Dave Grace

World Council of Credit Unions

Senior 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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 Who is WOCCU
• 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
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 About Credit Unions
• 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.

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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 - Supervision
Range 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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Core Principals for Legal Framework

• Requires Macro conditions

• Economic stability
• Efficient & effective judicial system
• Effective enforcement
• Open economy and private markets
• Property rights & collateral

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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

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 Thank you.

Dave Grace
World Council of Credit Unions
dgrace@woccu.org
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