Credit Union Policies and Performance in Latin America

This paper explores empirical linkages between credit unions' (CUs) policies and their financial performance. It details an analysis as measured by loan delinquency and profitability, using a unique micro dataset of credit unions in three Latin American countries.

The analysis estimates a translog profit function. In general, the analysis:

• Examines two types of variables:
  • One group that affects the incentives of borrowers to repay loans;
  • Another group that affects the CU's ability to screen loan applications accurately.
• It finds that:
  • Performance depends in important ways on two types of CU policy variables;
  • Certain variables from each group affect both delinquency and profitability, in accordance with theory;
  • The operative level of an average CU reflects administrative inefficiencies.

The paper states that the issues addressed by the analysis have been suggested by economic theory before. However:

• The hypotheses have not been widely accepted by industry practitioners in the sample countries;
• Direct observation of their importance has previously been hampered by the unavailability of sufficiently complete or reliable data.

The concerns tackled in this paper have important policy implications for:

• Successful operation of CUs in developing countries;
• Overall economic development;
• Unprecedented test of administrative inefficiencies of CUs.