Pacific Island Countries (PICs) comprise of many small islands. The islands are scattered over a vast expanse of ocean and this makes PIC people very skilful voyagers and navigators. Most PIC people also love to live in small pockets of villages—either inland or by the sea—and this makes PICs unique and this is perhaps one of the contributing factors to PICs’ low population density. However, the scatteredness of the islands and its people renders a cosmic challenge to PICs—it makes establishing a bank branch in remote areas unviable. This is sad because it stonewalls rural PIC people from participating in financial intermediation activities. Recently, there has been a push by PIC authorities to promote financial inclusion activities through the use of digital platforms but this push has met hurdles along the way. In particular, lack of reliable telecommunication infrastructure, scatteredness of islands, and risk-averse appetite of rural people towards embracing new technologies—among others—pushed back some of the initiatives. This article presents my observation of credit union movement.
People in rural PICs might wonder what a credit union or a savings and loans society is, or even question how credit unions can survive in a market that is dominated by big banks and non-bank financial institutions (NBFI). In the PIC region, banks and NBFI are growing and expanding rapidly compared to credit unions whose performances are disappointing and popularity diminishing. However, despite their disappointing performances, PIC credit unions continue to survive so what kind of a magic wand do PIC credit unions have? This is perhaps an important area for further research. Credit unions are formed by ordinary people who pool their resources together to achieve a common goal. Different people have different goals in life but, at the end of the day, everybody strives to accomplish one goal—access to finance.
Credit Unions are “niche” financial co-operatives. It is based on the principles of common bond and volunteerism so it can be established easily and cost-effectively in rural areas. This is because credit unions are owned and controlled by members—both customers and shareholders—and their central purpose is to provide a savings facility, cheaper credit and other financial services or rewards to their members. Examples of financial reward are interest received on savings and dividends paid to members at the end of each financial year.
Before taking steps to promoting credit union movements in rural PICs, it is important for PICs to look back and learn from challenges faced by credit unions in the past.
A lot of credit unions in PICs have governance issues. Credit union board and committee members for example have neglected their mandated roles and responsibilities due to the voluntary nature of credit unions and this is usually a first step towards the downfall of credit unions in most PICs. A weak administration or oversight leads to erosion of confidence and eventually to withdrawal of members. Crucial for sustainability of credit union movement, governance framework and prudent management are key areas that need to be addressed. Addressing these areas should enhance accountability and safeguard members’ interests going forward.
Secondly, most PIC credit unions, in particular the smaller credit unions, are operating manually. Their loans or accounting records are still on a manual system. It is costly for them to buy a good management information system. This manual operation makes updating records and production of reports a tedious task. Having a good management information system is critical for credit unions. Such a system will provide a more coherent approach towards decision making, hence, a requisite to making quality decisions. In the case of Solomon Islands, most credit unions do not have a proper management information system. This contributes to untimely and inadequate production of information for credit union boards and committees to analyse and make prudent decisions for credit unions. Building their own IT system and infrastructure is costly and remains a challenge for most PIC credit unions. Given the exorbitant cost of technology, a cost sharing arrangement with member credit unions network within PIC and the region would greatly assist smaller credit unions acquire proper information systems and boost credit union movement in PICs.
Finally, credit union legislation in most PICs were enacted decades ago, so most of them are outdated and in need of review. To this end, efforts made by some PIC regulators to review their credit union legislation is a step in the right direction. Such a review will provide guidance to credit union operations and ensure credit union board and management are aware of key risks associated with credit unions and how those risks can be easily mitigated through a robust policy framework. In the case of Solomon Islands, the push to review the Credit Union Act has made significant progress and I believe that the outcome of this review will contribute to enhance the governance practices of credit unions in the Solomon Islands. Some reforms, like the inclusion of an “independent director” into the board for example, should minimise conflicts of interest when making decisions. Inclusion of independent directors should also promote diversity of technical knowledge and skills within the board and contribute to effective administration and supervision of credit union operations.
Going forward, the credit union movement in PICs must keep abreast with international best practices in terms of operations and supervisory oversight. Ideally, a body that regulates and supervises banks is better positioned to supervise credit unions in PICs. Most banks and NBFI in the PICs are supervised by central banks so the onus is on PIC central banks to extend their supervision perimeters to credit unions. I strongly believe that PIC central banks should supervise and regulate credit unions, not only because they have supervision resources and experience, but also because such strategy will bring greater public confidence and trust that leads to better financial performance and growth and stability of the credit union movement.
Currently, most credit unions in the PICs, including Australia and New Zealand, are members of the Ocean Confederation of Credit Union League (OCCUL). OCCUL acts as an apex body to the member credit unions and is actively involved in the promotion of credit union education and inclusive networking for the exchange of information and ideas. Board and credit union committees—inclusive of stakeholders across the region—come together and discuss relevant topics relating to the operations and management of credit unions, extending focus and insights on current global trends to technological advancements and encroachments, fraud and risk management, and innovations and reforms of outdated legal infrastructure.
Ideas have been floating around to reform and re-strategise OCCUL as a way forward by the formation of credit union networks across the PIC region. This is to further complement and enhance the OCCUL objective by providing technical assistance to member’s credit unions in critical areas such as financial management and financial sector supervision, analysis and forecasting. In addition, such partnership from member credit unions can tap to stable funding from organisations in developed countries. I strongly believe that such networking, outreach or capacity building programs will assist the credit unions in the region and in turn contribute to the socioeconomic aspiration of members through financial services and creating economic opportunities. Further to governance spectrum, this will no doubt bring an effective platform for the credit union movement in the region to adhere to international best practices so that members have access to reasonable, consistent and sustainable financial services.
Mr Norman Vavaha is a Senior Analyst for Credit Union Sector Unit within the Financial System Regulation Department of the Central Bank of Solomon Islands. Views expressed in this article are his own and do not necessarily represents the position of the Central Bank of Solomon Islands.
For more articles on Pacific island banking sector, visit the South Pacific Centre for Central Banking Pacific Forum.
