CO-OPERATIVE FINANCING INSTITUTIONS- CREDIT UNIONS
Credit unions are cooperative financial institutions that began operating in developing countries in the 1950s. The credit union system that comprises the World Council of Credit Unions (WOCCU) is made up of four different types of institutions-credit unions, leagues, regional confederations, and the worldwide confederation-each of which has a specific role and purpose. Credit unions or savings and credit co-operatives are the base-level financial institutions that provide savings and credit services to individual members.
As cooperatives, they are organized and operated according to basic cooperative principles: There are no external shareholders; the members are the owners of the institution, with each member having the right to one vote in the organization. The policy-making leadership is drawn from the members themselves, and in new or small credit unions these positions are unpaid. Credit unions are legally constituted financial institutions-chartered and supervised, for the most part under national cooperative legislation. 3.1 Key Characteristics of the Credit Union Approach to Microfinance
i) Client Focus
Credit unions in the developing countries tend to serve low-income and lower middle-income segments of the population. This low-income market niche of credit unions is a result of two different factors. First, many credit unions were established by socially oriented groups that are working with a low-income membership base. Second, credit unions provide a basic set of services that low-income members find valuable, because they do not have access to these services through existing formal-sector alternatives.
These services typically are not attractive enough to entice a more affluent clientele. Loan amounts are not large enough, interest rates and other terms are not favorable enough, and credit unions lack the legal power to provide some of the services that more sophisticated clients need
For the most part, credit unions in the developing countries are single-purpose cooperatives that specialize in providing financial services to their members. Savings and relatively short-term installment credit are the two principal financial services offered by credit onions Very few have developed more sophisticated services such as open-ended lines of credit, pension programs, checking accounts, or investment services.
Credit unions develop both a savings and a loan relationship with their members. The savings relationship is generally first and is the key to the eventual loan relationship. In most developing countries, members are required to establish and maintain regular saving programs before they become eligible for loans. This reduces risk by allowing the credit union to gain experience with the member before making a loan.
Credit unions follow a “minimalist approach” to credit delivery, very rarely do they provide training, technical assistance or ancillary services to their microfinance members. This approach assumes that member is capable of running their business and determining their financial resources. The role of the credit union is to attempt to serve members’ requests and not to evaluate those decisions except when they relate to members’ ability to repay the repay loan.
v) Institutional Structure
As cooperatives, credit unions are owned and operated by their members, who are also the beneficiaries or clients. The people who are saving in and borrowing from the institution are also those in making the basic decisions on interest rates, terms, and other policies. This is significantly different from standard microfinance programs, in which the institutions are established and staffed by outsiders to channel externally provided resources to local clients. Credit unions are local institutions, owned and operated by the local population and using locally generated resources within the community. In this way they are similar to the village banks.
vi) Financial Structure
One key characteristic of credit unions throughout the developing world is that they operate on self-generated capital. The loans made by credit unions are in most entirely financed by member savings, not external donations or loans. Savings exceed loans outstanding. Finally, with only rare exceptions, credit unions are self-sustaining on the basis of operations; they are generally not dependent on operating subsidies or subsidized capital funds from either donors or governments