June 18-20 2009, Sobey School of Business, Saint Mary's University

1. Public Policy and Legal prerequisites for Financial Services Cooperatives:Political, strategic and technical pre-conditions for their Effective Regulation June 18-20 2009, Sobey School of Business, Saint Mary's University by Peter van Dijk, Micro-Finance Consultant

2. Objectives • « Tour du monde », some experiences with financial cooperatives in different countries; • What is Micro-finance and what is its role in financial sector development, poverty alleviation; • What is the Role of Government? • Different interpretations of cooperative principles; • Risks of public support, by government, foreign donors; • Possible steps to design a local process for the sustainable development of financial coops.

3. I. Situation, public policy challenges of/for financial coops in some parts of the world • East Africa (Kenya, Rwanda, Tanzania, Uganda) - long history of Sacco’s and Coop and Sacco authorities - weak authorities, few reliable data, documented weak performance. • French-speaking West African UEMOA region - creation of Sacco’s as consequence of one foreign donor project with BCEAO - large organisations, high penetration rate - influx of foreign support of Sacco’s leading to stressed relationship between regulator (BCEAO), supervisor (FinMin-y dep-t), MFIs, donors - worrying trends on large foreign debt, social investments, bad loan portfolio quality, stagnant savings and slow growth (particular members). • Southern Africa (South Africa, Madagascar) - creation and support of many different local and foreign bodies - no shared mindset, principles, no central public leadership - weak, small, limited potential for sustainability and growth.

4. Situation, public policy challenges of/for financial coops in some parts of the world (continued) • Cambodia, Laos - Bad aftertaste of past political experiments influenced by totalitarian regimes, local and foreign - Different foreign donor agencies creating Sacco’s without centralised effective supervision (some cases regulation written by foreign experts); • Pakistan - Long history of government Sacco program , with bad collaboration between central and provincial authorities, as well as Credit focus - Misappropriation, politicisation, fraud, theft, closure of Sacco’s, Coop Banks; • Indonesia - Many government, civic society and foreign projects in MF, many MFI’s created as cooperative societies - Weak collaboration between central bank and finance ministry on MF/FSD and a Cooperatives Ministry with few reliable data.

5. Table of Conclusions

6. II.Please Government, what is Microfinance? • A tool for building inclusive, stable, self-sustainable financial sector? • A part of the social safety net, providing politicised loans to different target clients? Although the overall goal of both is the emancipation of poor citizens, these activities need to be clearly separated!! Because:- • Strategy demands a common mindset based on full understanding of the realities of finance and the complexity of all influences on it; • Achieving strategic objectives demands a coherent policy framework and a regulatory framework ensuring full compliance; • Socio-political objectives and subsidies have a damaging effect on financial sector development, making a transparent performance based market impossible and causing unfair competition. Only in a clear, coherent environment can Cooperative societies find their proper role in achieving the above-mentioned first definition.

7. III. Developing a strategy, policy, a regulatory framework, and ensuring their implementation and full application are very expensive activities, especially when safety of money needs to be ensured Need for specific triggers for when to regulate institutions that provide financial services:- • Do they bear risks for the stability of the financial system? • Do they put at risk deposits and savings of the general public? • Do they affect a market process (data, transparency, fair comp.)? Financial coops are often small and concern the money of members who agree on rules and who control the organisations. As they are often small, operate in remote areas and under specific rules, it requires specific expertise, efficient coordination and adequate resources to regulate them and ensure full compliance.

8. IV. Identical rules of Financial Services Cooperatives • Member ownership (shares, capital value, control) • Savings oriented (deposits, longer term savings) • Common Bond, Solidarity • Non-profit Objective (sustainability, use of profits) • Obligatory reserves (statutory reserves) • Voluntarism (free will, own initiative) • Rigorous Governance structure, rules • Small markets, non-competition • Different levels of Cooperative societies • Gradual transformation into banks • Specific Regulation, Supervision.

9. Some remarks on important Sacco Rules Member ownership As other investors, state or private, are committed to put money in Financial Institutions for poor & rural citizens, the latter need to organise themselves. That means they have to contribute a sum of money that is affordable as well as important for them to be actively involved in these organisations. Active membership means real ownership, real control, with shares that compare to the total value of the organisation. Savings oriented The second important factor that determines a Sacco’s sustainable health, growth is that they are deposit- & savings oriented. That means that loan capital does not come from any other source than from member deposits (apart from capital) and their longer term specific savings products. Capital & savings ensure that members are active owners and controllers.

10. Remarks on Sacco rules (continued) Non-profit Objective MF and cooperative supporters often do not fully understand the legal status of a cooperative society that provides financial services. They want it to be sustainable but they also do not want it to make profits. That misunderstanding is often due to two issues: 1) the non-profit objective of cooperative soc-s means that they can (and should as commercial companies) make profits but that these profits are in principle not distributed between owners, shareholders, but re-invested in the coop; 2) net income over total costs are often called “surplus” by cooperants and not “profit” as lawyers and economists do. Obligatory reserves (legal & statutory reserves) Minimum capital requirements and provisions are basic conditions for banks. In cooperative regulations these items are included under regulatory reserves. Statutory reserves are additional reserves of which training (and growth) is most important, considering that members have had little education and certainly not on controlling financial institutions.

11. Remarks on Sacco rules (continued) Voluntarism Sacco’s are created out of free will, own initiative of individuals. Their creation, growth cannot be dictated by political strategies or donor projects. This principle also means that member activities, especially in control functions are non-remunerated and need to be well managed. If not, the cost advantage and common bond that Sacco’s success rely upon, will be lost. Small markets, non-competition Again to ensure common bond and effective control, Sacco’s, especially in start phases and underdeveloped environment, should be small. Growth will necessitate the creation of more &different levels of cooperative societies. To allow their growth they should not compete between each other. Gradual transformation into banks The basic signal of good Sacco performance is their growth. That means that its organisation and regulation aim at gradual integration into the banking sector.

12. IV. Benefits & Pitfalls of foreign donor aid • A lack of local government understanding and a multitude of foreign donors creating Sacco’s and providing technical & financial assistance, often resulted in weak and failing Sacco’s; • However, as many governments have little own know-how of Sacco’s, have limited resources and an uneducated public, foreign assistance can help; • The world’s leading MF/FSD Donors have under CGAP and the declarations of Monterrey, Paris and Doha promised to strengthen donor coordination and make their aid more effective; • Local governments should integrate foreign aid into their national programs and promote accountability, focusing on their strategies, definitions and local processes.

13. V. How to design an appropriate local development process for financial coops? • National Financial Sector Development Strategy developed, coordinated & supervised at the highest executive level (National FSD/MF Council); • National Microfinance Strategy that is in included under the FSD Strategy; • A FSD/MF Policy framework that ensures that all “flanking policies” are in coherence; • Financial Cooperatives chapters in FSD/MF policy fwk • An FSD and MF Regulatory framework that ensures implementation of strategies and compliance with laws; • Public promotion & education campaign on Sacco’s;

14. V. How to design an local development process for financial coops? (continued) • Creation of a competent national Coop Authority with adequate resources to effectively regulate and supervise all Sacco’s (registered, and with capacity to identify unregistered org-s that should register); • A specific Database on the performance of registered Sacco’s, created with assistance of the central bank with a comparable system and format; • All national and foreign support to Sacco’s needs to be known to the Coop Auth-y and all such organisations need to be member of the FSD/MF Council, respecting local rules and procedures.

15. Any questions, doubts ? Thank you for your attention Peter van Dijk petrusvandijk@yahoo.com Home base: Jakarta, Indonesia