1

Dave GraceWorld Council of Credit UnionsSenior Manager

Dave GraceWorld Council of Credit UnionsSenior Manager

2

Presentation Agenda

• Auditing standards in credit cooperatives

• Earnings distribution

• Requirements for an adequate legal framework for financial cooperatives

3

• Represents >120 million credit union members in 85 countries worldwide.

• Manages long-term TA programs to develop, strengthen, & modernize credit union systems Africa, Asia, the Caribbean, Central Asia, Europe, Latin America, & the South Pacific.

• Works to create a appropriate legal & regulatory environments for safe & sound credit union operation

Who is WOCCU

4

• Credit unions (a.k.a. credit cooperatives) are financial cooperatives that are user-owned MFIs offering savings and credit services

• Depending on a country’s legal framework, credit unions may be authorized by Superintendency of Banks, Central Bank, Ministry of Finance, Ministry of Cooperatives, or freestanding law to mobilize savings.

About Credit Unions

5

Auditing standards• Traditional Supervisory Committees in credit

cooperatives

– The traditional role of Supervisory Committees has evolved to an External/Internal Audit committee in credit cooperatives

– Strong preference for annual external auditor and periodic internal audits to be conducted be qualified external professionals (internal audits can be performed by staff reporting to Audit committee)

– Only in very, very small institutions should this be contemplated to be accomplished by volunteers and even then minimum criteria exist

6

Role of the External/Internal Audit Committee

• Perform or preferably, appoint an external professional auditor to review records within 90 days of close of fiscal year

• Perform or preferably, contract professionals to conduct frequent internal audits throughout the year covering operations, regulatory compliance and internal controls

• Present audit findings and annual audit to full board of directors and annual general meeting

• Follow up on all recommends made in audits

• Ensure independence and non-obstruction of annual and internal periodic audits

7

External/Internal Audits should include

• Evaluation of assets, liabilities & capital• Verification of cash balances, securities and all

member accounts• Examination of delinquent loans• Loan loss provisioning• Loans to officials & loan documentation• Accounting treatment used• General ledger & subsidiary ledger balancing• Compliance with laws, regulations & bylaws• Review of suspicious activity

8

Prudential Auditing - SupervisionRange of Preferences:

- Direct Supervision of all credit coops by government financial sector regulator– UK, Australia, US, most english-speaking Canada, Ireland, Costa Rica, Colombia- Direct Supervision of the large ones – Ecuador, Bolivia, Chile and Uruguay

Delegated supervision: Much of western Europe, Qubec Canada, Mexico

Self Regulation: Peru, Jamaica

9

Earnings Distribution• The first priority is capitalization to a level required by

regulation and based on business needs

• What is capital in a credit cooperatives– Regulatory reserves– Retained earnings – Donations/grants– Year to date net income that has not been closed to retained

earnings

– Ownership shares are not capital unless it they are permanent and unencumbered. See International Accounting Standard 32

10

Earnings Distribution

• Only after the organization is adequately capitalized should it consider an ownership share dividend

• Dividends on demand deposits should paid monthly as the business model permits

11

What is needed for strong credit coop legislation

• Specific law for financial cooperatives

– Separate from the general cooperative sector because of technical aspects of financial intermediation

– Separate from banking because of cooperative ownership and governance structure

– Separate from specialized laws that do not address savings component

12

• Requires Macro conditions• Economic stability • Efficient & effective judicial system• Effective enforcement• Open economy and private markets• Property rights & collateral

Core Principals for Legal Framework

13

Core Principals for Legal Framework

• WOCCU survey of over 100 countries indicates those countries with unique laws and strong financial sector regulation for credit cooperative have the most sophisticated credit coop systems

= OUTREACH

14

Legislative Tools

• Model Law for Credit Unions – model legislation for credit cooperatives

• Guide to International Credit Union Legislation – provides digests of actual credit cooperative laws and regulations in over 100 countries

• Both have been updated in 2005

15

Thank you.

Dave GraceWorld Council of Credit Unions

dgrace@woccu.org