1 When to Hammer and When to Help: Resolution Strategies for Problem Credit Unions Presented by Mensima MacNally-Boateng December 2, 2010

2 In Africa, credit unions play a vital role in stimulating economic growth by providing loans and other financial services to microenterprises. Turner (2000) defines a credit union as, “a financial self-help co-operative which encourages members to save money together. Pooled resources are then used to provide low- cost loans to members.”

3 He again states that, “a credit union operates within a clearly defined area of location and a mutual link must exist between all members. This link is known as the common bond of the credit union. The common bond may be based on all members living in the same locality or all members working for the same employer”.

4 Often, credit unions provide the only savings and credit opportunities to sole proprietors and small businesses. Customers therefore patronize these institutions for a variety of reasons. According to Aryeetey et al., 1994, research has shown that people patronize microfinance institutions, including credit unions, for a number of reasons. Among the reasons are:

5 Flexibility and adaptability of their services to the needs and work patterns of the rural and urban poor. Such customers normally lack access to institutionalized banking because of their small deposits and their lack of collateral. Person to person contact between collectors of contributions and the client ensures confidentiality in the financial transaction. Opportunity is provided for individuals to save small amounts which can be accumulated as start up capital.

6 In Ghana, a large proportion of credit unions are very small and may have fewer than 200 members. They are usually formed by colleagues in workplaces, trade unionists, among church members or among traders all on informal basis. However, in recent times the membership structure of credit unions has changed necessitating the need for the formal regulation of these institutions. It is for this reason that in Ghana the Non-Bank Financial Institution Act, 2008 (Act 774) makes provision for the formal regulation of credit union operations.

7 The Act gives the Bank of Ghana the discretion to appoint an authorized agent to regulate and supervise specified activities of a category or class of non-bank financial institutions. It is for this reason that Credit Union Regulations dealing with matters of licensing, capital, supervision, financial standards and corporate governance, among others, have been drafted.

8 The Regulations (proposed) provide for the appointment of the Board of the Credit Union Association (CUA) as a Supervisory Board to complement the supervisory work of the Bank of Ghana.

9 It is worthy of note that Credit Unions in Ghana face challenges such as: - lack of business orientation - lack of qualified board members - lack of good record keeping - problems of financial reporting and interpretation It is for this reason that the regulation of credit unions must not be all about hammering institutions that violate laid-down regulations but rather seeking ways of helping those facing problems.

10 Some resolution strategies for problem credit unions are discussed below: In the first place, credit unions must be subject to some form of regulation by a supervisory authority. This will enable the Authority monitor the performance of the union and determine whether institutions on whom requirements are imposed by regulation are complying with them.

11 Persons responsible for managing the business of the credit union must be duly held accountable. They ought to be required to develop and maintain adequate systems and controls for managing potential risks to the business.

12 Again, it is the responsibility of those managing a credit union to ensure that the firm acts in compliance with regulatory requirements. Where a credit union subject to regulation falls short of these requirements, the regulatory authority must ensure that action is taken to correct this and address the risks involved.

13 Usually, this is possible through persuasion and dialogue, rather than the use of enforcement powers and penalties. In order to meet its objectives, a regulatory authority may include the following tools in monitoring and supervising credit unions:

14 desk based reviews analysis of periodic financial returns inspection visits

15 make recommendations for preventive or remedial action provide guidance and, where appropriate, impose individual requirements

16 Apart from satisfactory regulation, the board of directors of credit unions must take a key role in shaping the business operations and risks of the institutions they have oversight responsibility for.

17 Even though economic conditions are a major influence on a credit union’s well being, arguably, the most important factor in the success of a credit union is the quality of its management.

18 In most cases, the failure of credit unions in both regulated and unregulated environments is as a result of mismanagement.

19 Consequently, it is essential that a capable management with the ability to manage the day-to-day operations of the credit union’s performance goals is appointed.

20 A brief highlight of the basic responsibilities of the board in actively overseeing the affairs of a credit union is discussed below:

21 Establish a compliance program emphasizing the importance of regulatory compliance as an inherent part of credit union operations, and this must include the credit union’s own policies and procedures.

22 Hire and retain managers with the skills, knowledge, and experience appropriate for the scope of their responsibilities. Review operating results, audits and compliance performance of new and existing activities.

23 Ensure that the credit union serves the credit needs of its members. Finally in addition to a competent board, it is essential that the key management staff of the credit union are well qualified to ensure the following:

24 That the credit union complies with laid-down laws and regulations. That concerns raised in audit and examination reports are resolved.

25 That approved board policies and directives are complied with. That concrete steps are taken to ensure that the credit union’s strategic plan is implemented.

26 In conclusion, it can be argued that for credit unions to be competitive they must be helped (rather than hammered) to develop operational strategies and adopt structural forms to meet the challenges of their environment.

27 Current changes in the financial sector have created a challenging environment for financial intermediaries, including credit unions. Consequently, credit unions must be guided through regulation to promote their sustainability.