Chapter

Chapter 11: Credit Unions: Prospects and Challenges

Author(s):
Alfred Schipke, Aliona Cebotari, and Nita Thacker
Published Date:
April 2013
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Author(s)
Yu Ching Wong and Antonio Lemus 

Credit unions in the Eastern Caribbean Economic and Monetary Union (OECS/ECCU) have established an impressive growth record and increase in importance. Some 57 active credit unions in the union manage total assets of about US$700 million (13 percent of GDP in the region) and have a membership base that encompasses about 40 percent of the region’s population, as of end-2010. Credit unions provide an important financial intermediation role, particularly for middle-and lower-income groups and other segments of the population that find it difficult to access credit through the commercial banking system. The objectives of credit unions differ somewhat from those of banks. Profit maximization is the main premise for banks, whereas credit unions serve their members with a greater focus on thrift and less on risk taking. Thus, credit unions must make the trade-off between offering the best financial services and products to their memberships and making a reasonable return. Credit unions accept deposits and provide services similar to those of banks and are therefore subject to the same macroeconomic shocks and stresses. Moreover, the size of some of the larger credit unions approaches that of some of the indigenous banks in the region. Consequently, strengthening the sector through more timely data disclosure and improved regulation and supervision is a pressing need to prevent the heavy costs associated with the potential failure of a credit union.

This chapter provides a descriptive overview of credit unions and the systemic role they play in the financial landscape of the OECS/ECCU, and it addresses the scarcity of information about them. The next section reviews the development of credit unions in the OECS/ECCU, and is followed by a section that examines the increasing overlap between credit union activities and those of commercial banks. Progress in improving the supervision and regulation of nonbank financial institutions, including credit unions, in the region is the topic of the subsequent section. The final section concludes with recommendations for reducing vulnerabilities in the credit union sector.

Recent Developments in Credit Unions in the OECS/ECCU

Credit union membership in the OECS/ECCU is high as compared with other countries globally. Member states rank among the 13 economies with the highest ratio of credit union members to total population in a sample of 93 countries (Figure 11.1).1 Montserrat and Dominica top the list, with ratios exceeding 80 percent, in contrast to a worldwide average ratio of about 10 percent. This global comparison also suggests that the degree of market penetration for credit unions is not related to the level of development or the depth of financial markets in any country. The countries with high credit union membership comprise advanced economies such as Ireland (third), Canada (tenth), and the United States (eleventh); other Caribbean countries such as Barbados, Belize, Jamaica, and Trinidad and Tobago; as well as developing countries like Benin and Senegal. Credit unions thus appear able to develop their niches in markets of different income levels and financial structures. In general, higher penetration is observed in communities with limited access to commercial banks.2 The history and development of credit unions in the OECS/ECCU dates back to the 1950s (see Box 11.1).

Figure 11.1Ratio of Credit Union Members to Total Population, 2008

Sources: IMF, 2010; World Bank, 2010; World Council of Credit Unions, 2009; and IMF staff calculations.

Membership in credit unions increased steadily in most OECS/ECCU jurisdictions during 2005–10 despite a decline in the number of credit unions. Between 2005 and 2010 the number of credit unions in the region decreased from 69 to 57, reflecting a number of mergers (Table 11.1). Nonetheless, membership expanded by close to 5 percent per year during the same period.

Table 11.1Number of Credit Unions and Members, 2005 and 2010
Number of credit unionsNumber of members
Country2005201020052010Annual growth (percent)
Antigua and Barbuda5514,75126,57512.5
Dominica161074,97461,695–3.8
Grenada191328,70241,6867.7
Montserrat114,5004,308–0.9
St. Kitts and Nevis347,82317,05516.9
Saint Lucia151550,96473,3437.6
St. Vincent and the Grenadines10940,81553,8155.7
OECS/ECCU69571222,529278,4774.6
Sources: Caribbean Confederation of Credit Unions; and World Council of Credit Unions.

The increasing importance of the credit union sector in the OECS/ECCU is reflected in the steady growth of its assets and deposits. As Figure 11.2, panel a shows, in the period 2005–10, the total asset size of the credit union sector almost doubled from EC$1,050 million (US$390 million or 9 percent of regional GDP) to EC$1,890 million (US$700 million or 13 percent of regional GDP), with an average annual growth rate of 12.5 percent. Commercial banks’ assets increased by about 140 percent to US$9 billion (171 percent of regional GDP) as of end-2010, demonstrating a much lower average annual growth rate of 7 percent during 2005–10. Similar upward trends are also reflected in the growth of credit unions’ deposits and loans (Figure 11.2, panel b). Credit unions have also extended proportionally more loans, with the loans-to-deposits ratio increasing by about 3 percentage points to 87 percent during 2005–10.

Figure 11.2OECS/ECCU Credit Union Assets, Deposits, and Loans, 2005–10

Sources: Caribbean Confederation of Credit Unions; Eastern Caribbean Central Bank; World Council of Credit Unions; and IMF staff estimates.

Box 11.1A Brief History of the Credit Union Movement and the Development of Credit Unions in the OECS/ECCU

Credit unions were first established in the 1850s in urban Germany by Franz Hermann Schulze Delitzsch to give those lacking access to financial services the opportunity to borrow from savings pooled by themselves and their fellow members. Friedrich Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf, Germany, in 1864. At that time, rural communities in Germany faced more-severe shortages of financial institutions than did the cities, and they were viewed as “unbankable” because of their very small and seasonal flows of cash and limited human resources.

The first credit union in North America was founded in Quebec, Canada, by Alphonse Desjardins and began operations in January 1901. It was modeled after European credit unions. The first credit union in the United States was chartered in 1909 by the parishioners of St. Mary’s Church in Manchester, New Hampshire, with assistance from Desjardins.

Credit unions were introduced in the Caribbean in the 1940s by missionaries from Canada and the United States. Credit unions were organized in Jamaica and Trinidad and Tobago in the early 1940s. A model cooperatives society ordinance was enacted in 1949. The Roseau Credit Union in Dominica, the largest in the OECS/ECCU until early 2010, was the first to register as a cooperative in 1951. In the original concept, members were to share a common bond, usually by place of residence or occupation. However, over the years the principle of the common bond lapsed, with the credit unions opening membership to anyone on their island wishing to join.

The Caribbean Confederation of Credit Unions (CCCU)—a regional organization for credit unions and other cooperatives—was formed in August 1972, taking on the role of the former West Indies Conference of Credit Societies established in 1959. Today, OECS/ECCU credit unions are affiliated with the CCCU, which represents the Caribbean credit unions at the World Council of Credit Unions, a worldwide body.

By the early 1990s, the credit union sector in the OECS/ECCU had become deeply troubled. Credit unions were small in both membership and assets. Few credit unions could afford professional management. Nonperforming loans were high and the law under which credit unions operated was outdated. In the second half of the 1990s, each of the member states enacted a new, common, Cooperative Societies Act. Guided by the Business Center of the CCCU, the credit union sector undertook a major credit union modernization project, to strengthen performance involving the 17 largest credit unions. These initiatives proved to be major steps in the industry’s revitalization. The result has been rapid growth in membership and assets, the introduction of new products, and improvement in managerial and financial performance (see Box 11.2 for an explanation of the PEARLS system).

Both concentration (as measured by asset size) and the size of credit unions vary widely in the OECS/ECCU. However, the lack of timely and quality data for individual credit unions, in particular for the smaller ones, prevents empirical analysis at the firm level. Nevertheless, a few salient features stand out from the available aggregate data:

  • Within the OECS/ECCU, Dominica has the largest credit union sector, accounting for slightly more than one-quarter of the credit union sector’s total assets in the region. The total assets of Dominica’s 10 credit unions represent close to 40 percent of its GDP, with deposits and loans of 32 percent and 26 percent of GDP, respectively, at end-2010 (Table 11.2). Together with Saint Lucia (22 percent), Grenada (18 percent), and St. Vincent and the Grenadines (14 percent), credit unions in these four countries represent 80 percent of the total credit union assets in the OECS/ECCU (see also Appendix 11A).

  • The three largest credit unions in the OECS/ECCU account for about one-third of the region’s credit union asset base. Roseau Cooperative Credit Union (CCU) in Dominica, Civil Service CCU in Saint Lucia, and General Employee CCU in St. Vincent collectively account for about 30 percent of market share in the region and roughly 60, 40, and 60 percent of credit union assets in their respective countries (Table 11.3). However, a large majority of the credit unions are small and some are likely to be too small to be viable.

  • The larger credit unions are comparably sized to the indigenous banks in the OECS/ECCU. For instance, Roseau CCU before the merger had assets of EC$260 million (end-2008), which outpaced the Caribbean Union Bank (EC$139 million) and the Bank of Montserrat (EC$200 million).3

Table 11.2Selected Indicators for Credit Unions, End-2010(Millions of EC dollars; unless noted otherwise)
IndicatorOECS/ECCUAntigua and BarbudaDominicaGrenadaMontserratSt. Kitts and NevisSaint LuciaSt. Vincent and the Grenadines
Assets1,88613449533265186420253
Assets as percentage of GDP13.14.038.215.340.710.214.413.6
Loans1,35110034125751120301182
Loans as percentage of GDP9.43.026.311.931.76.510.39.7
Deposits1,5529641426953128342250
Deposits as percentage of GDP10.82.932.012.532.97.011.713.4
Reserves168728154196034
Reserves as percentage of GDP1.20.22.20.72.31.02.11.8
Number of credit unions575101314159
Members278,47726,57561,69541,6864,30817,05573,34353,815
Average assets per institution3327492665472828
Average deposits per member (EC$)5,5743,6306,7076,46312,2537,5094,6634,642
Ratio of reserves to assets (percent)8.95.55.74.75.610.214.413.4
Ratio of reserves to loans (percent)12.47.38.36.07.215.820.118.6
Memorandum
Nominal GDP14,3663,3611,2942,1631601,8372,9211,864
Sources: Caribbean Confederation of Credit Unions; Eastern Caribbean Central Bank; World Council of Credit Unions; and IMF staff estimates.
Table 11.3Selected Indicators for Major Credit Unions, End-2009(Millions of EC dollars, unless noted otherwise)
Roseau CCU1Civil Service CCUGeneral Employee CCU
IndicatorShare in

Dominica

(percent)
Share in

OECS/

ECCU

(percent)
Share in

Saint

Lucia

(percent)
Share in

OECS/

ECCU

(percent)
Share in

St. Vincent

and the

Grenadines

(percent)
Share in

OECS/ECCU

(percent)
Assets26060.916.413137.86.914358.67.6
Loans17062.515.29136.87.57844.36.5
Deposits21156.115.710845.07.613156.69.3
Statutory reserve1255.25.31510.66.5617.92.4
Members24,54242.19.612,23718.61.732,26362.84.6
Sources: Annual reports of Roseau CCU, Civil Service CCU, and General Employee CCU; and World Council of Credit Unions.Note: Term deposits are fixed deposits at rates in the range of 3 to 7 percent.

Are Credit Unions Different from Commercial Banks?

Proponents of credit unions have long held the view that credit unions are better suited than commercial banks to provide smaller-value, uncollateralized consumer loans at lower interest rates. Credit unions are not-for-profit financial institutions that aim to promote the economic well-being of members, are tax exempted, are owned by members from restricted customer bases (although there is no membership restriction in the OECS/ECCU), and focus on small consumer loans. At the same time, they source their funding from member savings and share their dividends among their member shareholders.4 Commercial banks pay taxes on profits, are owned and controlled by stockholders, are open to the public, focus on lending to businesses and consumers with collateral, and distribute their dividends to their shareholders.5

Despite these differences, credit unions and commercial banks compete in the market for deposits and lending. As the credit union sector evolved, many credit unions—worldwide—expanded and became more bank-like in their provision of financial products and services. Credit unions in the OECS/ECCU offer many of the same financial services offered by commercial banks, such as saving accounts, checking accounts, credit cards, and mortgage finance, but the amounts involved for individual members are usually smaller than in commercial banks. Anecdotal evidence suggests that deposit and lending rates offered by credit unions track closely those of commercial banks and, similar to bank lending, a large share of credit union loans are in mortgages and consumer loans. In addition, unless specifically mentioned in the by-laws of a credit union, the membership restrictions that exist in other countries do not generally apply in the region. The rapid membership expansion and growth of some credit unions that has allowed them to compete with banks is attributable, in part, to the absence of this restriction.

The remarkable expansion of the credit union sector in the OECS/ECCU exceeded the growth of assets, loans, and deposits in commercial banks during 2005–10 (Table 11.4 and Figure 11.3). The OECS/ECCU’s bank-based financial system has 40 banks with total assets at 170 percent of the region’s GDP in 2010 (see details in Appendix 11A). During 2005–10, which covered the onset of the global financial crisis, growth in the credit union sector exceeded that of the banking system. The credit union sector achieved double-digit annual growth rates in assets, loans, and deposits. Although it is difficult to pinpoint all contributing factors, weakened confidence in the banking system triggered by the run on the Bank of Antigua, and potential losses related to the annuity investment products offered by insurance companies BAICO and CLICO (see discussion below), could have boosted the growth in credit unions. In addition, credit unions could issue dividends up to 3 percentage points above the minimum interest rate on saving deposits of commercial banks as set by the ECCB (currently at 3 percent), which also would have increased the attractiveness of credit unions.

Table 11.4Credit Unions Compared With Commercial Banks(Percentage of GDP, unless noted otherwise)
Institution20052010Annual growth

(percent)
Credit unions
Assets9.013.212.4
Loans6.39.512.8
Deposits7.610.912.0
Commercial banks
Assets148.8171.07.3
Private sector loans68.087.89.9
Private sector deposits78.783.35.6
Share of credit unions as percentage of all deposit-taking institutions
Assets5.77.2
Loans8.59.7
Deposits8.811.5
Sources: Caribbean Confederation of Credit Unions; Eastern Caribbean Central Bank; World Council of Credit Unions; and IMF staff estimates.

Figure 11.3Assets of OECS/ECCU Banks and Credit Unions as Percentage of GDP, 2010

Sources: Caribbean Confederation of Credit Unions; Eastern Caribbean Central Bank; and IMF staff calculations.

Credit unions absorb close to 12 percent of total private sector deposits and account for about 10 percent of total private sector loans in the OECS/ECCU. The ratio of credit union loans to commercial bank loans is highest in Montserrat (45 percent), followed closely by Dominica (32 percent), suggesting strong competition between credit unions and commercial banks. Credit union loans in St. Vincent and the Grenadines and in Saint Lucia are moderate at 16 percent and 13 percent, respectively, of bank loans. However, credit unions play a substantial role in deposit-taking and financial intermediation in Montserrat and Dominica, which each have only one indigenous bank.

Challenges: Reducing Vulnerabilities and Strengthening Regulation and Supervision

Until recently, responsibility for the oversight of credit unions came under the purview of the registrar or commissioner of cooperatives in each OECS/ECCU member; however, supervision has been deficient, suffering from resource constraints.6 Registrars are responsible for all cooperatives, not just credit unions, and often tend to be understaffed and undertrained for effective supervision of a large number of credit unions. Furthermore, registrars’ offices are more likely to focus on promotion rather than supervision. Thus, although credit unions function as deposit-taking institutions similar to banks, their supervision tends to be less intense than that for banks supervised by the ECCB. Although deposits in credit unions in the OECS/ECCU are not insured, the public appears to hold the assumption that an implicit guarantee exists in the event of a credit union failure. This could pose a serious challenge to governments in the union, given the limited fiscal space and high public debt levels in the region.

Inadequately regulated credit unions could potentially undermine financial stability. First, the importance of credit unions in the financial system, as reflected by their market share and growing membership, suggests that their supervision needs to be integrated with other deposit-taking institutions from a macroprudential perspective. Second, the 2008–09 global financial crisis has shown that threats to financial stability can emerge from any part of the integrated financial system and therefore all financial services should be adequately regulated to minimize spillovers. Spillovers and contagion also make smaller credit unions more vulnerable in a rapidly changing business environment because they are more likely to face serious capacity constraints preventing them from properly assessing credit and investment risks. Third, the lack of timely and detailed financial data on credit unions’ activities, together with insufficient supervision, also eliminate the opportunity to implement timely remedial measures. The global financial crisis and economic downturn have put OECS/ECCU banks’ balance sheets under stress, resulting in an overall lowering of liquidity and increase in nonperforming loans. Although credit unions and banks share a similar business environment, the lack of readily available and up-to-date information has rendered assessments of their financial positions difficult.

The collapse of Trinidad and Tobago–based CL Financial Group in early 2009 exposed weaknesses in the region’s regulatory framework for nonbank financial institutions.7 In the OECS/ECCU, the failure of British American Insurance Company Limited (BAICO) and Colonial Life Insurance Company (CLICO)—subsidiaries of the CL Financial Group—placed the financial system under stress. Deposit-taking institutions in particular, such as banks and credit unions, are exposed to the risks of spillovers across countries and between financial institutions. Information on the exact claims by investors and institutions remains limited, but the combined exposure of credit unions in member countries to BAICO and CLICO is estimated to be EC$84 million (Table 11.5). In some countries, the adverse impact on the balance sheets of individual institutions is likely to be significant, calling for resolution strategies and a further strengthening of affected credit unions. In addition, indirect impacts on banks could arise through the potential lowering of bank deposits by affected credit unions.

Table 11.5Estimated Exposure to CLICO and BAICO(Millions of EC$)
Estimated exposureRatio of estimated

exposure to capital

(percent)
Capital1CLICO2BAICO3Other4Total
OECS/ECCU236.227.547.88.583.835.5
Sources: Country authorities; World Council of Credit Unions; and IMF staff estimates.

The failure of CL Financial accelerated the proposed prudential reforms for the credit union sector in the OECS/ECCU. Recognizing the vulnerabilities and the risk of spillover to the rest of the financial system from an inadequately supervised and regulated credit union sector, the ECCB Monetary Council, in June 2008, urged the ECCB to pursue with urgency the finalization of the legislation by the end of the year.8 The objectives of strengthening prudential supervision of credit unions, as with that of banks, are to protect the savings of the general public and to maintain the stability of the financial system. The BAICO and CLICO debacle helped to reduce potential resistance from some parts of the credit union sector to the strengthening of regulation and supervision. This has, in part, accelerated passage of harmonized credit union legislation in both Dominica and Grenada, where credit unions play a substantial role in the financial system.

The new Cooperative Societies Bill (Comprehensive Credit Union Act) aims to tighten the activities of credit unions by enhancing licensing and reporting requirements, establishing prudential standards, and strengthening enforcement actions. More specifically, the act helps to strengthen risk-management capacity, independent auditing, and governance, as well as increases capital adequacy. For example, the act specifies that the minimum capital-to-asset ratio should be 10 percent of total assets, which is in accordance with recommendations of the World Council of Credit Unions (WOCCU).9 Components of capital include nondistributable reserves, capital donations, or other surpluses of the credit union. Ownership shares may be included in capital only if they are fully paid, permanent, and nonredeemable. Recognizing that building up capital may take several years of accumulating retained earnings, the draft law also specifies a certain percentage of retained earnings to be set aside to meet the minimum capital adequacy requirement.10

Progress has been made in establishing a single regulatory unit (SRU) within each member state to regulate nonbank financial institutions, including credit unions. All OECS/ECCU members, except St. Vincent and the Grenadines, have passed the SRU legislation, which provides the framework for the oversight of credit unions, insurance companies, and money transfer services. However, an urgent need remains to make these SRUs operational and to strengthen their capacity to implement regulation effectively and perform supervisory duties. See Table 11.6.

Table 11.6Status of Harmonized Legislation on the Nonbank Financial Sector, November 2011
Single regulatory units actCredit unions actInsurance actMoney services act
OECS/ECCU memberDate

enacted
Date

enacted
Date

enacted
Date

enacted
Anguillan.a.2009
Antigua and Barbudan.a.n.a.Nov. 2007Aug. 2007
Dominican.a.March 2011April 2010
GrenadaMay 2006Dec. 2011March 2010June 2009
Montserratn.a.June 2011Oct. 2008
St. Kitts and NevisOct. 2009Oct. 2011March 2009July 2008
Saint LuciaMarch 20112010
St. Vincent and the
Grenadines
Sources: Country authorities.Note: n.a. = Not available; ✓ = Enacted; ✕ = Not enacted.

Until SRUs are fully functional, further consideration should be given to transferring the supervision and regulation of systemically important credit unions to the ECCB. Credit unions provide deposit and lending services similar to those of banks, and some larger credit unions hold a significant proportion of the region’s deposits. Therefore, assigning responsibility for supervision of systemically important institutions to the ECCB supervisory authority would allow for integrated supervision, thus reducing information arbitrage, and would make use of existing expertise in the supervision of deposit-taking institutions. During this period, smaller credit unions would remain with national regulators. This could be a short-term solution, while the SRUs are being established. It would, of course, result in a need for additional resources for the ECCB, including new staff. Within the Caribbean region, for example, Belize, Bermuda, and Haiti have already integrated supervision of credit unions under the central bank or regulator of banks, and Jamaica and Trinidad and Tobago are in the process of doing so.

The establishment of a center of excellence for the sharing of human resources and the creation of a regional regulatory authority for nonbanks over the medium term should help to overcome the capacity bottlenecks in the OECS/ECCU. Although ensuring the effective functioning of the SRUs is the highest priority, securing qualified regulatory personnel for nonbank financial institutions would likely remain a key challenge. The OECS/ECCU would benefit from moving toward a regional regulatory body to reap the benefits of resource sharing, information sharing, and economies of scale in operation until the long-term solution is in place.

Consolidation of the smaller institutions through mergers would be beneficial. The focus could be on helping the small, weak institutions survive and improve their functioning, even though they hold only a fraction of the sector’s total assets. The recent merger of credit unions in Dominica is a move in the right direction and should allow them to benefit from economies of scale in fund management and risk mitigation. In addition, a smaller number of credit unions will also help to temper capacity constraints in providing effective supervision.

Improvements to the regulatory framework would need to include the adoption of international standards and international best practices, including WOCCU’s PEARLS indicators, and enhancements to the scope and frequency of data reporting. The use of PEARLS would help credit union managers to improve operational efficiency and regulators to improve supervision. The timely publication of PEARLS indicators would also facilitate comparison of data and performance with banks that rely on the CAMELS set of financial soundness indicators (see Box 11.2).

Conclusions

Given the growing importance of the credit union sector in the OECS/ECCU and the risks of spillover to the financial system in the event of shocks, the regulation and supervision framework for credit unions urgently needs to be strengthened by making the SRUs operational. Greater information exchange and collaboration between the ECCB, SRUs, and other regulators (e.g., the Eastern Caribbean Securities Regulation Commission) through the Regulatory Oversight Committee will also help to reduce information and supervision arbitrage.

Box 11.2PEARLS Indicators

The PEARLS financial performance monitoring system was developed by the World Council of Credit Unions (WOCCU) primarily as a tool for managing credit union operations. The system is also used as a supervisory tool by regulators. PEARLS consists of 44 quantitative financial indicators and they are largely parallel to CAMELS (capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk) indicators widely used by bank supervisory authorities. The PEARLS system monitors the following:

  • Protection—provisions for loan losses are the first line of defense against unexpected losses to the institution;

  • Effective financial structure—the most important variable affecting growth, profitability, and efficiency;

  • Asset quality—the main variable affecting institutional profitability;

  • Rates of return and costs—directly affecting the growth rates of an institution;

  • Liquidity management—an essential component of administering a savings institution; and

  • Signs of growth—reflecting member-client satisfaction with product offerings and financial strength.

If differences arise between the PEARLS standards and a country’s national standards of performance, WOCCU encourages credit union partners to opt for the more conservative of the two standards.

Table 11.2.1Selected Key PEARLS Indicators
IndicatorsStandards of excellence
P1. Allowance for loan losses/delinquency >12 months100%
P2. Net allowance for loan losses/delinquency of 1–12 months35%
E1. Net loans/total assets70%–80%
E5. Savings deposits/total assets70%–80%
E6. External credit/total assetsMaximum 5%
E9. Net institutional capital/total assetsMinimum 10%
A1. Total loan delinquency/gross loan portfolio≤ 5%
A2. Non-earning assets/total assets≤ 5%
R5. Financial costs: savings deposits/average savings depositsMarket rates > inflation
R7. Total interest (dividend) cost on shares/average member sharesMarket rates > R5
R9. Total operating expenses/average total assets0.05
R12. Net income/average total assetsLinked to E9
L1. Short-term investments + liquid assets - short-term payables/savingsMinimum 15%
deposits
S11. Growth in total assets> Inflation
Source: World Council of Credit Unions, “About PEARLS.” www.woccu.org/financialinclusion/pearls/aboutpearls.

In the short term, supervision of systemically important credit unions could be transferred to the ECCB. Consideration should also be given to the creation of a regional nonbank supervisory institution. Furthermore, consolidating the smaller credit unions should be studied, because it could allow improved oversight as well as strengthened performance.

Efforts to collect and compile data from credit unions need to be strengthened. Data collection must be enhanced to improve the accuracy and effectiveness of the regulation and supervision of credit unions. The lack of data makes it difficult to assess and monitor the performance and exposure of the credit unions in the region.

The OECS/ECCU would require continued technical assistance. Because the authorities might not have the necessary resources to assess which of the nonbank institutions are viable, technical assistance from the international financial institutions and regional and development partners would be needed.

Appendix 11A
Selected Indicators of ECCU Financial Institutions, End-2010(Millions of EC dollars, unless noted otherwise)
IndicatorOECS/ECCUAnguillaAntigua and

Barbuda
DominicaGrenadaMontserratSt. Kitts and

Nevis
Saint LuciaSt. Vincent and

the Grenadines
Assets of banking sector
Commercial banks including indigenous24,5622,0515,0931,6392,8323815,0245,5611,981
As percentage of GDP171.0268.0151.5126.7130.9237.1273.5190.4106.3
Indigenous banks10,7851,5331,9868845312002,6392,304708
As percentage of GDP75200.359.168.324.5124.4143.778.938.0
Assets of nonbank financial sector
Credit unions1,88613449533265186420253
As percentage of GDP13.14.038.215.340.710.214.413.6
As percentage of total ECCU credit union assets100.07.126.217.63.59.922.313.4
Development banksn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
National development foundationsn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Finance and mortgage companiesn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Building and loan societiesn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Insurance companiesn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Money service companiesn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Offshore banksn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Number of:
Commercial banks4048452764
Locally incorporated2235131432
Locally owned (indigenous)1424111221
Foreign owned8112211
Foreign incorporated1813321332
Credit unions575101314159
Development banks511111
National development foundations71111111
Finance and mortgage companies15212172
Building and loan societies41111
Insurance companies161202421237162723
Money service companies4048632944
Offshore banks3731536172
Total3663164484920406846
Memorandum
Nominal GDP14,3667653,3611,2942,1631601,8372,9211,864
Sources: Caribbean Confederation of Credit Unions; Eastern Caribbean Central Bank; World Council of Credit Unions; and IMF staff estimates.Note: n.a. = not available; ‥ = negligible.
References

The authors are grateful to Howard C. Edmonds, Brontie Duncan, and seminar participants at the Eastern Caribbean Central Bank for valuable comments on the presentation of a preliminary version of this chapter.

Because data for the population between 15 and 64 years of age were not available for all OECS/ECCU countries and territories, total population data were used.

Montserrat’s very high penetration ratio could be due, in part, to account holders who left after the volcano eruptions in the 1990s, but kept their accounts. Montserrat’s current population hovers around 5,000 and there is only one credit union.

The Vieille Case, St. Paul, St. David, and La Salette credit unions merged with Roseau Cooperative Credit Union to form the National Cooperative Credit Union (NCCU) in November 2010. NCCU is reported to have membership of more than 36,000 and assets of more than EC$330 million.

Credit unions traditionally acquire their members from a common affinity group, such as a religious organization, an occupation, or residence in a single community. Such common-bond lending has the advantages of enhanced monitoring within the common bond and a reputational incentive to repay loans; and relationship lending substitutes for collateral and credit ratings (Walter, 2006). However, a credit union with a narrow membership base is also more likely to face vulnerabilities as a result of a lack of risk diversification.

Depending on a country’s legal framework, credit unions may be authorized either by the Superintendency of Banks, the Central Bank, the Ministry of Finance, the Ministry of Cooperatives, or a freestanding law to mobilize member savings.

Credit unions in the OECS/ECCU are typically formed under a cooperative societies act that applies to all cooperatives, including agricultural and commercial cooperatives. The cooperative societies acts generally provide insufficient legal frameworks for prudential supervision.

For details on the collapse of the CL Financial Group, see Box 2 in IMF (2011).

A new harmonized Cooperative Societies Bill (Comprehensive Credit Union Act) had been drafted under a joint project of CARTAC, the ECCB, and the IMF (Legal Department) that began in 2002.

Credit unions with larger assets may be required to calculate the capital adequacy ratio using risk-weighted assets.

Five percent of the total of net income for each quarter, until regular reserves equal 6 percent of assets; and then two percent of the total of net income for each quarter, until the net worth ratio of the credit union complies with the minimum capital requirement.

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