1. What are credit unions?
|
|||||||||||||||||||||
In 2006, WOCCU's annual survey of 97 countries identified over 46,000 credit unions serving 172 million people. Global credit union assets surpassed the US$1 trillion mark and credit unions were entrusted with over US$900 billion in member savings.
2. Vital facts about credit unions
While the basic principle of member ownership is the same, credit unions in one country or region often differ from credit unions in another. The level of sophistication, the products and services, and the quality of management varies widely. WOCCU tracks specific data for the credit unions with which we have active programs, but data quality is difficult to ascertain due to the absence of data processing systems in many movements.
In mid-2007 sample data from 96 credit unions in Mexico, Colombia, Ecuador, Philippines and Sri Lanka gave us the following information about savings and loan accounts.
What we see are a large number of small depositors and a very mixed distribution of borrower loan sizes. The data validates the reputation of credit unions as entities that provide financial services to a wide range of poor and middle income clients. The diversity of credit union membership is one reason these institutions are able to keep costs low for all clients, including the poorest.
3. How do credit unions provide savings services?
Credit unions are founded on the belief that all people save, sometimes in cash and sometimes in other assets such as gold, cattle, or crops. Poorer households are just as likely as richer households to practice some form of savings. In our experience, most credit union clients rate the safety and security of their savings as their first priority. The return they receive on savings/investments (or the interest rate) is secondary in importance; however, as local markets become more competitive, CU clients often shop around for the best return.
WOCCU promotes a strategy of reaching out to both rich and poor savers because a blend of deposit accounts helps defray the costs of managing many small micro accounts. We also promote the use of user-friendly products for poorer clients such as eliminating minimum balances and hidden fees; maintaining attractive office hours (i.e., early mornings, evenings, and weekends); reducing lines; and paying attractive rates of interest. We are now experimenting with the use of group models and IT solutions to reach out to members (and potential members) in remote rural communities.
The main challenge credit unions face in mobilizing savings is convincing their members that their savings will be safe, well-managed, and available when needed. Once that is overcome, credit unions are most successful at savings mobilization when they offer a variety of demand-driven products and competitive rates of interest. As a general rule, we find credit union savings rates are a point or two above the rates paid by commercial banks. Loan rates are also very competitive because credit unions are not in the business of maximizing the return. When members apply for a loan, credit unions use their savings history as one measure of repayment capacity.
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||
4. How does the credit union movement compare with SHGs?
The main difference between credit unions and SHGs is the degree of formality that exists in organizational structure and delivery of services. Both SHGs and credit unions mobilize deposits from their members, and they use those deposits to make loans. However, credit unions have more formal structures, written policies and procedures, formal accounting and internal control systems, and they provide a wider range of savings and loan products to their members. Credit union members are required to save as a precondition to obtaining access to other services, but credit unions do not have "obligatory" savings requirements beyond what is required to open an account.
Regardless of the differences, WOCCU applauds the use of SHGs to help the poor obtain access to savings and loans. We share a belief in the importance of savings (particularly to poorer households), and we share a belief in providing the poor with access to loans.
WOCCU emphasizes institutional permanence and the long-term availability of financial services. We also believe in the importance of safety and soundness in managing member savings, as well as the use of competitive prices for both savings and loans. We discourage the use of external financing except for longer term investments such as home construction, and we promote diversification as a key to institutional stability. We have found that providing services to clients with a broad range of incomes is very important to reaching out to the very small saver in a sustainable way.
5. How do credit unions and SHGs relate to the rest of the financial sector?
Savings and loans:
Credit unions mobilize small deposits and make loans for micro and small businesses just like any other microfinance institution; however, microenterprise lending is not an exclusive line of business. Credit unions lend for a wide range of household needs including housing, agriculture, consumption, and emergencies. Typically, microenterprise lending represents about 30% of credit union loan portfolios.
Other financial services:
Credit unions provide a broader range of loan and savings products at a much cheaper cost than do most microfinance institutions. Credit union networks are also larger and possess greater outreach than do most MF institutions. In Latin America, our remittance programs had a significant impact on lowering the overall cost of remittance transfers when we competed directly with Western Union. Many credit union systems offer insurance products (credit life and savings protection) to their members as an additional component of household security.
Microfinance institutions and SHGs are primarily credit-oriented institutions wherein savings are more often mobilized for their collateral value rather than as a source of operating capital. Legal restrictions, the small size of most SHGs, and the absence of networks limit the range of financial services SHGs can offer. SHG bank linkage programs [such as those in India] are reported to have helped overcome liquidity constraints within SHGs. However, there are but a handful of such examples, and most of those are dependent upon government subsides for their continued existence.
6. What are credit union benefits for clients?
Credit unions provide value to their member-owners by providing them with a safe, secure place to save and access to loans when needed. Credit unions don't try to maximize profitability by charging high fees or rates of interest because they are owned by the people who use their services. Most commercial banks will not offer financial services to low income clients, and if they do, they often charge high fees or require high minimum savings balances, hurdles that are difficult for the poor to overcome.
There is also a striking difference in pricing between credit unions and most micro-credit institutions. Interest rates on credit union loans are often well below what is charged by the more strictly focused microfinance institutions. Some people argue that interest rates are not as important as access, but WOCCU does not share that view. Keeping transaction costs as low as possible is particularly important to the poorest households who have scarcest quantity of disposable income.
7. What is your message to funders and governments?
Credit unions offer financial services to clients that commercial banks typically ignore. Credit unions have a long history as the financial institution of choice for millions of poor and low income people, and they thrive by mobilizing small deposit accounts and making loans to meet the many different household needs of their client owners. If we believe access to financial services is important to economic development, the potential of the credit unions and their ability to reach out to the unbanked should be considered by donors and governments.
8. What are the challenges to the cooperative/credit union model? How can they be addressed?
The international credit union industry is small compared with other depository institutions, and there are many millions of people who lack reliable access to reasonably priced financial services. The biggest credit union challenge is how to achieve massive scale without weakening the financial management disciplines that are so important to safe, sound credit union operations.
Other key challenges include: taking financial products and services to the clients in remote or difficult-to-reach communities; replacing old IT technology, software and back office systems with newer, more efficient tools; overcoming governance weaknesses; retraining or replacing large numbers of unqualified credit union staff; and reversing overly conservative operating policies and processes that weaken the ability of credit unions to reach out to the poorest clients.
WOCCU has a credit union model that works and that has been successfully applied in many different countries. We are now focusing our attention on the issues surrounding massive scale: we are experimenting with different IT solutions to lower transaction costs and to reach out to poorer clients, and we are developing (with support from CGAP) a ratings tool that addresses the issues of transparency and governance.
The international credit union industry is maturing with a greater diversification of products and services. In the future, we expect to see more disciplined, transparent, and effective credit unions that will increasingly take on more of the features of mainstream financial institutions while serving greater numbers of the unbanked.
Related links:
- WOCCU
- WOCCU 2006 Statistical Report
- Focus Access, Dec 2007. Credit Unions Provide Entry to the Financial System
Barry Lennon
Mr. Lennon is a Senior Vice President with the World Council of Credit Unions. He manages the Washington Office of WOCCU and is responsible for relationships with donor organizations and the international development finance community. Mr. Lennon is a member of the corporate management team and he provides direction to WOCCU's overall strategies and technical interventions in many different international programs. Mr. Lennon has thirty-seven years of experience in international financial system development, and he has specialized in programs targeting the delivery of financial services for rural and low income populations throughout the world.
1 A group of credit unions represents a "movement"