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Dave GraceWorld Council of Credit UnionsSenior Manager
Dave GraceWorld Council of Credit UnionsSenior Manager
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Presentation Agenda
• Auditing standards in credit cooperatives
• Earnings distribution
• Requirements for an adequate legal framework for financial cooperatives
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• 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
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• 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
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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
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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
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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
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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
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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
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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
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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
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• Requires Macro conditions• Economic stability • Efficient & effective judicial system• Effective enforcement• Open economy and private markets• Property rights & collateral
Core Principals for Legal Framework
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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
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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