Comparative Analysis of Credit Unions’ movements in Europe and Central Asia

1. Strengthening Financial Cooperatives in Eastern Europe and Central Asia Baku, Azerbaijan, November 10-11, 2004 Comparative Analysis of Credit Unions’ movements in Europe and Central Asia Igor Gorashov, Consultant, World Bank

2. Objectives • The objectives of this presentation are: • to observe and state commonalities and differences in national CUs’ movements of those countries proposed for analysis • to determine the main obstacles in movements’ past development and learn from each other experience of their solving • to identify weaknesses in current developments and propose ways for future cooperation between the movements, local and central governments and other stakeholders

3. Outline Overview of CUs movement History of the movement Current development Member profiles Products and services Legal framework Institutional framework Trends and issues

4. Commonalities in the history of the movements • Previous credit unions’ history starting from the 19th century; • During World Wars and during soviet times in majority of these countries the credit unions’ movement, formally, ceased to exist (exception – Romania); • Collapse of the Soviet system – the credit unions revived • Very few re-started with external donor support (except Albania, Lithuania and Moldova) and when this assistance appeared it was often quite fragmented with a weak donor coordination there • Almost all (except Albania, Lithuania and Moldova) revived based on a solid legal framework prior actual implementation • With few exceptions (Albania, Lithuania and Moldova), all the others have suffered from atomization of the network and required an important effort to move toward its federalization

5. Lessons learned • Adequate legislation is one of the key of successful and long term sustainable CU development • Important role of the State in national strategies, legislation, supervision and No interference in the CUs daily activities • Effective accounting and reporting system with strong supervision • Need for high professionalism of CUs management • Commercial Banks and CUs - partners instead of competitors • Strong and viable CUs network institutions as condition for a strong and viable network • Weak transfer of knowledge to businesses as a serious obstacle for successful development and operations’ extension

6. 7 Main Common Characteristics • Modern history of less than 10 years • Predominantly serve physical persons • Pro-poor focus • Cover less than 1% of countries’ population • Extremely fast growing speed • Mostly credit oriented, weak savings mobilization • Strong willingness for further development

7. Overview of selected countries and their CUs’ movements

8. Overview of selected countries and their CUs’ movements (continuation)

9. Current developments Growth of the CUs’ system (2000 – 2003)

10. Current developments Growth of the CUs’ system (2000 – 2003) (continuation)

11. Current developments Performance indicators Country Indicator

12. CU’s Members • Credit union members - in different countries, different requirements regarding membership: • Only natural persons (countries) • Both natural and legal persons (countries) • Common key membership conditions: • belong to the defined common bond; • pay membership share; • accept and obey bylaws of the credit union. • Besides ordinary members, some CUs’ may have also associate members (Lithuania). • Associate members enjoy the same rights of a CU member, except • the right to vote • the right to be elected to the management and control bodies of a CU.

13. Services offered by CUs Country Services

14. Services offered by CUs Lending services Country Types

15. Services offered by CUs Non-financial services Country Services

16. Key legislative/regulatory requirements (by countries) Country Norm

17. Supervision mechanism • Four types of credit unions’ systems: • State supervision mechanism set up by law and performed by the Central/National Bank (Albania, Azerbaijan, Lithuania, Uzbekistan) • State supervision mechanism set up by law and performed by the Ministry of Finance or a specialized supervisory body (Moldova) • State supervision mechanism set up by law delegated to the National or Regional Association/Federation (Romania) • Un-formal supervision mechanism performed by the National or Regional Association/Federation (Russia)

18. Other institutions of CU’s network Country Institution

19. Weaknesses • Insufficient capacity of the State Supervisory Body to ensure adequate supervision of CU network • Often excessive reliance of CUs on external funds • Low CUs sustainability due to the small size and boundary limitation • Lack of loan portfolio diversification • Limited capacity and competence of CU staff • Insufficient internal control and lack of external audit • Lack of deposit insurance mechanism

20. Trends and issues in sustainable development of CUs • Adjustment of the legislation to new realities and more pro-banking standards, but not loosing the CU’s origins and advantageous achievements • Establishment of a proper supervision system • Search for alternative and/or additional financial resources • Need for training function institutionalization • Portfolio diversification and more attractive savings offer • Promotion of the “one system – different pockets” principle • New technologies (on-line services, plastic cards, etc) • Donor dependence exit strategy development • Others

21. Challenges (strategic) • Elaboration of National Strategy on Micro-finance Sustainable Development and its eventual implementation • More than finance – financial (micro financial) + business develop providers • Provision of support to encourage mobilization of long term savings • Encouraging active involvement of local commercial banks • Provision of support on sustainable development of main micro-finance institutions

22. Challenges (legal framework) • Amending the CU Law to eliminate impediments to future development • Development of legal framework on deposit insurance • Development of legislation framework with combined membership of natural persons and legal entities • Improving legislation on collateral, including movable • Develop mortgage and leasing legislation • Preparing an Overall Legal Frame for MFIs

23. Challenges (institutional building) • Institutional consolidation of the State Supervisory Body with provision of stable and sufficient funding • Ensuring operation of the National Federation as a self-financing and sustainable institution • Transformation / formation of the Central Finance Facility into a fully operational commercial bank • Establishment of a Cooperative Insurance Company by CUs and other MFIs • Establishment of Savings Insurance Agency to provide insurance of CU member savings

24. Challenges (implementation) • Vision • Strategy • Consistency • Insistency • Patience

25. Thank You and Good Luck! www.worldbank.org.az