Given the extent to which the global financial crisis has ravaged markets, crippled industries and closed countless businesses both large and small, it would seem doubtful that there's any light at all on the economic horizon. However, credit unions and financial cooperatives the world over have a good story to tell and may be able shed some light on a brighter financial future.
Credit unions are not without their challenges, particularly in the United States where the same subprime mortgage issues that have caused banks to stumble also have touched credit unions through their members, even though, as cooperative institutions, credit unions have not invested in the subprime market.
Credit unions, through their roles as member-owned and operated financial cooperatives, contributing to the healing process. By their nature, credit unions ensure access to affordable financial services for individuals and families worldwide. The impact has been different from country to country, but credit unions' overall conservative approach of accepting member deposits, making loans and generating strong capital bases has kept the majority of them out of harm's way as bad investments begin to take their toll on the for-profit financial services industry.
The World Council of Credit Unions has published a paper that details the effect of the financial crisis on nine different countries and regions. What credit unions have done, even during the darkest days of the crisis, is continue to serve their members by providing necessary loans. A March 15 Wall Street Journal article noted that, while the American banking industry in 2008 had cut back on lending, loans from the country's credit unions increased 7% to more than $575 billion. That's a growth of some $35 billion-an especially dramatic figure compared to the corresponding $31 billion decline in banks loans for the same period-and a critical influx of capital into a market desperately trying to grow enterprise.
The Year of Microcredit
As an active participant in the United Nations' Year of Microcredit and the broader microfinance community, we have continually stressed the importance of not-for-profit financial cooperatives that take a savings-led approach to development. This approach proved successful for credit unions during Ecuador's financial crisis of 1999, a period that saw the country's largest banks collapse while credit unions kept the Ecuadorian economy afloat simply by doing their job and serving their members.
Examples such as Ecuador are many, proving credit unions' strength and stability in times of crisis. Credit unions can help overcome financial market imperfections that perpetuate poverty by expanding and deepening access to financial services. World Council currently has programs at work around the world designed to expand access to services, serving people in countries such as Colombia, Kenya and Rwanda who exist on less than $2 a day.
A Look at Who Really Benefits
But credit unions serve more than the desperately poor. From a macroeconomic standpoint, credit unions also create and support middle classes in society. The existence of a broad middle class greatly contributes to political and economic stability, enabling members to support their families, build businesses and strengthen their neighborhoods, their communities and their countries. This all occurs in the name of member service, and it's the members themselves, not the institutions, who benefit from these initiatives.
Creating a middle class, or even serving the poor effectively, only comes in environments where the right regulatory environment exists. By that I mean an environment in which credit unions receive strong oversight and guidance from laws and standards appropriate to fostering cooperative growth.
To accomplish this, five principle restrictions that exist in many jurisdictions must be lifted. These are as follows:
- Credit unions must have direct access to payment, clearing and settlement systems. This includes access to and membership in transaction card networks, many of which are owned by banks.
- As part of that, credit unions need direct access to the central bank's liquidity window.
- Restrictions on small business lending must be lifted.
- Credit union access to deposit insurance systems must be on par with that of commercials banks.
- Credit unions must gain the ability to access and issue alternative forms of capital in markets where they clearly exhibit the ability to do so.
Of course, we realize all of these principles require systems capable of effectively taking advantage of them. The lifting of legislative barriers will go a long way in helping develop such systems.
Credit unions and cooperative banks have fared exceptionally well during the current economic crisis. The commitment to member service, rather than short-term profit maximization has a lot to do with that success. World Council is committed to facilitating continued cooperative growth, and we look forward to fully supporting the United Nations' International Year of Cooperatives as way to achieve that goal.
Pete Crear is CEO of the World Council of Credit Unions, Madison, Wis.