by a single regulator — the Central Bank, he said. He also said that credit unions must get their act together, if they are to survive. “The sustainability of the movement will require that credit unions get into increasingly riskier activities to survive and thrive,” he said. Williams underscored  the important role the credit union movement has played and continues to play in Trinidad and Tobago. He felt though that in order to achieve this, more robust regulation and supervision are urgently needed.

Williams said the financial environment was changing very rapidly and the credit union movement will have to continue changing with the times “to meet its members needs, to fend off competition from other financial service providers and to remain relevant.” “In these circumstances, formal, rigorous supervision will become more critical and urgent,” he said. According to Williams, it was in everybody’s self-interest to have effective formal regulation, since poor financial practices by one or two credit unions could undermine confidence in the entire movement, and could conceivably have contagious effects on the entire financial system.