1 Dave Grace World Council of Credit Unions Senior Manager Dave Grace World Council of Credit Unions Senior Manager

2 Presentation Agenda Auditing standards in credit cooperatives Earnings distribution Requirements for an adequate legal framework for financial cooperatives

3 Represents >120 million credit union members in 85 countries worldwide. Manages long-term TA programs to develop, strengthen, & modernize credit union systems Africa, Asia, the Caribbean, Central Asia, Europe, Latin America, & the South Pacific. Works to create a appropriate legal & regulatory environments for safe & sound credit union operation Who is WOCCU

4 Credit unions (a.k.a. credit cooperatives) are financial cooperatives that are user-owned MFIs offering savings and credit services Depending on a countrys legal framework, credit unions may be authorized by Superintendency of Banks, Central Bank, Ministry of Finance, Ministry of Cooperatives, or freestanding law to mobilize savings. About Credit Unions

5 Auditing standards Traditional Supervisory Committees in credit cooperatives –The traditional role of Supervisory Committees has evolved to an External/Internal Audit committee in credit cooperatives –Strong preference for annual external auditor and periodic internal audits to be conducted be qualified external professionals (internal audits can be performed by staff reporting to Audit committee) –Only in very, very small institutions should this be contemplated to be accomplished by volunteers and even then minimum criteria exist

6 Role of the External/Internal Audit Committee Perform or preferably, appoint an external professional auditor to review records within 90 days of close of fiscal year Perform or preferably, contract professionals to conduct frequent internal audits throughout the year covering operations, regulatory compliance and internal controls Present audit findings and annual audit to full board of directors and annual general meeting Follow up on all recommends made in audits Ensure independence and non-obstruction of annual and internal periodic audits

7 External/Internal Audits should include Evaluation of assets, liabilities & capital Verification of cash balances, securities and all member accounts Examination of delinquent loans Loan loss provisioning Loans to officials & loan documentation Accounting treatment used General ledger & subsidiary ledger balancing Compliance with laws, regulations & bylaws Review of suspicious activity

8 Prudential Auditing - Supervision Range of Preferences: - Direct Supervision of all credit coops by government financial sector regulator– UK, Australia, US, most english-speaking Canada, Ireland, Costa Rica, Colombia - Direct Supervision of the large ones – Ecuador, Bolivia, Chile and Uruguay Delegated supervision: Much of western Europe, Qubec Canada, Mexico Self Regulation: Peru, Jamaica

9 Earnings Distribution The first priority is capitalization to a level required by regulation and based on business needs What is capital in a credit cooperatives –Regulatory reserves –Retained earnings –Donations/grants –Year to date net income that has not been closed to retained earnings –Ownership shares are not capital unless it they are permanent and unencumbered. See International Accounting Standard 32

10 Earnings Distribution Only after the organization is adequately capitalized should it consider an ownership share dividend Dividends on demand deposits should paid monthly as the business model permits

11 What is needed for strong credit coop legislation Specific law for financial cooperatives –Separate from the general cooperative sector because of technical aspects of financial intermediation –Separate from banking because of cooperative ownership and governance structure –Separate from specialized laws that do not address savings component

12 Requires Macro conditions Economic stability Efficient & effective judicial system Effective enforcement Open economy and private markets Property rights & collateral Core Principals for Legal Framework

13 Core Principals for Legal Framework WOCCU survey of over 100 countries indicates those countries with unique laws and strong financial sector regulation for credit cooperative have the most sophisticated credit coop systems = OUTREACH

14 Legislative Tools Model Law for Credit Unions – model legislation for credit cooperatives Guide to International Credit Union Legislation – provides digests of actual credit cooperative laws and regulations in over 100 countries Both have been updated in 2005

15 Thank you. Dave Grace World Council of Credit Unions