The Eastern Caribbean Currency Union (ECCU) has made significant progress in improving the quality and quantity of the macroeconomic statistics it produces and disseminates to the public. The Selected Issues Paper discusses prospects and challenges for credit unions in the ECCU. It reviews the current state of macroeconomic statistics, outlines progress that has been made, and identifies outstanding challenges. It also describes technical assistance to the region and presents the challenges for the production of macroeconomic statistics in small island states.

Abstract

The Eastern Caribbean Currency Union (ECCU) has made significant progress in improving the quality and quantity of the macroeconomic statistics it produces and disseminates to the public. The Selected Issues Paper discusses prospects and challenges for credit unions in the ECCU. It reviews the current state of macroeconomic statistics, outlines progress that has been made, and identifies outstanding challenges. It also describes technical assistance to the region and presents the challenges for the production of macroeconomic statistics in small island states.

I. Credit Unions in the ECCU: Prospects and Challenges 12

A. Introduction

1. Credit unions in the ECCU have an impressive record both in terms of growth and importance. There are a total of 61 active credit unions in the ECCU with total assets of about US$700 million (13 percent of the regional GDP) and a membership base averaging 40 percent of the region’s population, as of end-2010. They provide an important financial intermediation role, particularly for middle and lower income groups and other key segments of the population that might have otherwise find it difficult to access credit through the commercial banking system. The objectives of credit unions are somewhat different from those of banks. For the latter the main premise is profit maximization, while for credit unions the prime objective is to serve its members with a greater focus on thrift and less so on risk taking. Thus, there is often a trade-off between offering the best financial services and products to the membership and the need make a reasonable return. Nonetheless, credit unions do accept deposits and provide services similar to banks and are therefore subject to the same macro-economic shocks and stresses. Moreover, some of the larger credit unions are comparable in size to some of the indigenous banks in the region. Consequently, there is a pressing need to strengthen the sector through more timely data disclosure and improved regulation and supervision.3

2. Given the very important and systemic role that credit unions play in the financial landscape of the ECCU, and that information about them is scarce, this chapter provides a descriptive overview of these institutions. It is organized as follows: Section B reviews the developments of credit unions in the ECCU; Section C examines the increasing overlapping of credit unions’ activities with commercial banks; and Section D discusses the progress in improving the supervision and regulation of non-bank financial institutions, including the credit unions, in the ECCU. Section E concludes with recommendations to reduce the vulnerabilities of the credit union sector.

B. Recent Developments of Credit Unions in the ECCU

3. Credit union membership in the ECCU is very high when compared to other countries in the world. ECCU countries/territories are among the 13 economies with the highest ratio of credit union members to total population in a sample of 93 countries.4 Montserrat and Dominica topped the list with a ratio exceeding 80 percent, against an average ratio of about 10 percent worldwide. This global comparison also suggests that the degree of penetration is not related to the level of development and the depth of the financial markets. The countries where credit union membership are high consisted of advanced countries 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 African countries like Benin and Senegal. This implies that credit unions are able to develop their niches in markets of different income levels and financial structures. In general, a higher penetration of credit unions is observed in communities and for small and micro businesses with limited access to commercial banks.5 Credit unions were first established during the 1940s in the Caribbean, and in the 1950s in the ECCU (see Box 1).

uA01fig01

Share of credit union members to total population, 2008

(in percent)

Citation: IMF Staff Country Reports 2012, 130; 10.5089/9781475504101.002.A001

Sources: World Council of Credit Unions, 2008 Statistical Report; World Bank, World Development Indicators 2010; International Monetary Fund, World Economic Outlook 2010; and Fund staff calculations.Note: Antigua and Barbuda (ATG), Barbados (BRB), Belize (BLZ), Canada (CAN), Benin (BEN), Dominica (DMA), Grenada (GRD), Ireland (IRL), Jamaica (JAM), Montserrat (MTS), Senegal (SEN), St. Kitts and Nevis (KNA), St. Lucia (LCA), St. Vincent and the Grenadines (VCT), Trinidad and Tobago (TTO), and United States (USA).

Credit union membership increased steadily in most ECCU jurisdiction during 2005-10 despite a decline in the number of credit unions. Between 2005 and 2010 the number of credit unions in the ECCU decreased from 69 to 57, reflecting a tendency toward mergers. Nonetheless, union membership expanded by close to 5 percent per annum over the same period.

A Brief History of Credit Unions in the Caribbean1

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. Friedrick Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf in Germany in 1864. At that time, rural communities in Germany faced more severe shortage of financial institutions than the cities and they were viewed as ‘unbankable’ due to very small seasonal flows of cash and very limited human resources. The organizational method refined by Raiffeisen, called “social capital” today, is a hallmark of the global credit union identify.

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

Credit unions were introduced to 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 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 place of residence or occupation. However, in recent years the principle of the common bond is lapsing with the larger unions opening their membership to anyone on their island wishing to join.

Overtime, given the systemically important role played by the credit unions, the OECS member countries decided in August 1972 to establish the Caribbean Confederation of Credit Unions—a regional organization for credit unions and other co-operatives. Today, the credit unions of the ECCU countries are affiliated with the Caribbean Confederation of Credit Unions (CCCU) which represents the Caribbean credit unions at the World Council of Credit Unions (WOCCU), which represent the credit union movement worldwide.

By the early 1990s the credit union movement in the ECCU had become deeply troubled. The unions were small in both membership and assets. Few credit unions could afford professional management. Non-performing loans were high and the law under which the unions operated was dated. In the second half of the 1990s each of the ECCU members enacted a new, common, credit union law. Guided by the Business Center of the CCCU, the credit union movement undertook a major project to strengthen performance, known as the Credit Union Modernization Project, involving the seventeen largest credit unions. These initiatives proved to be a major step in the industry’s revitalization. The result has been rapid growth in membership and assets, new products, and improvement in managerial and financial performance. Of the 17 unions involved in the project, 16 meet the minimum standards of “world class” credit union, as judged by the PEARLS standards of the World Council of Credit Unions.

1 See IMF (2004), Wharton (2010), and Walter (2006).

Number of credit union members in the ECCU, 2005-10

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Sources: World Council of Credit Unions; and Caribbean Conferation of Credit Union.

4. The increasing importance of the credit union sector in the ECCU is reflected in the steady growth of assets and deposits. In the period 2005–10, the total assets size of the credit union sector almost doubled from EC$1050 (US$390 million or 9 percent of regional GDP) to EC$ 1890 (US$700 million or 13 percent of regional GDP), with an average annual growth rate of 12 percent. This represent a much faster expansion than that of commercial banks’ assets, which increased by about 140 percent to US$9 billion (171 percent of regional GDP) as of end-2010, with an average annual growth of 7 percent during 2005–10. Similar upward trends are also reflected in the growth of credit unions’ deposits and loans. Credit unions have also extended proportionally more loans with the loans-to-deposits ratio increased by about 3 percentage points to 87 percent during 2005–10.

uA01fig02

ECCU: Total Assets of Credit Unions, 2005-10

Citation: IMF Staff Country Reports 2012, 130; 10.5089/9781475504101.002.A001

uA01fig03

ECCU: Total Deposits and Loans of Credit Unions, 2005-10

Citation: IMF Staff Country Reports 2012, 130; 10.5089/9781475504101.002.A001

Sources: World Council of Credit Unions; Caribbean Confederation of Credit unions; ECCB; and Fund staff estimates.

5. There are large variations in concentration and size of credit unions in the ECCU. However, the lack of timely and quality data for individual credit unions, in particular for the smaller unions, prevent us from conducting empirical analysis at firm level. Nevertheless, a few salient features stand out from aggregate data that are available:

  • Within the ECCU, Dominica has the largest credit union sector. Dominica accounts for slightly more than one-quarter of the credit union sector’s total assets in the ECCU. Total assets of 10 credit unions in Dominica represent close to 40 percent of its GDP, with deposits and loans of 32 percent and 26 percent of GDP, respectively at end-2010. Together with St. Lucia (22 percent), Grenada (18 percent) and St. Vincent and the Grenadines (13 percent), credit unions in these four countries represent 80 percent of the total assets concentration in the ECCU region (see also Appendix Table 1).
  • The largest three credit unions account for about one-third of the region’s credit union asset base. Roseau Cooperative Credit Union in Dominica, Civil Service CCU in St. Lucia and the General Employee CCU in St. Vincent collectively accounts for about 30 percent of the market share in the ECCU and roughly 60, 40 and 60 percent of credit union assets in their respective countries. 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 comparable in size to the indigenous banks in the ECCU. For instance, the Roseau Cooperative Credit Union before the merger had an asset size of EC$260 million (end-2008), which is larger than some of the smaller ECCU indigenous banks such as the Caribbean Union Bank (EC$139 million) and the Bank of Montserrat (EC$200 million).

ECCU: Selected Indicators of Credit Union, end-2010

(In millions of EC dollars; unless noted otherwise)

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Sources: World Council of Credit Unions; Caribbean Confederation of Credit Unions; ECCB and Fund staff estimates.

ECCU: Selected Indicators of Major Credit Union, end-2009 1/

(In millions of EC dollars, unless noted otherwise)

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Sources: Annual Reports of Roseau Cooperative Credit Union (CCU); Civil Service Cooperative Credit Union; General Employee Cooperative Credit Union; World Council of Credit Unions.

Data for Roseau CCU is as of end-2008.

C. Are Credit Unions Different from Commercial Banks?

6. Proponents of the credit union movement have long viewed that credit unions are better suited in providing 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; tax exempted, owned by members from a restricted customer base (although there is no membership restriction in the ECCU), focus on small consumer loans, at the same time source their funding from member savings, and share their dividends among their member shareholders.6 Commercial banks pay taxes on profits, are owned and controlled by stockholders, open to the public, focus on lending to businesses and consumers with collateral, and distribute their dividends to their shareholders.7

7. Despite these differences, credit unions and commercial banks compete in the market for deposits and consumer loans. As the credit union sector evolved, many credit unions, not only specific to those in the ECCU but also a more world-wide phenomenon, have expanded in size and became more bank-like in their provision of financial products and services. Credit unions in the ECCU offer many of the financial services offered by commercial banks, such as saving accounts, checking accounts, credit cards, mortgage finance but the amounts involved are usually smaller than in commercial banks. Anecdotal evidence suggests that deposit and lending rates offered by the credit unions track closely those of commercial banks and a high share of the credit union loans are in mortgages and consumer loans similar to bank loans. In addition, unless specifically mentioned in the bylaws of credit union, membership restrictions—which exist in other countries, does not in general apply in the ECCU. This in part has resulted in the rapid membership expansion and growth of some credit unions which allow them to compete with the banks.

8. The credit union sector in the ECCU has shown remarkable expansion exceeding the growth of assets, loans and deposits in commercial banks during 2005–10. The ECCU has a bank-based financial system with total assets of 40 banks at 170 percent of the region’ GDP in 2010 (see details in Appendix Table 1). However, during 2005–10 which covered the onset of the global financial crisis, growth in the credit union sector exceeded that of the banking system, achieving double- digit annual growth in assets, loans and deposits. While it is difficult to pin-point the attributing factors, weakened confidence in the banking system triggered by the bank run at the Bank of Antigua, and potential losses related to the annuity investment products offered by insurance company BAICO and CLICO (see discussion below) could have contributed to the growth in credit unions. In addition, as credit unions could issue a dividend up to 3 percent above the minimum saving interest rate of commercial banks as set by the ECCB (currently at 3 percent), which would have increased the attractiveness of credit unions.

uA01fig04

ECCU: Assets of Commercial Banks and Credit Unions

(in percent of GDP)

Citation: IMF Staff Country Reports 2012, 130; 10.5089/9781475504101.002.A001

Sources: Caribbean Confederation of Credit Unions; EECB; and Fund staff calculations.

Credit Unions Versus Commercial Banks

(In percent of GDP; unless noted otherwise)

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Sources: World Council of Credit Unions; Caribbean Confederation of Credit Unions; ECCB; and Fund staff

9. 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 ECCU. The share of credit union loans to commercial bank loans is the 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 St. Lucia are moderate at 16 percent and 13 percent of the respective bank loans. It is worth noting, however, the substantial role played by credit unions in deposit-taking and financial intermediation in Montserrat and Dominica where there is only one indigenous bank in each territory.

D. Challenges: Reducing Vulnerabilities and Strengthening Regulation and Supervision

10. Until recently, responsibility for the oversight of credit unions came under the purview of the registrar of cooperatives, but suffered from resource constraints and supervision has been deficient.8 Registrars are responsible for all cooperatives, including agricultural and commercial cooperatives, not just credit unions, and often tend to be understaffed and under-trained for effective supervision of a large number of credit unions. Furthermore, the registrar’s office is more likely to place its focus on promotion, rather than supervision. In this context, while credit unions function as deposit taking institutions similar to the banks, their supervision tends to be less intense than that for banks supervised by the ECCU. Although credit unions in the ECCU are not covered under any deposit insurance scheme, there is likely to be the assumption of an implicit guarantee in the event of a credit union failure. This could represent a serious challenge for ECCU governments, given the limited fiscal space and high debt public levels in the region.

11. 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 from a macro-prudential perspective. Second, the recent global financial crisis has shown that threats to financial stability can emerge from any parts of the integrated financial system and therefore all financial services should be adequately regulated to minimize spillovers. This would also make smaller credit unions more vulnerable in a rapid changing business environment as they are more likely to face serious capacity constraints to properly assess credit and investment risks. Third, the lack of timely and detailed financial data on credit union’s activities together with insufficient supervision would also rule out the opportunity to implement timely remedial measures. The global financial crisis and economic downturn has put ECCU banks’ balance sheets under stressed, resulting in the overall lowering of liquidity and rising non-performing loans. While credit unions faced a similar business environment as banks, the lack of readily up-to-date information has rendered these assessments difficult.

12. The collapsed Trinidad and Tobago-based CL Financial Group exposed weaknesses in the region’s regulatory framework for nonbank financial institutions.9 In the ECCU, the failure of the British-American Insurance Company Limited (BAICO) and Colonial Life Insurance Company (CLICO), subsidiaries/branches of the CL Financial Group placed the financial system under stress, in particular deposit-taking institutions such as banks and credit unions are exposed to the risks of spillovers across countries and between financial institutions. While information on the exact claims by investor/institution remains limited, the combined exposure of credit unions in ECCU member countries to BAICO and CLICO is estimated at EC$84 million. In some countries, the adverse impact on the balance sheets of individual institutions is likely to be quite significant calling for a resolution strategy and a further strengthening of affected credit unions. In addition, indirect impact on banks could also arise through potential lowering of bank deposits by affected credit unions.

ECCU: Estimated Exposure to CLICO and BAICO

(In millions of EC$)

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Sources: World Council of Credit Unions (WOCCU); country authorities and Fund staff estimates.

Capital is defined by the WOCCU as the credit unions reserves; data as of end-2009.

As of end 2008.

As of end-June 2009, according to the November 2009 judicial managers’ report.

Includes Clico Investment Bank, CMMB, and the CL Financial Group.

13. At the same time, the failure of CL Financial accelerated the proposed prudential reforms of the credit union sector in the 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 purse with urgency the finalization of the legislation by the end of the year.10 The objectives of strengthening prudential supervision of credit unions, not different from that on banks, are to protect the savings of the general public and to maintain the stability of the financial system. In this context, the experience from the BAICO and CLICO debacle helped to reduce the potential resistance from some parts of the credit union sector on the need to strengthen regulation and supervision. This has, in part, accelerated the passage of the harmonized credit union legislation in Dominica and Grenada where the credit union sector played a substantial role in the financial system.

14. The new cooperative societies legislation aim to tighten the activities of credit unions through enhancing licensing requirements, establishing prudential standards, enhancing reporting requirements and strengthening enforcement actions. More specifically, the act helps to strengthen risk management capacity, independent auditing, and governance, as well as to increase capital adequacy. For example, in the case of capital adequacy requirement, first, the draft law specified that (also in accordance to WOCCU recommendation) the minimum capital-to-asset ratio should be 10 percent of total assets.11 Components of capital include non-distributable 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. Second, recognizing that building up capital may take several years of retained earnings accumulation, the draft law also specified a certain percentage of retained earnings to be set aside to meet the minimum capital adequacy requirement.12

15. Some progress has been made in establishing a single regulatory unit (SRU) within each ECCU member to regulate non-bank financial institutions including credit unions. All ECCU members, except for 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. There is, however, urgent need to make these SRUs operational and in strengthening their capacity to implement effective regulation and supervision.

ECCU: Status of Harmonized Legislation on Non-Bank Financial Sector 1/

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Sources: The authorities; others.Note:

Enacted (√), Outstanding (x). As of November 10, 2011.

16. In the short term, further consideration should be given to transfer the supervision and regulation of systemically important credit unions to the ECCB.13 Given that credit unions provide deposit and lending services similar to banks, and to the extent that some of the larger credit unions hold a significant proportion of deposits in the financial system, assigning responsibility of credit union supervision of systemically important institutions to the ECCB supervisory authority would have the advantages of integrated supervision thus reducing information arbitrage and making use of existing expertise in the supervision of deposit-taking institutions. During this period, smaller credit unions would remain with national regulators. Within the Caribbean region, for example Belize, Bermuda, and Haiti have already integrated supervision of credit unions under the central bank/regulator of banks, whereas Jamaica and Trinidad and Tobago are in the process of doing so. This could be a short term solution, while a strong regional regulator is being established. It would, of course, call for additional resources for the ECCB, including the hiring of new staff.

17. The establishment of a center of excellent for the sharing of human resources and creation of a regional regulatory authority for non-banks over the medium term should help to overcome the capacity bottlenecks in the ECCU. While the urgent need is to ensure the effective functioning of the SRUs, securing qualified regulators on non-banks financial institutions would likely remain a key challenge. In this context, the ECCU would benefit from moving towards a regional regulatory body to reap the benefits of resource sharing, information sharing and economies of scale in operation over the medium term.

18. The need to improve the regulatory framework would need to include the adaptation of international standards and international best practices including PEARLS and enhancing the scope and frequency of data reporting. The greater use of PEARLS would provide a toolkit to improve operational efficiency for credit union managers and as a supervisory tool by regulators. The timely and publication of these PEARLS indicators would also facilitate data comparison and performance assessment in comparison with the banks which rely on the CAMEL set of financial soundness indicators (see Box 2).

E. Policy Recommendations and Conclusions

19. Given the growing importance of the credit union sector in the ECCU and the risks of spillover to the financial system in the event of shocks, there is an urgent need to strengthen the regulation and supervision framework by making operational the SRUs. Greater information exchange and collaboration between the ECCB, SRUs, and other regulators (e.g., the Eastern Caribbean Securities Regulation Commission (ECSRC)) through the Regulatory Oversight Committee (ROC) will also help to reduce information and supervision arbitrage.

PEARLS Indicators1

The PEARLS financial performance monitoring system was developed by WOCCU primarily as a management tool for managing credit union operations. They are also used as supervisory tool by regulators. There are in total 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. PEARLS monitor:

  • Protection as provisions for loan losses are the first line of defense against unexpected losses to the institution;
  • Effective financial structure as the most important variable that affects growth, profitability and efficiency;
  • Asset quality as the main variable that affects institutional profitability;
  • Rates of return and costs affecting directly the growth rates of an institution;
  • Liquidity management as an essential component of administering a savings institutions; and
  • Signs of growth reflecting member-client satisfaction on product offering and financial strength.

In case there is a difference between the PEARLS standards of excellence and a country’s national standards of performance, WOCCU encourages credit union partners to opt for the more conservative of the two standards.

Selected Key PEARLS Indicators

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Source: World Council of Credit Unions.
1 See details in WOCCU (A).

20. In the short-term supervision of systemically important credit unions should be transfers to the ECCB, and in the medium term consideration should be given to the creation of a regional nonbank supervisory institution and in consolidating the number of smaller credit unions.

21. Merger and consolidation of the smaller institutions would offer benefits. On the one hand, the focus could be on helping the small weak unions survive and improve their functioning, even though they hold only a small fraction of the system’s total assets. However, the number of credit unions in the ECCU is relatively large in relation to its small market size. In this context, the recent merger of credit unions in Dominica is move in the right direction as this 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 overcome capacity constraints in providing effective supervision.

22. Efforts to collect and compile data from credit unions need to be strengthened. Enhance data collection to improve the accuracy and greater effectiveness in the regulation and supervision of credit unions is needed. The lack of data makes difficult to assess and monitor the performance and exposure of the credit unions in the region.

23. Continue technical assistance would be needed from the ECCU. Since the authorities might not have the necessary resources to assess which of the nonbank institutions are viable, continued technical assistance from the IFIs, regional and development partners would be needed.

Appendix Table 1.

ECCU: Selected Indicators of Financial Institutions, end-2010

(In millions of EC dollars; unless noted otherwise)

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Sources: ECCB; World Council of Credit Unions; Caribbean Confederation of Credit Unions; and Fund staff estimates.

REFERENCES

  • Caribbean Confederation of Credit Unions (CCCU), 2010 (available via the internet: http://www.caribccu.coop/cms/)

  • Dominica Co-operative Societies League Limited, 2007 (available via the internet: http://dcsll.org/)

  • IMF, 2004, Eastern Caribbean Currency Union: Financial System Stability Assessment, Staff Report, IMF Country Report No. 04/293, September 2004.

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  • IMF, 2011, Eastern Caribbean Currency Union: 2010 Discussion on Common Policies of Member Countries—Staff Report, IMF Country Report No. 11/30, January 2011 (http://www.imf.org/external/pubs/ft/scr/2011/cr1130.pdf).

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  • Wharton, R., 2010, ‘The Structure and History of Credit Unions as Financial Institutions’, an article of the ECCB Financial Information Month, October 2010 (www.eccb-centralbank.org/…/structure of credit unions.pdf)

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  • World Council of Credit Unions (WOCCU), 2009 Statistical Report (available via the internet: http://www.woccu.org/)

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1

Prepared by Y. Wong and A. Lemus.

2

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 this paper.

3

Under the World Bank Grant Strengthening project, efforts are continuing to develop the regulation and supervision of the sector.

4

As data for the population between 15 and 64 years were not available for the ECCU countries, total population data were used for all countries.

5

For Montserrat, very high penetration ratio could be due in part to account holders who have left after the volcano eruptions. It has a current population of close to 5000.

6

Credit unions are traditionally required to choose their members from a common affinity such as religious organization, occupation or residence in a single community. Such common bond lending has the advantages of enhanced monitoring within the common bond, reputational incentive to repay loans and relationship lending as a substitute for collateral and credit ratings (see Walter (2006)). However, credit unions with a narrow membership base are also more likely to face vulnerabilities due to a lack of diversification.

7

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.

8

Credit unions are typically formed under a cooperative societies act that applies to all cooperatives, including agricultural and commercial cooperatives. The cooperative societies act is also less likely to provide sufficient legal framework for prudential supervision.

9

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

10

A new harmonized cooperative societies’ act was drafted under a joint project of CARTAC, ECCB, and IMF (Legal Department) started back in 2002.

11

Credit unions over certain size in assets may be required to perform the calculation of the capital adequacy ratio using risk-weighted assets.

12

Five percent of the total of net income for each quarter, until the regular reserve equals 6 percent of the assets; and then two percent of the total of net income for each quarter, until the net worth ration of the new credit unions complies with the minimum capital requirement.

13

IMF (2004) identified two credit unions as being of sufficient scale, both in terms of assets and number of memberships, to be considered of systemic importance and as such warranting transfer of responsibility for their supervision to the ECCB.

Eastern Caribbean Currency Union: Selected Issues
Author: International Monetary Fund