BANK OF PAPUA NEW GUINEA
PACIFIC CREDIT UNION TECHNICAL CONGRESS 2014
6th NOVEMBER 2014
MR. LOI M BAKANI
GOVERNOR
BANK OF PAPUA NEW GUINEA
1. Acknowledgements
Members of the OCCUL Board
Board Members of Credit Unions in Pacific
Distinguished Guest Speakers
Congress Delegates
Ladies and Gentlemen
2. Introductory Remarks
Let me begin by thanking OCCUL for inviting me to speak at this
Congress on ‘The Future of Credit Unions given the Global Regulatory
Trends’, from my perspective as the Governor of a Central Bank in the
Pacific Region and Registrar of Savings & Loan Societies in PNG.
I suppose the greatest strength for the credit union movement lies in the
model it is built upon which is based on the interdependence and mutual
support by each other, the members. Credit unions are all about
financial inclusion. They provide services to their members who may be
part of the working class, civil servants, or community based. Credit
unions provide services for small savers, big savers, small borrowers
and big borrowers alike.
Even though our credit unions in the Pacific vary significantly from
country to country, in terms of the level of development, or maturity they
are at and the applicable rulebooks, the challenges faced by
practitioners and for Regulators are similar.
Secondly, credit unions provide competition in the financial
intermediation market and are some of the major players in the Pacific
region too. The credit union movement will have to continue changing
with the times to meet its members’ needs, to fend off competition, from
other financial service providers to survive in a very competitive industry
and environment.
Competition has its benefits. It forces the credit unions to be managed
professionally and diversify and improve on the services it provides to its
members. Credit unions are another tier of financial institutions providing
financial services like any other tiers of financial service providers. The
products and services depend on how credit unions are structured in
each jurisdiction. Some operate almost like small commercial banks in a
competitive environment, while others remain small, concentrating on
fewer basic services for its membership. The sustainability of the credit
union movement requires that credit unions get into increasingly riskier
activities to survive in a highly competitive industry. In these
circumstances, formal rigorous supervision will become more critical.
From our experience, credit unions or savings & loan societies as they
are referred to in Papua New Guinea (PNG), are increasingly aware of
their own challenges and are taking measures to maintain their positions
or space in the market. However, to do this, societies continue to seek
the Registrar’s endorsement to venture into these risky activities. We
wanted to do away with that and therefore have proposed some
legislative reforms to give boards and management more opportunities
and decision making in operation of their institutions.
3. Increased Regulatory Compliance
In discussing the benefits of credit unions, I am mindful of the increasing
need for regulatory compliance globally and we in the Pacific are no
different. Ladies and gentlemen, I know you will agree with me that
credit unions have evolved over time. There has been a lot of growth in
the movement in terms of membership, the growth in asset size and how
credit unions do business (refer booklet by OCCUL). We cannot allow
the movement to be stagnant, it has to be guided to adapt to global and
domestically driven changes. In doing so, legislative reforms have to be
made to enable appropriate and relevant regulation and supervision by
the Regulator. As we all know, the high demand for regulatory
compliance increases costs. This is inevitable but one that should be
balanced. Increase in regulation can be due to a number of reasons:
A policy change by government or the standard setters.
Effects of globalisation, for example the Global Financial Crisis.
Technological innovation is becoming the order of business
operations today and if credit unions are to survive, reforms should
be encouraged to enable changes and enhancements to be made.
Technology is changing the landscape of the way business
conduct themselves. For us in the Pacific, the population is
scattered throughout many small islands and into the rural
communities, which makes provision of financial services and
accessibility for these services very costly. Technology like the use
of mobile phones by credit unions will enable availability and
accessibility of services to reach the rural majorities.
Thirdly, there is increasing trade across borders made possible by
technological innovation and whilst it is good, it has its own risks
such as money laundering, terrorism financing and scams. Thus,
regulation must be appropriate to govern them.
Questionable practices by those entrusted with the duty to manage
credit unions resulting in enacting rules to correct those practices.
Topical issues today include financial corruption, insider trading,
and conflicts of interest.
4. Global Regulatory Trends
Ladies and gentlemen, the credit union sector in the Pacific plays a
crucial role in helping to meet financial, economic and social needs of
our people. However since we are part of a global village, whatever
happens in the World economy affects how we do business in the
Pacific. This was seen clearly by the recent global financial and
economic crisis which prompted governments to come up with new laws
and rules to safe guard banks and financial institutions from systemic
risks.
At this point let’s discuss some issues relating to the global regulatory
trends.
The World Council of Credit Union (WOCCU) 2013 Annual Report,
highlighted the following four issues as key challenges to the credit
union movement, which are: 1. Increased regulatory burden; 2.
Payments innovation; 3. Young adult membership growth; and 4. Small
credit union sustainability. Those of you who attended the World Credit
Union Congress in Gold Coast may remember these issues being
discussed.
Firstly, I see these challenges as the key areas that are driving the
regulatory trend. Since the global financial crisis, governments around
the World have tried to push for credit unions to come under close
scrutiny and regulation, which is good for the credit union credibility but
can damage the movement. For example, pushing smaller credit unions,
to report as per the International Financial Reporting Standards (IFRS)
for credit instrument impairment and BASEL III Requirements. This goes
also for AML compliance. Whist they are appropriate for bigger banks,
they may not be for credit unions because the credit unions are
established to promote thrifts and provide access to credit for provident
purposes and are an alternative to the banks and financial institutions.
Therefore, it is becoming increasingly difficult for credit unions to serve
their members when such laws and regulations are ignoring the
business structure and size difference between credit unions and banks.
However, if the regulation is streamlined to a model conducive for credit
unions to grow, regulation of the sector will be beneficial in the long
term.
In PNG, we have taken the initiative to review the Savings & Loans
Society Act in close consultation and input from the industry. The review
of the draft S&L legislation has been completed in 2013 and has now
progressed to Parliament to be finalised and passed as law. It is our
wish that the new legislation will assist the industry to grow and allow for
the expansion of societies/credit unions in the long term.
We must be committed to enhancing the credit union movement as
much as possible particularly with regard to business lending and raising
of capital, but at the same time we also need greater flexibility in order to
serve our members.
Secondly, another trend the credit unions worldwide are embarking on is
to address payments innovation, where credit unions venture into
partnerships with private sector to improve their payment systems. As
experienced in PNG, some societies have been able to build shared
mobile phone technology platforms to provide the underserved members
with access to their accounts and other financial services provided by
the society through mobile banking products. The PNG financial
institutions & credit unions have teamed up with mobile network
operators such as Digicel to extend their services to the rural areas
where banking services are not available and thus fulfilling the financial
inclusion mandate.
Thirdly, we also see a trend in addressing membership growth of
financial institutions & credit unions through networking workshops,
educational awareness and financial inclusion expositions that are been
conducted to disseminate information, open new accounts, conduct
awareness and share best practices. These new innovative products &
services offered are effectively reaching potential unbanked members
through mobile phone technology, marketing outreach, financial literacy
and social media advertising. In PNG, savings & loan societies have
signed up and partnered with the mobile service providers & the
Microfinance Expansion Project funded by the Government and donor
organisations to open up new savings accounts and promote best
practises in the use of these products.
Fourthly, to ensure sustainability of smaller credit unions; Credit unions
& financial institutions are being challenged continuously by regulatory
burden, to improve or acquire cost effective management information
systems and membership growth. This dictates the use of systems that
are capable to assist and sustain its operations. Therefore credit unions
have engaged with system developers to discuss collaborative solutions
such as shared back office systems and payments platforms etc. The
lessons learnt from such arrangements have allowed other collaborative
networks that can improve small credit union efficiency and allow them
to offer the full range of products that consumers demand. In PNG
FESALOS facilitates the ULTRA DATA 3 that is used by member
societies to run their operations.
5. The future of Credit Unions
Our industry landscape may continue to change every year, but our
common mission and values continued to resonate with consumers.
Across our global community, we find a variety of modern tools and
methods to respond to our common challenges. When we collaborate,
we have the power to share innovative ideas and strategies that help
strengthen the future of the credit union movement.
We all know that the global financial crisis created a need to develop an
industry model that would pave the way towards success for the
movement in the Pacific. This has also brought with it a need for banks
and financial institutions to be more closely regulated and in turn
increasing the costs of compliance. Currently there is inefficiency in
capacities of the regulator to properly regulate while on the other hand
the credit unions often lack the capacity to comply. The industry needs a
model tailored to its needs; one that encourages expansion and allows
consolidation where appropriate to increase services to the members
under economies of scale.
We have seen in the last five (5) years a number of countries have
undertaken major reforms in legislation of credit unions. I understand this
is the same in the Pacific. Times have changed, and we have to model
these changes or else our industry will be left behind.
Reforms must be appropriate and relevant to the challenges facing the
movement. Any legislative reforms governing credit unions and societies
in the Pacific should aim at promoting growth and development in the
industry and not stifle it. As our governments, various regional groups
and donors focus increasingly on regional/Pacific cooperation and trade,
this may provide an opportunity for the CU movement in the Pacific to
consider ways to expand and sustain itself in future.
Credit unions are here to stay. Its sustainability depends very much on
each of us here today in ensuring:
Systems of Good & Strong Governance is in place to ensure
accountability at all levels, from management through to the board.
Our members should feel comfortable that their savings are safe
and that they will continue to have access to them and other
services provided by the society;
Fit & Proper Persons – having the right people in management
and the board is critical to the success of credit unions who will
drive the credit unions forward;
Training for staff, management and the board is also critical and
should form part of the credit union yearly plans. Do not downplay
the importance of training. If you want good returns and provision
of quality services to members, then training should be given the
importance it deserves.
Adequate Risk Management Framework must be in place. Your
understanding of this area is a must. If you understand, you will
work to ensure it is in place. If you don’t, then you could be a risk
to the entity.
Suitable Products for Members - ensuring that products being
developed are suitable for your members. Credit unions should not
be wasting their resources on developing products that are not
suited for the members.
Member Protection and Awareness - needed to ensure
satisfaction, confidence and sustainability of the industry. Our
members, like any consumers demand protection from improper
practices in service delivery, want fair and competitive service at
appropriate cost to them. CUs need to focus on their members
welfare in regard to services they can access.
6. Conclusion
To conclude, I have highlighted that given the ever changing global,
regional and domestic economic and financial environment, the
complexity of the financial system, products, transactions and structures,
the complexity of demands by consumers and membership of CUs,
there is now a common trend for increased regulation and supervision.
Coupled with increased competition that CUs have to tussle with, other
issues like money laundering, terrorism financing, financial corruption
and scams have reached the forefront of regulators. Making reforms to
legislations and regulation are necessary. But the capacity for regulators
to regulate, and for CUs to comply with them is an ongoing challenge.
Finding the balance between the two, and the appropriate model for the
CU movement is always the challenge for regulators.
Some of you participants will be graduating tomorrow under MCP, and I
hope that you are already using the new knowledge to meaningfully
contribute to the operation of your respective credit unions and thus the
movement as a whole. If you have not started, start as soon as you go
back and make a difference. The knowledge you have acquired is not for
you to keep but to use it.
I congratulate you for your achievements and wish you all the success in
implementing these lessons in your institutions.
I wish OCCUL all the success in hosting this event.
Thank you for listening & God Bless.