Sada Reddy: Microfinance development in Fiji
Opening speech by Mr Sada Reddy, Governor of the Reserve Bank of Fiji, at the 2nd Pacific
Credit Union Congress, Nadi, 14-18 September 2009.
* * *
Distinguished Guests, ladies and gentlemen,
It gives me great pleasure to be here this morning to officiate at the opening of the 2nd
Pacific Credit Union Congress.
This meeting is very timely as we in Fiji are now seriously looking at our policies, institutions
and legislations to see if they are serving the needs of our country and our people especially
our rural population and people who are said to be unbankable.
We are asking serious questions if our existing financial institutions, such as banks and other
licensed finance companies, are delivering the services that we need to bring more of our
economically inactive population in to the mainstream economy.
Therefore, we are putting more focus and emphasis in terms of policies to direct greater
access to banking and other financial services to those who currently do not have access to
such facilities.
These are difficult and challenging issues and many countries continue to struggle in these
areas. There are no easy solutions but we as policymakers, have to continue to persevere so
that economic benefits are shared more equitably and we are able to lift the living standards
of our people.
It is my hope that in the course of your discussions at this gathering, you will examine these
challenges especially as it relates to credit unions.
I would like to thank the Credit Union Foundation of Australia, the World Council of Credit
Unions and the Fiji Credit Union League for hosting this Congress. I believe that this is the
second gathering to be held in Fiji. Thank you for selecting Fiji as your venue.
No doubt this congress provides the ideal opportunity for credit union movements,
governments and regulators to share experiences and learn from one another. I note that
represented at this gathering are credit union volunteers, regulators and professionals, not
only from our South Pacific region but also from beyond.
Ladies and gentlemen, we are meeting at a time when the world is grappling with the worst
financial crisis since the Great Depression. As you know there are some positive signs
emerging that the worst may be over.
However, it is expected that the recovery maybe slow and very uncertain. Therefore, it will be
sometime before our economies will fully recover. This is particularly so for the small Island
economies in the Pacific.
For the benefit of the visitors let me share with you a brief overview of the Fiji economy and
highlight some areas which were affected by the global crisis.
Like most of the other countries the Fiji economy was also significantly affected. But not as
badly as some others. In addition to the global crisis, Fiji also suffered one of the worst
flooding in its history in January this year.
When the year started we were expecting a positive growth of around 2 percent. However,
the double effects of the global crisis and the floods led us to revise our economic forecast
down to minus 0.3 percent.
Some of the sectors which were directly affected through the global crisis were tourism,
inward remittances and exports such as fish, timber, garments, bottled water and some other
manufactured items.
However, I am pleased to say that tourism is now picking up strongly and the declines in
earnings from remittances are slowly reversing. The other exports, of course, are heavily
dependent on the global recovery.
However, as I said earlier, we are now seeing definite signs of recovery in our major trading
partner economies, and if this continues, I am quite confident that most of our exports should
start to recover from next year, if not sooner.
Against this background we are now expecting the Fiji economy to recover modestly at
around 2 percent next year.
Fiji's balance of payment came under severe pressure over the last 24 months and more so
early this year. The foreign reserves dropped very rapidly to below 2 months of imports or
F$430m.
However, assisted by various policies put in place since mid-April, the foreign reserves have
recovered strongly and are over 3 months of imports or F$980m as of last Friday. One of the
major policies was the devaluation of the F$ by 20 percent on 15th April this year. This
devaluation became necessary as the Fiji $ appreciated significantly against two of our major
trading partners, namely Australia and New Zealand.
At one stage early this year, F$ was even stronger then NZ$. This was unsustainable. The
reason for F$ to strengthen was not because of any inherent strength in the Fiji economy, but
was largely due to the global crisis which led to NZ$ and A$ depreciating significantly against
the US$.
I am pleased to say that with the level of reserves now reaching a comfortable position, the
Reserve Bank has eased credit policy by lifting the credit ceiling that was put in place in
December 2006.
Interest rates are now trending downwards with liquidity in the banking system at around
F$270m, which is over five times the normal level. The banking system liquidity had
tightened substantially to around F$15m in March this year.
We are now seeing more positive investor and consumer sentiments especially with much
improved financial conditions.
Ladies and gentlemen, with this brief up-date on the Fiji economy let me now address some
of the issues in relation to credit unions.
The importance of Credit Union in economic growth
The Credit Union movement plays a very important role in facilitating economic growth in a
country. You are more than an intermediary that facilitates the mobilisation of savings for
productive use.
You are also the trustee of the hard earned savings of your members. Efficient and effective
use of the members' savings will grow the benefits to them and in turn also grow the
economy.
It is interesting to note that the credit union movement fosters the very basic principle of
cooperatives. I am told that the first credit union was founded on mutual cooperation of local
farmers in Germany during the late 1840's who agreed to pool their savings and lend to one
another at reasonable interest rates. Underlying this business concept is the determination to
improve each other's living standard. The key ingredient that underlies the foundation of a
credit union is that there must be a "common bond".
Credit unions enable members to own their own financial institution that gives them the
opportunity to enhance their living standards through business entrepreneurship, building
family homes, enables the provision of education and meets the provident needs.
Let me share with you some statistics on credit unions in our region.
The data produced by the World Council of Credit Unions in 2008 for the Oceania region
including Australia and New Zealand is revealing.
It showed that:
•
There are a total of 282 credit unions, 135 of which are outside of Australia and New
Zealand;
•
Total assets equal to around US$37 billion. Of this, Papua New Guinea accounted for
US$222 million and Fiji US$29 million;
•
Savings totaled US$27 billion whilst loans disbursed was US$25 billion; and
•
In the areas of savings and loans, PNG (US$119m savings and US$63m loan) and
Fiji (US$22m savings and US$24m loans) are dominant outside Australia and New
Zealand.
These figures show the significant impact and contribution that Credit Unions can have in the
economy through generating savings and creating wealth and providing financial services.
However, credit unions do face a lot of challenges in terms of growth and governance. I know
for certain, that in Fiji, we have a lot of issues in the area of credit union governance.
I am told that the Fiji Credit Union League membership has fallen from 180 in 1991 to 45 in
2008. It will be interesting to see the reasons behind this decline. Having said that let me also
acknowledge that we have a number of sizable Credit Unions that are very successful and
have grown from strength to strength over the years.
There are a number of issues Credit Unions need to take account of in order to remain
viable. I wish to raise these in the hope that it will stimulate discussions during your
congress.
Let me start with governance oversight and risk management.
The global financial crisis brought to the forefront the issue of failure in the governance
oversight functions and risk management.
The governance oversight functions of the board, senior management, risk management,
internal audit and compliance, practically failed in not proactively detecting what was
happening.
They all failed to accurately assess the liquidity issues surrounding the subprime mortgages
and were ineffective in their duties. The laxity in the governance oversight functions as a
result, cost tax payers billions of dollars in the bailout by various governments of the affected
financial institutions and industries.
What happened also heightened the concern over unwarranted risks. Financial institutions
continued to accept risks well above their required risk margin, given their resources. Since
the crisis, the whole focus of good governance and risk management has again come to the
forefront of doing business.
How do these issues affect Credit Unions?
Credit Unions, like banks and other financial intermediaries, are not immune to risks. Of
course, there are certain risks that would be assumed within organisations, whilst others
would not.
In your case, risk management is about managing risks that will impinge on the capital and
earnings of your institutions. Unlike banks and finance companies, where capital injection is
always a viable option and can be raised in the market place, I am not so sure if this is all
that readily possible with Credit Unions, given the fact that it is the members who will need to
fund the required capital. The more the risk, the more exposed the Credit Union's capital
base and earnings.
What will this do?
This can no doubt undermine the viability of a credit union if not addressed urgently.
Members could lose confidence in the Credit Union. They may not place their hard earned
savings with the institution out of fear of not deriving the intended benefits. If the credit union
movement is sizable, it can have major destabilizing effects on the financial system. It is for
these reasons that some countries have allowed for legislation which puts the responsibility
of licensing and supervision of Credit Unions with the Central Bank of the Country.
Allow me to elaborate on where the Credit Unions in Fiji stand with some of these
issues.
Governance structure
Firstly, the legal environment that embraces credit unions is very important. The financial
systems and markets have, in recent times, undergone substantial structural changes. We
are seeing major improvements in technology and a number of complex and sophisticated
financial products in the market place.
With these changes taking place around us, credit unions will need to relook at their
legislative environment to ensure that they do not become archaic and hence fall behind in
developments.
The Credit Union Act in Fiji was enacted in July 1954. The Act should be reviewed and
modernised to take account of the dynamic changes taking place in the financial systems
both domestically and internationally and should include new financial innovations.
The current Act incorporates a structure that, in my view, falls far short of good accountability
practices. The Act provides for a Registrar of Credit Unions. The registrar, I gather, does
nothing other than to just register credit unions.
We have the Fiji Credit Union League (FCUL) that mainly provides training support for credit
unions. The FCUL does not have any legislative backing and the credit unions basically run
their operations unsupervised by any outside agency.
Within the Credit Unions, the Act requires the formation of a Board, a Supervisory Committee
and a Credit Committee. The Board basically sets policies whilst the Supervisory Committee
is meant to play the internal audit role. The Credit Committee is responsible for approving
loan applications. These committee members, who are also members of the credit union, are
elected by members.
The present structure, in my view, has a number of weaknesses in terms of governance that
needs to be looked at.
In this regard, I am pleased to inform that the Reserve Bank of Fiji will shortly be carrying out
a study to find out what needs to be done to improve the governance standards of credit
unions in Fiji. This will also involve a thorough review of the Fiji Credit Union Act.
This review is also expected to make recommendations to the Fiji Government on the
appropriate licensing and supervision arrangements for the Credit Unions in Fiji as we move
forward so that we have strong and thriving credit unions in Fiji.
Fit and proper
We need to have fit and proper persons to manage the credit unions. The choices by
members as to who should be, and who should not be, committee members may not always
meet stringent fit and proper requirements.
In other words, selection could be made based on friendship rather than the prudent qualities
required in a fit and proper selection. Where inappropriate people are appointed, wrong
decisions and mismanagement are bound to happen.
I mentioned earlier the large decline in the number of credit unions in Fiji. It is my
understanding that many of the credit unions in Fiji have disappeared due to
mismanagement and incompetent managers.
The Reserve Bank has issued Fit and Proper Guidelines to the financial institutions it
supervises. These guidelines lay out stringent requirements for fit and proper persons and
qualities of the board, senior management and staff of these institutions, in particular, those
holding responsible positions.
It is my view that the credit unions should likewise adopt fit and proper guidelines so as to
ensure that people selected, will conduct themselves in the best interest of the members.
Delinquent loans
Another issue of concern is the area of delinquent loans. I am told that the loan delinquency
rate is quite high in Fiji. This has the impact of reducing the credit union pool of funds and the
worse this is, the more the negative perception this has on members, who may in turn
withdraw their membership.
Liquidity
Liquidity management is also an issue where there have been experiences of liquidity
shortfalls and hence liquidity risk. This happens when there are mismatches in the assets
and liabilities of the credit unions and in particular when there is a tendency that more loans
are given out that can jeopardize the cash flow positions of credit unions. This is why I was
baffled by the statistics on Fiji where Fiji credit unions lend more than they are receiving
through members' savings.
Technology
Technology is another issue that has significant impact on the operations of credit unions.
Transactions are of small value and the administrative load can be cumbersome. A good
computer system is needed to improve efficiency and effectiveness of cost. I am aware that
some of the credit unions do have computer systems whilst there are others who do not. For
those that have them, most need their system to be upgraded to a more capable system.
Availability of data
Data collection is a problem area. It is very difficult to study the operations of Credit Unions if
there are no effective data on individual unions and on the industry as a whole. It will be very
useful if the Fiji Credit Union League had a centralised data system that was able to capture
the operational data and which can be used for analysis by the Credit Unions themselves
and also by the public. I am sure that Fiji is not alone in this area of data collection. Your
colleagues in the Pacific probably share the same challenge.
Information flow and reporting to members
On information flow and reporting to members, this is an area I gather that is currently very
weak and creates transparency issues. Proper, timely and accurate reporting on the
operations of the credit unions to members is paramount to ensure transparency. Members
must not be kept in the dark. Dissemination of timely and accurate information is a key
ingredient to good governance structure. The use of efficient and effective technology will
assist in this area.
Let me now turn to the important issue of being innovative.
Credit unions must be innovative in the provisions of its services to compete and to stay
ahead. Credit unions have the potential and structure to reach people of all walks of life,
including the poor.
Credit unions were founded on the premise of their outreach to the needy and low income
earners. In order for credit unions to serve their intended target group and to grow, they need
to be innovative in diversifying membership base, their product range and use of new
technology.
There are many people in our countries that do not have access to credit and financing
facilities that are offered through the formal banking sector. Within the embrace of the
"common bond", credit unions can canvas for a broader membership base by encouraging
these people to join.
In so doing, it is not enough for credit unions to only offer the traditional savings and term
deposit and loan products. Savings products must be innovative enough to target the poor.
The poor must be given innovative savings products that will enable them to abide by the
"save first" principle before they can be given a loan. The same applies to their loan products
where these are available for all members of the credit union, including the poor.
Credit unions, thus, should be able to offer a wide array of facilities and amongst others - (1)
varying savings and loans products; (2) debit and credit cards; (3) money transfers; (4)
leasing; (5) investment products; (6) sell investment instruments & foreign currency and (7)
even insurance. In some countries, the list of services offered by credit unions can be quite
large.
Credit unions must resort to the use of technology in order to stay in competition with other
financial institutions. Various technological innovations are available to enable the provision
of services to the members and to the poor. For instance, networking technology with other
credit unions, enable members to access services at any credit union.
The use of money transfer linkages through credit unions could be another vital service in
particular for us in the Pacific where remittances is a major contributor to our GDP.
You need to be aware of technological developments around you and stay ahead of the
game. Otherwise, competition will drive your members to other institutions.
In tandem with the development of products and services, including the use of new
technology, credit unions must be an advocate of financial literacy.
There are underprivileged out in the rural, peri-urban and urban areas that do not have
• access to credit;
•
are not familiar with the mechanism of savings & loans;
•
financial & investment products; and
•
need to be educated on basic financial management.
Credit Unions have a primary role to play in this area and in particular, members must be
well informed and educated in financial matters.
Let me round off by touching a bit on the intentions of the Reserve Bank of Fiji in
having the poor or those considered non-bankable being provided access to credit
and financing facilities so as to help reduce poverty.
The Reserve Bank has been in the forefront of the development of microfinance in Fiji. Since
the RBF and Government co-hosted the first Fiji national conference on microfinance in 1998
and the subsequent formalising of the microfinance unit, the RBF has played a more
promotional approach to microfinance, in the sense of open advocacy, advisory to
government and moral suasion of commercial banks to contribute to this important area.
In April this year, we at the Reserve Bank, decided that things needed to change and we
needed to pick up the pace. We needed to be more involved if things were to move in this
particular segment of society.
We have formed a new department within the Bank to specifically drive the developmental
pace of microfinance and initiatives of reaching the poor and the unbanked in Fiji. We have
given the banks and financial institutions certain instructions to increase their involvement in
microfinance.
We have also encouraged the use of local resources in Fiji in sectors such as tourism. This
should also facilitate development of small and medium enterprises (SMEs), which is a
potential business area for your members.
Again, this would require you to think innovatively and present such opportunities to your
members.
I am certain that the Credit Unions have a lot to offer for the poor and the unbanked in our
countries and it is well within your reach to do so.
Concluding remarks
To sum up, ladies and gentlemen, I want to acknowledge the vital role played by the Credit
Union movements in meeting the needs of our people. The benefits derived from credit
unions are manifold as seen from the improvements in the living standards of members.
Assets are accumulated and savings are encouraged to help improve the livelihood of
members.
Credit Unions need to take on board good governance and risk management practices so as
to minimise losses to capital and hard earned earnings.
The legal framework needs to be reformed to allow for modernisation and innovation. The
governance structure is very critical to the success and growth of credit unions.
Fit and proper guidelines should be followed in the election of Committee members.
Members need to be kept fully informed of the operations of their credit union. Data collection
through a centralised data system will help in better positioning the credit union industry.
Lastly, credit unions need to be innovative in diversifying products and use of technology. We
believe that the Credit Union Movement is an ideal vehicle to reach the poor and less
privileged and I wish to again reassure the Movement in Fiji that the RBF will partner with
you to outreach microfinance development to this sector of our population so as to make a
positive impact on the lives of our people.
The Reserve Bank values the contribution made by the Credit Unions in Fiji and hopes that
the Movement will grow and expand in the future with the right kind of governance
framework.
I know that you will have a lot to discuss and share in this Congress. One of the better ways
of success is to learn from one another's experiences and with the attendance, like the one
we have here today, I am sure that the outcome of this Congress will be a success.
With those words, I wish the Congress well and it is my privilege and honour to now declare
the 2009 Credit Union Pacific Congress officially opened.
Thank you.