Teaching Old Dogs New Tricks: The Commercialization of Credit Unions
This document discusses open-bond and close-bond credit unions and states that the microfinance industry of today often ignores the potential of credit unions as financial service intermediaries because they are seen as failed donor initiatives. In addition, the potential for savings was ignored because the poor were thought to be unable to save, and lending policies were designed to transfer as much credit as possible to small farmers, often ignoring capacity-to-pay and/or guarantees to ensure good loan recovery.
The paper examines a new operating methodology that has transformed credit unions into commercially vibrant, highly efficient microfinance institutions (MFIs). This new methodology has allowed credit unions to reach many low- and middle-income clients with a broader mix of financial products and services at more favorable interest rates than many of the leading nongovernmental MFIs. The new methodology is comprised of 10 linked components:
- Accounting and reporting transparency;
- Financial discipline and prudential standards
- Operating efficiency;
- Financial restructuring;
- Physical image enhancement;
- Savings mobilization;
- Product diversification;
- Aggressive market penetration and expansion of new market niches;
- PEARLS (Protection, Effective Financial Structure, Asset Quality, Rates of Return and Costs, Liquidity, and Signs of Growth) monitoring system;
- Stakeholder equilibrium.
