DeLisle Worrell: Credit unions have a competitive edge
Feature address by Dr DeLisle Worrell, Governor of the Central Bank of Barbados, at the
Awards Ceremony of Endeavour Cooperative Credit Union Ltd, Bridgetown, 7 October 2013.
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I very much welcome this opportunity to address your awards ceremony and to join with you
in celebrating the Endeavour Credit Union's growth and contribution to its members'
wellbeing to date. Over the past four decades or thereabouts, credit unions in Barbados, the
US and elsewhere have grown in importance relative to other types of financial institutions.
Credit unions have been able to achieve this because of their competitive edge vis-à-vis
banks, in serving the needs of individuals and households. Let me elaborate.
As you know, Barbados now has no locally owned banks, a situation which is not unfamiliar
to us. For most of our history our banks have been foreign owned, an inevitable
consequence of the fact that Barbados is such a small economy. By and large, very big
banks tend to have a more solid foundation than small banks, because they are able to
spread the risks that are inherent to banking over many activities, countries and regions.
That offers a better chance of mitigating the effects of a downturn in any one activity, and the
impact of loss of profits in one area may be compensated by gains in other areas. Locally
owned banks in small countries do not have the same range and scope, and they tend to be
relatively unprofitable, compared with branches of foreign banks.
As our banks have modernised their systems and controls, and as the international financial
market has become more competitive, banks have become more impersonal and more
inflexible in their approach to lending. This is not something that is welcomed either by banks
or their customers, but it is an inevitable consequence of large size and increasing
complexity. Building relationships with your customers is the safest way to do banking. The
most successful banker, in the long run, is the banker who has the largest portfolio of
dependable borrowers, who are known to have the willingness and ability to service their
borrowings on time. The best way to establish the borrower's credentials is to build a
relationship with them, so that they may establish a track record that speaks to their
competence and prudence. However, big banks with wide networks find it difficult to do this
in today's dynamic world. Instead they must rely mainly on rules of thumb, credit limits, credit
scoring, collateral, and similar tools.
Credit unions have an inherent advantage in this regard, because your institution is
structured around the relationships of your members to each other, to the credit union, and,
most often, to some other institution or location, be that a church, profession, workplace or
town or village. Your members are known to the union, and are subject to a powerful social
sanction that serves as an incentive to service loans granted by the credit union. Nobody
wants to endure the humiliation of being known as a defaulter, and feeling that all and sundry
are ostracising you and looking down on you as a deadbeat. As Mohammed Younis from
Bangladesh, the man who dreamed up microcredit realised, social sanction can be the most
powerful incentive to pay what you owe. It follows that cooperative institutions such as credit
unions will have a better track record than banks, so long as they are tolerably well run.
Credit unions typically are able to offer a better deal to their customers than banks can afford
to do. They do not have all the overhead costs that a big bank has to pay, and any surpluses
the union realises are added to members' bonuses and distributed. Credit unions are not
under pressure from shareholders to maximise their profits, as banks are. They are therefore
able to accept deposits at higher rates than would be profitable for banks, and make loans at
somewhat better rates than banks are able to do.
Therefore, as financial systems are modernised in many countries, credit unions come to
play an increasing role in the provision of financial services to households. The growth of
credit union membership is a phenomenon that may be observed not only in Barbados but in
the US, Canada and many other countries.
The establishment of our Financial Services Commission in 2011 was an important milestone
in the ongoing strengthening of credit unionism in Barbados. The FSC is the new regulator of
credit unions and all financial institutions other than banks, finance companies and trust
companies. The FSC oversees credit unions to ensure that their operations are satisfactory,
and that they are lending prudently. All credit unions report regularly to the FSC, which also
carries out physical inspections from time to time. Any credit union that is not operating at
internationally acceptable standards is required by the FSC to remedy all deficiencies, as a
condition of renewing its license. Credit union members therefore have an assurance that
licensed credit unions are well run, and that measures are in train to ensure that all licensed
institutions are up to par.
The insurance of credit union deposits would be an additional reassurance for credit union
members. A proposal for a deposit insurance fund for credit unions to be opened at the
Barbados Deposit Insurance Corporation is under consideration, and final details are being
worked out prior to implementation.
The growing importance of credit unions contributes importantly to increasing the efficiency
with which our financial system serves the needs of Barbadians. Credit unions provide
practical, sustainable competition for banks because they do not go head-to-head with
banks, which are so much larger. Instead, the credit union business model permits them to
be competitive with giant banks and be profitable, in spite of their small size. That provides
the average household with a better financial service, at a good price. I expect that credit
unions will continue to grow in importance, and be recognised as a vital element in our
increasingly sophisticated financial system. The credit union sector is an excellent example
of the way our financial system is adapting to the Barbadian reality, because it grows out of
our tradition of thrift, self-reliance and cooperation.
The development of our financial system needs to be seen in the context of the progress of
the economy as a whole. Barbados is poised to resume economic growth that is driven by
the enterprise, vision, determination and persistence of Barbadians in all walks of life. We are
clear about the way forward: it is based on expanding our foreign exchange activities:
tourism, international business, and rum, our main foreign exchange earners, and alternative
energy, which saves us foreign exchange. Barbadian entrepreneurs must conceptualise the
products and services that will refresh and enrich our offerings in these areas, and actively
solicit the foreign participation that may be needed to help to bring them to fruition. Our
government has ongoing initiatives designed to improve business facilitation, which is
recognised as an urgent priority. For our workforce the priority is to improve our productivity,
build our reputation for excellence in service, and to always give our clients outstanding
value for their money.
Ever since the onset of the global recession in 2008, your economic policy makers have kept
a stable economic platform from which to launch the push for renewed economic growth.
Foreign exchange reserves have been kept well over $1 billion over the past 5 years, by
always holding the lid on spending, in light of expected foreign currency inflows. That is what
motivated the August budget. It maintains the stable platform. Growth will come as a result of
the structure that the private sector builds on that foundation.
The challenges that face our economy are formidable, but students of history will recognise
that they are far less so than the challenges Barbadian society has had to overcome to
achieve the highest living standard of any independent country in the Caribbean. We may
therefore be confident that we will win our way to a new era of growth and prosperity through
the exercise of those virtues that have brought us this far.