The Effects of Using Credit Unions as on Lending Agents for External Lines of Credit: The Experience of the International Credit Union Movement

This paper examines the position of the World Council of Credit Unions [WOCCU] in promoting the establishment and strengthening of credit unions during the past twenty years.

It describes the role of the World Council, examines the problems it has encountered in its work, and summarizes the lessons learned, using case examples of the credit union movement in Benin, Togo, and Lesotho. The study points out that the use of credit unions as conduits for external lines of credit may serve the short-term needs of a donor efficiently. It will not, however, make a bad credit union good, nor make a weak one strong. It may, if implemented properly, help make good credit unions better.

In order for this to happen, the study suggests six conditions that need to be met:

• Credit unions should be required to qualify for these lines of credit. Need and/or desire for credit and donor goals are not qualifications for participation;
• The various "players" - credit unions and their associations, donors, and technical assistance providers - need to have a clear discussion of each others' goals and objectives, approaches, and constituent considerations;
• The availability of a line of credit should be structured in a way as to serve as an incentive for credit unions to adopt and implement good policies and practices, rather than as a means to avoid doing so;
• External lines of credit should never be the principal source of loanable funds of a credit union;
• Criteria must be agreed upon not only for qualifying for the line of credit, but also for performance in its use;
• The commitment of and the use of external lines of credit should not be open-ended. It should have an agreed upon date or an agreed upon set of conditions for the conclusion of its use.

The study points out that the following actions are required:

• Need for further investigating the financial performance of credit unions using external lines of credit in comparison to control groups of those which do not and to credit unions as a whole. This should permit credit union associations and promoters to further refine their understanding of the lessons learned.

Based upon this information and the considerable body of reports on the subject, a "how-to" (and "when-not-to") manual for both donors and credit unions and their associations should be prepared.