Credit union funds

Continuing on from last week’s discussion, we delve into the provisions relating to credit unions proper as outlined in the Cooperative Societies Act, Chapter 378A.

A credit union is really the financial arm of a cooperative society and is defined in section 193 of the Act as “a registered society carrying on the business of a credit union”, a redundancy if there ever was one.

Recently it was reported in the media that there was trouble brewing between the credit union movement and the regulator, the Financial Services Commission, as to where and how credit union funds were to be invested. The commission allegedly issued a circular to all credit unions requiring the divestment of funds from non-banking institutions. On the other side, the response in some quarters was predictably emotive and based on the premise that this is always how we’ve done it and wish to continue doing it this way.

The law as stated is patently clear and so that the public can judge for themselves, justifies repetition verbatim. Section 34A of the Act provides as follows:

(1) The funds of a society, including the reserve, may (a) be deposited in (i) a bank licensed under the Financial Institutions Act; (ii) a society registered under this Act; or (b) be invested in (i) securities issued by the Government of Barbados; (ii) securities, the payment of interest on which is guaranteed by the Government of Barbados; (iii) subject to subsection (2), securities issued in Barbados by a company incorporated in Barbados and listed by the Barbados Stock Exchange, if the company has paid a dividend on its shares for the preceding 5 consecutive years; (iv) subject to subsection (2), securities issued in a member state of the Caribbean Community by a company incorporated in that member state and listed by the Stock Exchange of that member state of the Community, if the company has paid a dividend on its shares for the preceding 5 consecutive years; (v) subject to subsection (2), securities issued in a member state of the Caribbean Community by a credit union that is registered in a member state of the Caribbean Community in accordance with the laws of that state; (vi) real property, but subject to the provisions of section 196A where the society is a credit union; (vii) subject to subsection (2) any other manner approved by the Registrar.”

(2) The investments referred to in sub-paragraphs (iii), (iv) and (v) of subsection (1) shall not exceed in the aggregate 10 per cent of the statutory reserve of any credit union.

After reading that section, it takes a certain level of disingenuousness to claim that the commission is trying to force credit unions to put their money in commercial banks and only commercial banks. The clincher is item (vii) which allows investment of any kind subject to the approval of the Registrar for Cooperative Societies.

It is not difficult to see the justification for the commission’s directive in the wake of the CLICO debacle. There was a shortfall in CLICO’s statutory reserve, they were overexposed in real estate (property) and to put it succinctly appeared to be securing their own liabilities intra-company.

By way of example, it was reported that some of the disputed investments were made in Capita Financial and there was much fanfare in the press when the said institution was purchased by a credit union from CLICO and rebranded. Now, if the credit union which owns Capita is also overly exposed as far as additional investments in Capita, can we not see how and where a problem could arise?

Remember that the credit union or cooperative society is an institution owned by the members and the funds deposited belong to the members. Section 196 requires the maintenance of sufficient liquid assets by the credit union, the rationale being that should a member call for his/her funds the institution should be in a position to honour the withdrawal as well as all its other debts and obligations. That was also the rationale behind the statutory reserve for insurance companies such as CLICO.

We cannot afford another CLICO and if the credit unions take such great exception to putting their money into foreign banks they should put it where their mouths are and open one of their own. More than one billion dollars in assets says so.

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