11-year stalemate!
Published:Sunday | May 8, 2011 | 12:00 AM
Avia Collinder, Business Writer
The negotiations have been ongoing for more than a decade, but credit union bosses want even more dialogue, saying five of the new rules being imposed on them by the central bank are not in the sector's best interests and are likely to contract rather than grow business.
But the Bank of Jamaica (BOJ) has indicated that its position on the disputed regulatory standards will not change, saying the rules are no more onerous than the existing local and international rules on which are they based.
A meeting of the umbrella Jamaica Co-operative Credit Union League (JCCUL) late last month mandated the agency to continue to forcefully press this point and seek new concessions not from the BOJ, but from the minister of finance, to temper the rules.
JCCUL General Manager Glenworth Francis says he did not, as reported, reject wholesale the pending regulatory regime.
No consensus
"The league and the Government - the Ministry of Finance and the Bank of Jamaica - have been in negotiations for 11 years," said Francis.
"We came to agreement on a number of areas, but there are five areas over which we have not reached consensus."
The five points of conflict, which he said are the subject of negotiations, are: capital requirements to start a credit union; the claim on dormant funds by the Ministry of Finance; a proposed 10 per cent portfolio limit on unsecured loans; the time limit on the period in which adequate capitalisation can be achieved; and the amount of cash reserves to be lodged at the central bank.
The community lenders are especially galled by the 10 per cent credit limit on unsecured loans, saying they have successfully managed loan portfolios without such restrictions for seven decades.
"This requirement exists in no other sector. We have been in the business of making loans for 70 years. We are able to take a lot of security, which is not considered collateral by regulators," said Francis.
"We were set up to provide for poorer Jamaicans who do not have collateral in the form that other institutions require. We do not see the need for a 10 per cent limit on unsecured loans, and we want this requirement removed from the proposed regulations."
The BOJ's Gayon Hosin, deputy governor responsible for financial institutions supervision, said last Wednesday in response to the JCCUL annual general meeting mandate, that the central bank will not be drafting new regulations, and that those already put forward were the result of over a decade of consultation with the credit union movement itself, including the World Council of Credit Unions (WOCCU).
The formulation of the clauses, says Hosin, were "based generally on the best-practice rules set out by WOCCU for the guidance of credit union movements across the world, as well as critical prudential safety and soundness standards, which have been adapted as appropriate for the credit union sector".
The regulations she said, include a minimum capital requirement of J$5 million as a condition of licensing, and a requirement that aggregate unsecured loans be capped at 20 per cent of the credit union's regulatory capital.
The local credit union movement is now largely self-policed under the JCCUL.
The sector, after the 1990s meltdown of the financial sector, though largely unscathed by it, thought it best to seek an independent arbiter to maintain watch over their affairs in order to avoid falling into the same circumstance in the future.
They have been negotiating with the BOJ to develop the regulatory framework since 1999, the year they were designated "specified financial institutions" under Section 2 of the Bank of Jamaica Act.
The designation effectively established a reporting relationship that allows the central bank to obtain information from credit unions and to do periodic on-site examinations, Hosin said.
Real progress
The drafting of regulations, which began in September 1999, made real progress years later to facilitate implementation of a full supervisory framework for credit unions. The process led to the drafting of the 'Bank of Jamaica (Credit Unions) Regulations', which was approved by Cabinet on August 10, 2009, and is soon to be tabled in Parliament.
Francis says that overall, the portfolio of unsecured loans across the sector is already less than the 10 per cent limit.
But, he acknowledges, there are are some credit unions with a much larger ratio, and some with a lower figure, arising from "their individual ability to manage risk, their membership bond, and their business model."
The movement also objects to the policy for unclaimed monies from inactive accounts, which existing law already specifies would be taken over by Government after 15 years of dormancy.
"We say that anyone who joins a credit union does so by signing a nominating form in which they name a beneficiary. There are no unclaimed monies in the credit union," said the JCCUL head.
"Additionally, a number of Jamaicans migrate with the full intention of reactivating their accounts on their return. Finally, there are older Jamaicans who deliberately leave their funds in the credit union so that younger Jamaicans can benefit from it," he said.
The JCCUL estimates that about 10 per cent of credit union deposits are now sitting in dormant accounts.
Based on the J$47.63 billion value placed on credit union savings at December 2010, the Government could inherit J$4.76 billion of their holdings once the law is passed to place the lenders under the ambit of the central bank.
The JCCUL also considers the requirements for capitalisation onerous and likely to limit new start-ups.
"It is a barrier to poor people helping themselves. Five million dollars is a smokescreen because the BOJ's proposed regulations also state that the capital base must be six per cent of assets. Effectively, therefore, one would need to save J$90 million before starting a credit union," Francis charged.
No agreement
To date, he stated, there has been no agreement between the credit unions and the BOJ over this matter, nor have they made headway on the fourth area of conflict: the mandated one-year period over which minimum capital requirements must be attained.
"We think this should go back to two years," said Francis.
"Although it appears now that many credit unions are adequately capitalised, when different standards are applied, they might not be. Some loans are secured by appliances and by salary deductions. These will not be considered collateral and might be deducted from capital from the BOJ by the regulator," said the JCCUL head.
"So, because of the standards that will be used, some credit unions might end up undercapitalised."
Additionally, the small lenders are pressing back against the reserve requirements as an opportunity cost, as less cash at their disposal could force them to raise lending rates and make their businesses less competitive.
The JCCUL, at the AGM, said members were asked to vote for a resolution in support of the negotiating position, "which they did overwhelmingly," said Francis.
"Our next step will be to seek dialogue with the minister of finance, and also to make our members aware."
In the meantime, the window to continue lobbying has narrowed.
"It is the bank's understanding that the draft regulations are currently in the process of being finalised for laying in Parliament," said the central bank official.
"Note that in the absence of passage of these regulations, the Bank of Jamaica has no statutory authority over credit unions except to receive information as noted."