Governance, Regulation, and Supervision of Cooperative Financial Institutions

A call for specific supervision of cooperative financial institutions
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This presentation highlights the need for specific regulation for cooperative financial institutions (CFIs) and develops principles for effective CFI regulation and supervision. The presentation begins by outlining the context and motivation to develop separate regulation for CFIs and the links, overlaps, and areas of confusion between CFIs and microfinance.It then presents the following factors that justify specific regulation and supervision for CFIs:

  • Owners are both suppliers and users of funds;
  • CFIs are usually under a combination of laws of both cooperative societies and banking;
  • Sources of default risk are usually connected to governance.

The presentation discusses governance and risk in CFIs, listing agency conflicts that include:

  • Conflict between strengths and weaknesses of cooperative principles;
  • Member-manager conflicts;
  • Governance trade-offs involved in scale;
  • Net borrower - net saver conflict.

The presentation discusses:

  • CFI alliances (networking) as a possible method of governance, listing their advantages as well as possible sources of stress;
  • The legal environment and calls for:
    • Learning from past mistakes;
    • Reconciling differences with NGOs and microfinance;
    • Having specialized CFI laws;
    • Addressing agency conflicts;
    • Evaluating control mechanisms;
    • Incorporating indirect/ auxiliary supervision.

The presentation concludes by marking a path towards principles of CFI regulation and supervision by finding a consensus for the experience of banking, and experience with previous models and against local politics.