Ewart S Williams: Building individual and organisational capacity
Feature address by Mr Ewart S Williams, Governor of the Central Bank of Trinidad and
Tobago, at the Co-operative Credit Union League, Launch of Events Calendar 2011,
Chaguanas, 26 January 2011.
* * *
I wish to thank the Co-operative Credit Union League for the invitation and extend a Happy
New Year to you and your organisations. It has been some time since I have met with the
credit union movement, so I welcome this opportunity.
You have suggested that I address the topic "Building Individual and Organisational
I am not sure that I could tell you much about this, since your credit unions, in
Capacity".
order to survive in this increasingly competitive environment, have had to expend
considerable efforts in capacity building. I, however, welcome the opportunity to offer my
variation on this theme since, in my view,
the outlook both for the economy and for your
sector will require you to intensify and, indeed, broaden your capacity building efforts,
if you are to maximize your contribution to your membership and adhere to the new
regulatory paradigm that is on the way.
Permit me to put my views against the background of the following recent developments:
As you know, the decline in economic activity in 2009 was followed by another year of
economic stagnation in 2010. The economic downturn was triggered by the sharp
contraction of activity in non-energy sector (most notably construction) and was
accompanied by a significant increase in unemployment. The official data show that
unemployment rose from a low of 3.9 per cent in the last quarter of 2008 to 6.7 per cent in
the first quarter of 2010. I guess, with your close day-to-day involvement in the community,
you are in a better position to appreciate the real level of employment and
underemployment in the country.
The more challenging economic environment has led to a sharp rise in non-performing
loans on the commercial banks' balance sheets - from 1 per cent to 5 per cent. The
nonbanks, that cater to a somewhat different clientele have recorded an even more sizable
increase in loan delinquency - from around 4-5 per cent to almost 12 per cent of total loans.
Fortunately, the banking system - both the banks and non-banks, have the resources to
adequately provide for these bad loans.
We, in the Central Bank, do not have up-to-date comprehensive data for the credit union
However, the information we have been able to piece together, suggest,
sector. that the
current economic situation is also taking its toll on credit unions as more members
face lay-offs and find it more difficult to pay their loans on time.
In fact, sample data for credit unions (and I should clarify that it is a relatively small sample)
suggest that delinquency ratios went up significantly in 2010. What's more, it appears
that many credit unions have not been vigorously addressing delinquency, for
example, through adequate provisions or by writing off bad debts.
I am also advised that some credit unions (and not only the small credit unions) may still not
have recognized the importance of "provisions" or know how to provision. In some cases, it
is not clear whether the boards of the credit unions are fully aware of the extent of the
problem and thus, in fact, what may be happening is that dividend payouts are coming out
of reserves. If that is so, this is certainly not good financial management.
The other "contextual" development that I would like to refer to has to do with the credit
unions' exposure in the unfolding CLICO situation. The information which is in the public
domain indicates that 65 credit unions had investments amounting to close to $700 million in
CLICO. That, in itself, is not my issue. What is the issue? It is that for some credit unions,
the impairment of these investments would threaten their very viability. This suggests that,
the management of these credit unions may not have properly assessed credit and
investment risks and, through insufficient portfolio diversification, almost compromised
the viability of their organizations. Fortunately, it appears that satisfactory arrangements
have been made to contain any systemic damage to the credit union sector.
These two situations point to chronic challenges being faced by the credit union
sector. You add to these the medium term outlook, in which economic recovery is expected
to depend heavily on small business development, and you mix in the enhanced
requirements of the new regulatory framework that is being proposed, and the prescription
is for more and more diversified capacity enhancement, at both the individual and
organizational level.
Permit me to expand on this theme.
As you know better than I, what makes the credit union movement different from the banking
sector is your founding principle - not for profit, not for charity but for service. The
philosophy of is the cornerstone of your movement. This
"people helping people"
philosophy imposes on each credit union and on the movement, the obligation to educate
their members. Put another way, "financial education or financial literacy" must be at the top
of your agenda.
As the CLICO crisis underscores, the rapid pace of financial innovation requires that financial
institutions contribute to providing more information and more financial education to the
consumer public. Credit union members consume other financial services - they have
variable rate mortgages with commercial banks, they have mutual funds, they have bank
loans, some participate in the stock market and they need to have the facts in order to
make informed decisions and to understand their exposure. And because of the special
relationship of trust between the credit union and its members, you are in a better
position than most other people to provide that education.
I know some credit unions (and I believe, the League) occasionally put on financial education
sessions but this must become an integral, on-going component of your operations.
Perhaps it could be seen as a "community" service, available to members and non-members
alike, in which case the entire country will benefit from your efforts.
I would like to stress that the Central Bank stands ready to collaborate with the credit
union movement or with individual credit unions to further the cause of financial education in
Trinidad and Tobago. We would particularly welcome collaborating in "train the trainer"
sessions which offer opportunities for reaching a wider membership.
It is clear that going forward our economy
will need to depend more on the non-energy
sector and on job-creation in the small and micro-enterprise sector. The credit union
movement has stood out as a major source of financing for this sector and could be
expected to face even increasing demand over the next few years.
To cater to this increasing demand, while protecting the resources of your shareholders,
credit unions will be well-served by increasing their capacity to provide business
services to the clients, to accompany the provision of finance. The combination of
finance and business advice will redound to the benefit of your micro-enterprise borrowers
and contribute to reducing loan delinquency.
Again, here is an area in which you could collaborate with other agencies - this time with
NEDCO, BDC and other SME development institutions. I am not sure how much of this is
being done at present.
Then there is the need for building organizational capacity to prepare for the new regulatory
paradigm that is expected to be in place later this year.
Permit me to digress a bit about this new regulatory framework - particularly to clarify what it
is and what it is not intended to do.
Formal regulation by the Central Bank is not designed to interfere with or undermine the
cooperative (democratic) character of the credit union sector. We fully recognize that this is
what makes the sector unique and so important to our economic and social development.
The Bank has no intention of stymieing the growth of the sector or closing down credit unions
that do not immediately meet the prudential requirements. We do intend to work with the
sector to ensure that credit unions are able to operate at standards that are the appropriate
standards. We have also ensured that credit unions have a reasonable amount of time
(maximum five years) to make the transitions necessary to comply with the new legislation.
What is the regulation intended to do?
In a practical sense, the new credit union regulation will formalize many of the practices that
the many credit unions already implement - like managing their financial performance by
adhering to the PEARLS ratios. The proposed regulation will now formalize the requirements
to have adequate liquidity and capital buffers, to limit borrowing by credit unions and to
control related-party lending and investments.
The legislation will also emphasize which is critical for the protection of
good governance,
shareholders and for effective financial management. For example, Board members will be
required to meet certain fit and proper criteria and an appropriate level of financial
not by the Central Bank. In turn, the
competence, as determined by the credit union,
Board will need to ensure that the credit union has the systems in place, including, as a
minimum, an audit and a credit committee, to ensure transparency and accountability.
The legislation will provide for strict reporting requirements and audited financial
statements to be submitted three months after the close of the financial year.
I should also note that the new regulatory structure envisages the introduction of a
mandatory insurance fund for the protection of members' deposits and shares. As in the
case of the commercial banks, the protection will have a certain threshold, which will be
determined in collaboration with the credit union movement. It is envisaged that the
mandate of the Deposit Insurance Fund will be expanded to cover credit unions.
Credit unions will need to build the necessary capacity to operate effectively in line with the
new regulatory requirements. I would like to identify four areas:
Firstly, members will need to understand the provisions of the draft new legislation.
Secondly, credit union members will need to insist that their credit unions operate according
to the rules and put in place an adequate governance structure.
Third, Board members or those aspiring to be Board members may want to strengthen
their understanding of the laws and philosophy governing credit unions, their ability to
read and interpret financial statements and to acquire some knowledge of risk management;
and
Four, the recent passage of the Anti-Money Laundering legislation also applies to credit
unions. As such, credit unions are expected to put measures in place to ensure compliance
with the AML/CFT.
I hope these few ideas help you to plan your activities. I also hope we could continue to work
together to bring the Credit Union Legislation and the regulatory framework into operation
this year. As you know, we are awaiting Government's approval of the policy framework after
which we would proceed rapidly to the preparation of the Draft Bill. Work is proceeding, in
parallel, on the amendment to the present Co-operative Societies Act.
It is my firm conviction that the new legislation is in the best interest of the credit union
movement and ultimately will strengthen the contribution that the sector could make to the
economy.
I end by reiterating my earlier statement that the Central Bank strongly supports the Credit
Union Movement which has made a significant contribution to the economy over the
and which I will continue to play a major part in our attainment of long
past decade am sure
term sustainable growth and improvement for our entire population.
I wish the League and its membership, the best for 2011.