Legislation for the Puertorrican Cooperative Development

1. Legislation for the Puertorrican Cooperative Development Irma Hilerio Cooperative Development Administrator Puerto Rico Industrial Development Co. May 25, 2004

2. Cooperatives Private companies with many owners

3. Cooperatives Key Reasons for a Development Controlled through Legislation Many Owners who invest their scarce savings Many Ideas Hard-working Leadership (Seeking the Best for the Whole) Lidership that Seeks Improving Itself Associates who Confide too Much On Occasions, Limited Administrative Capability

4. Some cooperatives serve: Customers The Associates Themselves

5. System • Definition • A group of rules, principles or means connected among each other.

6. Cooperative System • Principles • Voluntary • Democratic • Equitative • Independent • Integrate • Supportive of the Community • Educational

7. Cooperative System The principles of this system are universal, but each country in the world has its own experiences, necessities and culture.

8. Cooperative System • Rules • Cooperative Laws • Laws applicable to the sector from which they arise • Regulations • Policies • Proceedings • Guideline Letters

9. Cooperative System The Cooperative Movement in the world is unique, but all the countries function differently, depending in great measure on their internal surroundings and are afected by external surroundings. Besides, their necessities are different, although similar.

10. System of Systems The cooperative system exists within other very strong systems such as the Political and Economic (financial). Inclusive each cooperative sector has its own applicable system, each one different from other sectors.

11. Experiences • Historically in Puerto Rico • The formation of the first cooperatives arose without rules or regulations. They only rely on principles.

12. Experiences The great Confusion Because of its collective nature, the associates-customers confuse them with the services of the State and when complaints arise, they are given to the Government. The Government, because of their collective nature, fears their agglutinative formation and simply limits their faculties as ordered by the competition.

13. Experiences Impact of a Failure: When a Cooperative fails, many humble persons are affected. It is from this situation that public interest (State interest) arises to regulate them through legislation.

14. Results Principally, the laws approved are responsive and not pro-active for the orderly development of the Cooperative Movement

15. Results The laws approved in response overturn the system, which in turn is also altered by the same changes in the system of each sector. Presently almost all the sectors are altered by the economic globalization.

16. Search If we live in a world of peace, something that cooperativism with its social justice promotes, we can be able to create laws, rules y guides in a just manner for all, so that these allow the development of the cooperative role.

17. Experience of the Puertorrican Cooperative Financial System

18. Laws creating the cooperative system Law 291 of April 9, 1946 and Law 10 The First Law establishes the following System: Power of the Assembly of Associates Directors – Includes the Supervisory Committee Annual Assembly Exclusive Participation of Associates (Law 10) Capital not subject to shares (Law 291), Limited Capital (Law 10) Limitation on Consumer loans Reserve for Irrecoverable Loans arising as a result of operations. The manner of destituting an associate or proceeding with a resignation is established. Payment to heirs in case of death is established. The creation of federations and for the investment in the creation of other cooperatives is established.

19. Defficiencies of this first legislation (Law 10) • Attending customers and non-associates was not contemplated. This is a limitation, compared to all the other existing financial systems. • The maximum top investment that can be made by each associate limits the future growth. • Limited to solely offering consumer loans does not allow the use of these resources to expand other sectors.

20. Defficiencies of this first legislation • The reserve, created with the sole purpose of covering tardily paid loans does not create an indivisible capital. Inclusive, he who most needs this reserve is the one who will not be able to create it because he has operational losses. • La disposition of payments to heirs presents a conflict with the Law of Inheritance.

21. Second Legislation for the Financial Sector (Law 1) • Allows offering services to non-associates (customers) • Eliminates investment tops by associates • Requires that loans to be given to non-associates have a 100% investment in deposits and forces them to be executed. • Recognizes the head of the Cooperatives Inspector as the regulating entity of the cooperative system and established an annual audit per cooperative. • Establishes the obligatory election of an Educational Committee

22. Third Direct Legislation for the Financial Sector (Law 99 of 1980) The Investment and Deposits Insurance Program is created and appointed to the Office of the Cooperatives Inspector of Puerto Rico, which is compulsory for all the cooperatives. Its purpose was to insure the sum of the shares and deposits of the associates and depositors of the savings and credit cooperatives up to $40,000. Economic solvency guides are established to be able to acquire this insurance. That cooperative which does not comply will have to be eliminated.

23. Third Direct Legislation for the Financial Sector Arrangements were made for the establishment of assessments (payment for losses of the other cooperatives). For the first time, the administration of one Cooperative affects another cooperative, without having any control over its decisions. It was established that the cooperatives will pay premiums for the insurance, but capitalization by either the State or the Movement was not established.

24. Third Direct Legislation for the Financial Sector This third legislation arose at a time when the World Financial System was facing high inflation and, consequently, interest on savings and loans rose to incredible levels. Some cooperatives thought they were experts and uncontrollably began buying expensive funds, which later caused their disappearance.

25. Third Direct Legislation for the Financial Sector (Law 99 of 1980) Law 99 of 1980 marked the road to high regulation with the purpose of guaranteeing that no particular decision of a cooperative could affect another. The effect caused by this, that provoked the closure (after five years offered to become used to the Law) of many cooperatives, had the affect of promoting that the Cooperative Movement be activated (in response) and find new legislation.

26. Fourth Direct Legislation for the Financial Sector (Law 6, of 1990) The cooperatives are authorized to offer services of: Checking Account Credit Cards Affiliation with monetary interchange networks Acquire and administer Automatic Tellers (ATH) For the first time an indivisible reserve is created, known as a risk reserve. The calculation for the provision of irrecoverable loans will be done with charges to the operations and will be subtracted from the active loan to be collected.

27. Fifth Direct Legislation for the Financial Sector (Law 5, of 1990) The Insurance for Shares and Deposits Corporation was established and the assets were transferred from the Program that were appointed to the Office of the Cooperatives Inspector of Puerto Rico. The functions of regulating and supervising the Cooperative Movement were transferred to the Office of the Commissioner of Financial Institutions. The Corporation is obliged to establish a cooperatives classification system to estimate their risk. The CAMEL system is established. Besides paying the insurance premiums, it is established that the cooperatives will capitalize the Corporation annually.

28. Sixth Direct Legislation for the Financial Sector (Law 114, of 2001) Establishes the Corporation for Supervising and Insuring the Cooperatives, transferring the authority of the Supervision of the Office of the Commissioner of Financial Institutions to the Corporation (COSSEC). The Board of Directors once again has participation in the Cooperative Movement and the representative of the townspeople is to be named by the Board of the Directors of the Corporation. Authorizes the Corporation to educate in relation to the technical aspects of the sector.

29. Seventh Direct Legislation for the Financial Sector (Law 255, of 2002) Expands the services that the cooperatives can offer, such as: Commercial loans, small loans to non-associates, investment in other entities (cooperatives and non-cooperatives) that are 100% owned. Determines the risk of the cooperatives in a similar manner to the other financial institutions of the system. Establishes a definite time frame so that the cooperatives reach a minimum of 8% of risk capital, versus risky assets.

30. Investment Fund - Law 198 of 2002 Law that determines that each Cooperative (of the financial sector and others) contribute annually an amount determined by a formula to be used in the development of new cooperative enterprises. Create a private Corporation (FIDECOOP) that will receive funds from the Cooperative Movement, which will be matched up to $25 million by the State to succeed in said development.

31. Law 220, Cooperatives Law for Juveniles Students and Commons • Create a Cooperativism Division in the Departament of Education and assign a Coordinator for Juvenile Student Cooperatives. • Children and youths up to age 25 can be associates of these cooperatives. • Of the net benefits, the Cooperative will segregate 30% for the Student Community, 20% for social reserve and 50% can be distributed to associates for their patronage. • The savings and credit cooperatives can be sponsors.

32. Financial Cooperative System of Puerto Rico Investment of Associates Savings and Credit Cooperative Banco Cooperativo or another Bank Services Services Regulated and Supervised by the Commissioner of Financial Institutions Formed, regulated and supervised by COSSEC Insured by COSSEC

33. Comparison of the Statistics of the Savings and Credit Sector 1980 & 2003 -58%

34. Comparison of the Statistics of the Savings and Credit Sector 1980 & 2003

35. Comparison of the Statistics of the Savings and Credit Sector 1980 & 2003

36. Comparison of Statistics of the Savings and Credit Sector 1980 & 2003

37. Comparison of the Statistics of the Savings and Credit Sector 1980 & 2003