Teaching Old Dogs New Tricks: The Commercialization of Credit Unions
The potential of credit unions as financial service intermediaries is often ignored because they are seen as failed models, a legacy of the production credit programs of the 1970s and 1980s, when international donors such as the U.S. Agency for International Development (USAID) used credit unions as channels for credit to small farmers. Those programs left credit unions with misguided operating policies and procedures, a belief that borrowers were more important than savers and a dependence on external capital, which brought many to the verge of collapse when donor support was turned off. Rather than building viable, community-based financial service institutions, the donors and government bureaucrats had used them as single purpose channels for subsidized production credit programs. The potential for savings was ignored because the poor were thought to be unable to save, and lending policies were designed to transfer as much credit as possible to small farmers, often ignoring capacity-to-pay and/or guarantees to ensure good loan recovery. When loan delinquency rates increased and donor interest shifted, credit unions that relied on donor resources to finance their lending were left illiquid, unprofitable, and insolvent. This image has remained frozen in the minds of many microfinance professionals who have no apparent desire to revisit the credit union paradigm and look for new ways to make these 150-year-old institutions relevant for poor people living in our time.
The purpose of this paper, which is also published as a chapter of the book “The Commercialization of Microfinance”, is to share with the reader a powerful, new operating methodology that has revolutionized credit unions. This methodology has transformed them into commercially vibrant, highly efficient microfinance institutions (MFIs) that often reach many low- and middle-income clients with a broader mix of financial products and services at more favorable interest rates than do many of the leading microfinance nongovernmental organizations (NGOs) around the world. Even though reformed or ommercialized credit unions are still a small minority in emerging nations, there are enough concrete examples of these reformed institutions in different cultural and economic settings to suggest that they are worthy of a second look, because many of these ideas and principles are relevant not only for credit unions but for NGOs as well, as they embark on a strategy to operate on more market-based, commercial principles. As credit unions and NGOs become more commercial, there emerges a great convergence between the two entities, as they both have very similar operating policies, financial products and services, and clientele. Their collective goal is to maximize their outreach to the poor and disenfranchised people of the world.
The methodology described involves improved accounting and reporting transparency, financial discipline and prudential standards, operating efficiency, financial restructuring, savings mobilisation, product diversification, aggressive marketing and physical image enhancement. The paper also tackles the issue of whether a commercial and a social mission can be merged into one and argues that it is possible to achieve both objectives, but only if the commercial aspects are operating correctly. In conclusion, the authors suggest that there is a unique opportunity for credit unions and microfinance organisations to learn from each other and thus, go forward with greater vigour to reach those in need of their services.