By Professor Leyland Lucas
A Response to Prime Minister Dr. Keith Rowley’s recent comments on the state of the Credit Union movement in Trinidad and Tobago
Within Guyana, the Credit Union movement appears to be at an interesting juncture. While many of them appear well entrenched in their original positions, one major Credit Union was recently taken over by the authorities, based on claims of mismanagement. Whether those claims are accurate or not is an issue for the auditors, Interim Management Committee (IMC), and the Courts of Guyana to resolve. Nonetheless, one thing does remain clear: Credit Unions are in dire need of reform.
To understand the role of Credit Unions, we must begin by exploring their history and reasons for existence. These financial institutions were created out of an awareness of a gap in the traditional financial sector. That gap emerged because of underserved communities, which could not meet the basic requirements of established financial institutions. Credit Unions are cooperative financial institutions. These are owned and controlled by their members who utilize their services, and are based on some form of common relationship through their employment or other form of affiliation. Credit Unions are not-for-profit, and exist to provide a safe, convenient place for member-owners to save money and to get loans at reasonable rates.
Credit Unions have thrived on a simple value proposition: place your monies in a safe place, while securing credit at a reasonable cost. Traditionally, they have helped to offer basic products that other financial institutions either saw as unprofitable to venture into, too costly to manage, and not offering significant returns.
Over the years, this relationship has thrived as the established financial sector has viewed it as uncompetitive. From their perspective, this market segment was just and remains too poor for the established financial institutions to consider entering. Instead, they chose to perform the more ‘high end’ lending, while managing the financial resources garnered from the ‘low end’ contributors and benefitting from such a relationship. Any review of the history of established banking-Credit Union relationships will show a significant spread between benefits of these resources accruing to the banks as against what accrues to the Credit Unions. The absence of enlightened legislation, seeking to upgrade the status of Credit Unions has helped to reinforce this situation. To some, this may appear as further evidence of a dependency syndrome, one that reinforces the notion that the less fortunate are incapable of managing their resources effectively and must continually rely on the guidance of the ‘more knowledgeable and informed.’
Prime Minister of Trinidad & Tobago, The Honourable Dr. Keith Rowley has spoken about the need for a paradigm shift in the management and accountability of Credit Unions. He posited that Credit Unions have the ability to be agents of change, and must do so in order to realize their full potential. This is certainly necessary as we have seen an evolution of this form of financial institution within the developed world. Credit Unions effectively control a significant amount of financial resources.
One thing that has continually been argued is the importance of change. It is said to be the only constant to which one can expect in life. And, in a world that is flat, change in one place can be speedily transferred to another. In today’s world, with a vibrant social media platform, things that are good and bad quickly move from one location to another. In many instances, these new things are adopted in and adapted for the local environment.
The issues of adoption and adaptation are quite important as we seek to examine the future of Credit Unions in Guyana. Looking at what has transpired over the decades with the Credit Union movement, we see a great deal of stagnancy in the management of Credit Unions and their willingness to embrace change. Yes, new products have emerged, including small mortgages and auto loans, but many of these new products are still offered using a traditional lending model. That is, one must have the funds available in one’s own account. And, as some members would confirm, the guarantee process appears to be most cumbersome and complex.
More important for us to understand is that, in the 21st Century, the old value proposition can no longer work. Credit Unions need to adopt a new value proposition. One that reflects the new dispensation that would allow them to function as equal players in the financial world, increasing their earning potential, while maintaining their competitive posture. In essence, Credit Unions must change the way they do business in order to better serve the needs of their members.
Changing the value proposition will also require a change in management philosophy. Credit Unions serve the needs not only of the less fortunate but also the more financially successful. They not only secure deposits from lower level employees but also from managers. That new management philosophy must embrace a role of professionalism, whereby individuals are trained to and employ very well developed management and financial strategies to transform these entities. The Credit Union of today must provide mechanisms and products that fit the growing needs of its members. They must begin to serve as viable competitors to standard lending institutions. By so doing, they are able to unleash the potential of their members to significantly alter their economic contributions to national development. In this new dispensation, Credit Unions must employ personnel with the necessary knowledge to effectively transform the way these entities operate. By so doing, Credit Unions will emerge as enablers of economic activity rather than guardians of savings, changes their standing in the national economy. With an enlightened management approach, while increasing the risk levels, credit unions can help to develop and expand the wealth-generating class.
While one may fully endorse the views of Prime Minister Rowley, these are based on a critical assumption. That is, the presence of appropriate legislation. In the case of Guyana, such legislation is sadly lacking. Currently, within the Laws of Guyana, Credit Unions are strictly regulated both in their lending practices and investment options. Even within the local stock market, Credit Unions are not permitted to place their resources. These investment restrictions place major controls on the ability of Credit Unions to be innovative and competitive. There needs to be significant updates of the Banking legislation that will allow for the transformation of Credit Unions, such that they can offer products and services similar to those currently available from Banks. Absent such legislative changes, Credit Unions will remain in a time warp, locked into the ideas of times past.
It is also important to note that the issues surrounding Credit Unions and their ability to adopt for the future is a symptom of a larger problem. That is, the need to transform the entire financial system within the country. New financial instruments must be created to facilitate some of the changes occurring globally. For instance, as the Green Economy concept takes hold, how do we finance projects whose value proposition is rebuilding a community? As members of the Diaspora with deposits in their Credit Unions seek to assist their local communities, what tools are available? Given the social responsibility aspect of such products and the sense of community involvement, these may lend themselves well to an expanded Credit Union portfolio. Such instruments as Social Venture Capital Funds and Renewable Energy Funds are just two examples of financial instruments that lend themselves well for adoption by Credit Unions.
Let me conclude by saying that the time for Credit Unions to play a more vibrant role in the economy is long overdue. They must cease seeing themselves as guardians of savings and, instead, adopt a role of vibrant economic agents. They must command the power of their deposits and place them at the disposal of their members, such that significant wealth can be generated.
Transformative initiatives by Credit Unions require not only financial resources but also a strong support system. Credit Unions must seek professional managers who can provide them with the talent needed to change their approaches to business. Changes in the way business is done must also be supported on the legislative side. Major changes in banking legislation is needed to unleash the power of these sleeping giants. Generally speaking, transforming Credit Unions must be part of a larger discussion of transforming the financial system of Guyana.
Professor Leyland Lucas is Head of the School of Enterprise, Business and Innovation at the University of Guyana