CREDIT UNIONS – PRE-HISTORY AND PERSPECTIVES

Maia Razmadze

Credit unions are a microfinance institution based on self-financing and autonomy. Already Ilia Chavchavadze tried to introduce it in Georgia. At that time, development of credit unions was postponed by wrong management and communist regime…

Reality in the form of market economy have again placed the necessity of forming micro-finance institution on agenda. Credit unions were, first of all, viewed as an additional force for poor farmers and peasants. Presently, there are more than 200 credit unions in Georgia. This network has been expanded by means of donor organisations and financial aid of the World Bank. Yet, foreign experts are discontent. They do not consider these activities successful, but still they intend to support the development of this direction in our country all the more so that their requirement about legalisation of credit unions was fulfilled. The Parliament has recently passed law on “Nonbank Depository Institutions” that helps to form legal framework for credit unions. The reasons of the inefficient work of credit unions are insolvency of population, lack of state subsidy. However, despite the riskiness, agricultural activities should develop and produce good results after a certain period.
David Kirvalidze, minister of agriculture: – during transition period, microfinancing has played an important role in many countries, and it continues to do so. How important is it for the country? The most serious problem for farmers is financial deficit i.e. unavailability of initial capital. The objective reason of it issues from the reality of the country. Today, money is expensive in Georgia. Expensive money means that there is no active market in our country as it is in European countries where an average interest rate of credit ranges from 18% to 24%. Besides, theses are always short-term credits in hard currency, mainly, in dollars. This means that inflation risk will bear heavy on farmers. Such expensive interest rates are a rare thing in agriculture. Certainly, it is not in the interests of banks to invest money in such risky business. The issue of mortgage is also problematic. One of serious levers is microfinance institution, credit unions and credit association.
Credit unions were introduced in Georgia by some organisations. One of them is the World Bank that formed credit unions and American non-government organisation (IFDP) that formed credit associations. Besides, credit unions were formed for internally displaced population at the initiative of the French government.
Credit unions and credit associations help farmers solve their problems, but this network does not comprise the whole of Georgia as well as all farmers. There are more opportunities in the regions with such credit unions: credits are available to farmers, mortgage terms are simplified; there are also such schemes as pledging future harvest, which is a less attractive perspective for banks.
We support credit unions and we think that this microfinance institution is the very lever that we should use. Under the international agreement signed by the ministry of finance and American government, 35 thousand tons of American wheat was imported. The amount of money from the monetisation of this wheat will help to strengthen this microfinance institution. The money will serve as credit resources for these institutions.
Credit associations work non-stop. The work of credit unions of the World Banks has been postponed for a certain period, but it will continue again. They have already started to allot money. Besides, IFAD is much interested in the activities of credit unions. IFAD programme implying development of mountainous regions is aimed at the creation of microfinance institutions and provision of peasants with credit resources. Besides, the Parliament has already passed a bill on credit unions. At the same time, a special registration and supervision team was formed in the National Bank. Creation of credit unions is necessary for the development of big farmers and promotion of co-operation.
Givi Maglakelidze, director of IFAD project on the development of agriculture:
– Credit unions are everywhere in the world, they have a long history. The experience of credit unions or petty farmers’ credit partnerships comes from pre-Revolutionary period. The initiator and founder of these partnerships was Ilia Chavchavadze.
Credit union is a petty farmers’ union that makes credit resources available to farmers. Nowadays, credit unions and associations are transformed into large financial institutions in the whole world. In Georgia they are under way of formation.
Georgia is an agrarian country with more than half of population living in villages. After the transformation that was subsequent upon the disintegration of the Soviet Union, people faced a problem of unavailability of financial sources. Thus, more than 2 millions people were deprived of the opportunity to obtain a credit. The majority of them are unable to make any business. This is the part of population that will not become customers of commercial banks for, at least, 20-25 years, as it has no guarantee funds, and liquidity… Yet, these people need money for buying cattle, equipment, combustive-lubricating materials, etc. Today, they will not be accepted by either the commercial bank or financial institution. Thus, credit union is one of models formed by peasants in villages.
With this purpose, our programme IFAD (International Fund of Agricultural Development), the World Bank and the Georgian Government launched a test pilot activity in order to create background and basis for the development of financial unions. Today, dozens of financial unions were formed. Thousands of people have been members of the unions since 1997. The first credit unions were formed in Kavtiskhevi. Farmers had the opportunity to take a loan without having to go to Tbilisi. In their turn, banks are right, too. Proceeding from the opportunities, strategies and monitoring, it is not advantageous for banks to give 300-500 GEL or even 1000-2000 GEL to one person. Such diversification of loans is unacceptable to banks. Yet, credit union is the only opportunity for a peasant to borrow and repay money without having to leave the village. Credit union is not only an attracted resource. It implies that people should save money themselves, create credit, relief funds, capital and other monetary resources.
After the creation of such background, an issue of forming legal, institutional formation was placed on the agenda. It was necessary to pass a law or normative act that would regulate this activity. International experts and the National Bank took part in the preparation of the law. A department of the National Bank was formed to supervise activity of Nonbank Depository Institutions. Credit unions are one of the most important parts of these activities. Thus, the country has legal framework necessary for the work of credit unions. When America experienced a serious crisis in the 30-ieth, Roosevelt decided to allot money from federal resources. He gave it to farmers through credit unions. Thus, he made 6 mln. farmers work on the land, and America turned into a larder for the whole world. This became possible by means of using model of credit unions. Nowadays, there are no other institutions in Georgia assisting farmers.
Naturally enough, there are problems, too. It is difficult to execute work of credit unions in a country with serious macroeconomic problems. A farmer is the most conscientious and responsible citizen. However, it is very difficult for a farmer to cover a debt due to climatic and macroeconomic problems. There are other objective reasons – drought, flood. That is why credit unions need state support, otherwise they might face difficulties.
– What do you mean by support?
– It is necessary to introduce a system of long-term loans, establish a real interest rate, and restructure credit unions. It is forbidden to issue 3-month, 6-month, annual resources of credit unions. There should be long-term credits in villages so that a peasant could make a vineyard, plant fruit trees, etc. State support is necessary.
– There is an answer to it – the state has no funds.
– There are necessary funds, i.e. credit resources have always existed, even in international financial institutions. When credit unions strengthen in the country, international commercial banks will join the process. The greatest French bank “Egrikolbank”, Dutch Bank “Rabobank” in work in this direction. Credit unions in Ireland are so strong that they even provide state with assistance and give it loans for the construction of bridges and roads. It is money-and-credit and financial institution. We need much support in order to reach the same level.
– There are strong credit unions in the World Bank and Monetary Fund. However, their macroeconomic situation is, certainly, strong as there are high salaries there. Credit unions are created by one group, and factor of trust is high. However, we should take into account the fact that peasants are hard up in our country. The government should solve many problems issuing from the reality. By the government I mean state institutions dealing with the issues.
– What will be the effect of the law?
– The law will produce good effects. First of all, there will be legal framework. The law says that credit unions should obtain licensing and pass registration. Financial parameters become evident – the volume of capital, structure of managing credit unions. The law provides for eliminating cases of the so-called “pyramids” and other ugly forms. Under the law, the activities of credit unions are regulated by legislative norms. This is very important.
Temur Kuprava, head of the project of agricultural development in the World Bank and Centre of the development of credit unions: – In our country and other foreign countries, credit unions served as a structure for credit resources in the village. This branch is weak for the development and support of agriculture because it has small profit, and it will face difficulties without special programmes. A clear example of it is world experience. 85% of agricultural loans fall at the share of the well-known French bank “Egrikolbank”. The state provides subsidy of interest rates from which farmers receive funds. The same thing is in developed countries, i.e. special banks finance agriculture there.
Today, there are, in fact, no agricultural credit unions. They are in villages, and they, certainly, finance agriculture. 70% of Irish population are members of the Irish league of credit unions. The example of Poland is the newest one. It took Poland 10-15 years to make it possible for credit unions to work on their own means. They used to be financed by different projects. They overcame all problems usual for such financing. Today, they are considered to be one of systemised structures, schemes. Europeans plan to form a common centre of European credit unions of which Poland will become a centre.
Stable service of loan is possible only in case of regular income. In our country rural inhabitants derive profit, mainly, from the realisation of products. The funds should be enough for a farmer to cover everyday expenses. Therefore, he, certainly, encounters with difficulties. Credit is repaid in due date. Credit unions have passed through serious ordeals in our country. However, rural inhabitants understand that there is no other source for financing their work. Therefore, they try to preserve the institution. They trust credit unions and understand that it is a co-operative society that they should manage themselves.
Generally speaking, microfinancing sector is a niche in our market that cannot be occupied by a bank. Therefore, service of this niche should be undertaken by someone else.
Msia Tefnadze, head of supervision administration on Nonbank Depository Institutions: – In 1996 by the decree of the President, a basis for the activities of credit unions was formed. This decree was passed on account of difficulties caused by the disintegration of the old system, abolishment of collective and state farms, a vacuum and problems in the sphere of tillage, supply and realisation of goods. These problems are actual today. When this or that activity is connected with certain traditions, there arises a vacuum, difficulties that should be overcome before new ways are found. Besides, natural persons had no work experience with loans in the earlier period. Legal persons dealt with this sphere i.e. population had no knowledge of such work. It was one more reason for the formation of credit unions with the purpose of overcoming difficulties and restoring agriculture. These unions would make credits available to the population and would, therefore, make their life easier. The above-mentioned decree of the President served this very purpose that, to a certain extent, filled the existing legislative vacuum. According to the information of the Statistics Department, more than 200 credit unions have been registered in Georgia since 1996.
Credit unions were formed in 1880 in Georgia i.e. this issue was still of interest. At that time, relations were based on private property. A question was raised about passing a law that would regulate their activities. The whole part of entrepreneurial law is devoted to co-operative societies. Credit union is a form of co-operative society, too, but of a narrower profile. As there are so many credit unions, it became necessary to pass the law. Both old credit unions and new ones will be regulated by this law.
Credit union is an organisation based on voluntary basis. Members of unions can be united in accordance with their profession, place of residence. There was a mutual aid fund when I started work in the State (now National) bank. It has existed for a long time, but we have not fully realised where it sprang from and which legal status it was determined by. One thing was clear – we, each of our co-workers needed it. We saved particular sum, our savings. This was, certainly, registered. All of us felt importance of mutual aid fund – the small sums that we invested were our savings. It was no use going to bank for this purpose. It was impossible to save it at home, too. If I needed money, I knew that no one would refuse me. There was such an orientation – contribution plus salary. I could take a loan of this sum. It was very comfortable. I put my savings into circulation. The second party was not afraid of giving me a loan because I worked and received a regular salary. It was a good insurance for both parties.
This very principle underlay activities of credit unions, i.e. they are based on the principle of autonomy and self-financing. The leitmotif of the law was this very approach.
The law does not define amount of contribution, but as it is part of banking there will be no results if the amount of contribution is one tetri, even if there are thousand people in the union. The law says that the amount of contribution is determined by members of unions, but the minimal sum is periodically determined by the National Bank. Thus, the sum should be minimal. However, members of co-operative societies should take into consideration the fact that they will have to issue credits in accordance with the amount of contribution, demands on credits and, finally, efficiency of covering loan.
– The state will supervise activities of credit unions by means of the National Bank from now on.
– It is one thing that credit unions make contribution in the form of shares, but it is another thing that they pass money into an account. Under the organic law on the National Bank, the National Bank supervises each person who attracts deposits. The state gave this function to the National Bank in order to protect population from waste of deposit. The National Bank will control which direction this or that team moves, whether it faces bankruptcy so that the National Bank could intrude into its activities and protect it from danger by using its authority. With this purpose, this form of control was accepted and activities of credit unions were subject to license. After the enactment of the law, no one will have the right to form a credit union without license of the National Bank. Credit unions will have to bring this activity into accord with the law.
– that means bringing into line.
– Credit unions have three steering organs – general meeting of members of credit unions and Observer’s board. Observer’s board controls the way policy is pursued as well as the way financial and banking activities of the credit unions develop. The board represents credit union before a third person. It creates rim zones within the union. One of such aides is credit committee. Members of union receive loans through the committee. It is necessary to determine policy so that this work would not be spontaneous. The law defines the amount and terms of issuing credits.
– The board is governed by an executive director who is a member of the board. An employed person can also be appointed an executive director in case no member of the board has experience in banking. It is one of nuances of management and self-government provided by the law.
– The law will come in force since October one. If by this time the credit union does not become a licensed organ, it will not be able to proceed with its activities. The credit union is, first of all, called upon to reorganise such organisation that would be helpful for our rural population during reproduction. As far as you know rural population is more hard-up that urban one. They are fully dependent on climatic and natural conditions. There are many problems and risk factors ranging from the process of turning to realisation of production. All this affects their economic situation. Given the fact that population is in a very hard economic situation, credits are, certainly, not so capable as necessary, i.e. contributions are not so mobile as to make these unions profitable. Foreign instructors understand quite well what helps the country to overcome poverty and invest much money in such credit unions. They demand guarantees that these sums will be protected and will really reach people who should become their real consumers. Even if everything goes the way it is planned, the second party still may have some doubts that, probably, something was wrong. Thus, foreign instructors’ demand was a main reason of passing the law.
– Now we should try to make all efforts and assure population that they need these credit unions.