ࡱ> [ bjbj 8Rΐΐb6.h   8ED iC3([[666BBBBBBB$EG>66666#!!!6B!6B!!<D?[Z)6 fX=B9C0iCv=G,G<D?GD?66F!66666CCF!666iC6666G666666666 : Cooperatives, Legislation and Public Policy: Political, strategic and technical pre-conditions for Effectively Regulating Financial Services Cooperatives by Peter van Dijk, Consultant Microfinance CONTENTS Introduction page 1 Role of Government page 4 General Principles of financial services cooperatives page 9 The risks of government and foreign support page 21 A possible development process for financial services coops page 22 Conclusion page 23 Introduction, country experience with Microfinance Cooperatives The main objective of the paper is to explain how policies, laws and regulations can build a framework that can successfully enable and support the sustained growth of cooperative societies that provide financial services for unbanked people in countries with massive poverty challenges and an underdeveloped infrastructure. National regulators can only undertake a strong enabling and supporting role when they understand well the principles and governance rules of financial services cooperatives and are able to decide on their interpretation and application. This paper is based on working on regulation & supervision in microfinance and financial sector development in East Africa (Kenya, Tanzania, Uganda), West Africa (the 8 Francophone member countries of the UEMOA, plus Guinea and Mauritania), Southern Africa (Madagascar and South Africa), Cambodia, Laos, Pakistan and Indonesia. In all these countries operate or operated financial institutions established as cooperative societies. These organisations aim specifically at providing financial services in a sustainable manner to citizens that are not clients of banks. The main reasons for which they are not banked are that they have low and unstable incomes and/or that they live in areas where commercial banks do not operate (no branches, no agents, no mobile banking activities). Recognising that financial services are important for people in managing their lives and in improving them, governments and aid agencies have undertaken initiatives in all the above-mentioned countries to support the development of financial services cooperatives as an alternative to banks. Savings & Credit Cooperatives (Saccos), or similarly organised microfinance institutions (MFIs) such as Village Banks, have operated for over a century in many African countries During British influence, cooperative movements were started in East Africa with British support and cooperative departments were established in governments. ɫ Cooperatives organisations, Sacco and Credit Union (CU) specialists as well as other donor agencies subsequently collaborated with East African Saccos. Performance assessments made over the last years report that Saccos in the region have crumbled or face many common challenges that will be explained below. In the Francophone West African UEMOA region (8 member countries, some 80 million inhabitants) hundreds of MFIs registered with national MF departments in the Finance Ministry who have no means to effectively supervise them. As a consequence of a foreign donor project, the cooperative society is the dominant legal status of MFIs in this area. Recently the regional central bank (BCEAO) started a program with support from aid agencies to help improve ministerial supervision of the largest MFIs. Some of these Coop MFIs have hundreds of thousands of members and collect the equivalent of millions of US$ in deposits and savings of poor and/or rural citizens. This regions MFIs have a high coverage rate (some 10% of the population). Over the last five years external loans and investments to MFIs are increasing whilst member savings are decreasing. At the same time, Portfolio at Risk hovers over five per cent, well beyond BCEAOs standard of three per cent (its definition of PAR is lenient too, three months past due, where global best practice defines it as one month past due). In South Africa, some 30 Savings and Credit Cooperatives are member of the SACCO League (SACCOL). Since its creation in 1993 these Saccos report around 10.000 members; they are mainly credit oriented and donor dependent. Most are small and weak. When discussing with SACCOL the winding up of weak members, its MD explained that their weakness has been due to insufficient political support and donor grants, although they already depend on such support. Saccos have also been created by government departments, trade unions and individuals. The central (Reserve) bank is responsible for the Saccos but seems to undertake few activities. A Mutual Banks Act was established in 1993 but no Sacco has been able to transform itself into a mutual bank. In 2008 a Cooperatives Bank law was introduced. The law gives special attention to support organisations, collecting and managing grants and establishing a specific Cooperative Banks Development Agency. No attention was given to principles for the proper functioning of a cooperative bank, their savings orientation, the common bond between founding and client members, voluntarism, financial autonomy and active member control. In Pakistan, a big country with some 170 million people many of whom are poor and/or live in rural areas, cooperative societies providing financial services were created half a century ago with strong government support. Many failed dramatically, together with provincial cooperative banks which functioned as wholesale organisations, nearly all have been closed down. The central bank (SBP) concluded in a report last year that the main reasons for failure were politicisation, misappropriation and fraud (especially by wealthy landlords), bad collaboration between federal and provincial government, credit-focus and external (mainly federal) funding for credit. Nevertheless its Governor proposed a revitalisation of the MF coop-s under a different name, Credit Unions. In Cambodia and Laos cooperative societies have been identified by foreign donor agencies as a promising set-up for MFIs notwithstanding the reticence of government and citizens due to past communist-inspired experiences. Foreign agencies requested central banks in both countries to allow them to create and operate cooperative MFIs with a mild information obligation. These coops have limited operations. In Cambodia, donor dependent MFIs mainly set up as NGOs are busy transforming into MF businesses regulated by the central bank; one even transformed itself into a commercial bank with financial and technical assistance of development finance institutions. Finally, Indonesia is a vast country of thousands of islands with the worlds fourth largest population of about 237 million inhabitants, nearly half of whom (according to a 2006 Poverty study of the World Bank) depend on less than 2 US$ income per day, the recently adopted UN standard of absolute poverty. The microfinance sector is diverse, with state-owned banks (such as BRI, considered the worlds largest MF services provider), private banks, rural banks, community non-banks, government credit programs, NGOs and foreign agencies. There are also tens of thousands of MF services providers that are established as cooperative societies by government, NGOs and foreign aid agencies. The Government (Ministry of Cooperatives) and not the central bank is responsible for their regulation and supervision but has no reliable data on the number of these MFIs, their members, their operations and performance. What is required from Government when it chooses to support cooperatives as an instrument to provide financial services to poor and rural citizens? In industrialised countries and regions, such as in the European Union (EU), local government is in charge of the policy and regulatory framework in microfinance and financial sector development. Local regulators thus also decide on the legal status financial institutions can have and determine the possible role of cooperative societies. Since commercial banks in the EU complained about unfair competition and abuse of financial terms (rules that protect consumers), the EU decided a few years ago that MF in the EU would be defined and could only be undertaken as social credit activities; such activities are thus not financial or banking services and cannot be called such. Social organisations such as NGOs and Associations that provide these MF activities are not allowed to call themselves banks or financial institutions and cannot use terms or parts of these terms to give that impression. They are of course not regulated by financial authorities. However, such NGOs, Foundations, Funds (such as the worlds biggest MF Fund EFSE supported by KfW) may, together with national aid agencies, development banks (such as EBRD, EIB, DEG, FMO) and social responsibility departments of companies (also of well-known banks such as Deutsche Bank, Kommerzbank, Credit Mutuel, Rabobank, Cajas de Ahorros and many others), undertake microfinance activities as they want outside the EU. They mix social with commercial objectives and activities. This clear separation is expressed by the EUs MF Strategy and by the two different European MF associations. MF activities that socially motivated organisations (mainly from North America and Western Europe, Japan and the Arab oil and gas nations) undertake can compete with banks and other regulated financial institutions and are in many countries at odds with banking laws. Government and financial sector authorities do not often act against these initiatives as the foreign projects benefit many of their poorest citizens who do not have access to banks; their unbanked population is often large and the basic need for financial services well recognised, especially since the efforts of Professor Yunus GrameenBank and the initiative of United Nations 2005 YearofMicroCredit received world-wide attention. Also governments themselves undertake MF activities. They offer programs targeting agriculture, women, youth, irrigation, poverty alleviation, social development, enterprise development, unemployment, refugee programs, integration of ex-combatants, handicapped people and so forth and so on. Many governments also promote financial services cooperatives (also called credit unions, village banks or equivalents in other languages) outside of the financial sector, as part of socio-political initiatives. And cooperative initiatives are also undertaken by political parties, trade unions, NGOs, associations, local leaders, political hopefuls etc. This wide array of MF activity has yet to demonstrate MFIs potential for structural poverty alleviation and the role financial coops can play. Governments will need to take two important decisions before it can successfully support the development of sustainable professional, therefore regulated and effectively supervised, financial services cooperatives, which are able to strengthen the MF sector:- Microfinance is a tool for building an inclusive formal, regulated, financial sector that ensures that all citizens benefit from safe, professional financial services and that they are protected against abuse and bad practices; If MF is a part of the formal financial sector, then financial services cooperatives need to be regulated (and effectively supervised, ensuring full compliance of laws and regulations) by Financial and Cooperative authorities. Over the last five years, most if not all above-mentioned countries have adopted national Microfinance strategies. Often these strategies were developed and written with substantial support of foreign donors. Many stakeholders listed above have provided opinions, often at workshops moderated by consultants and foreign experts. As one might therefore expect, many of these strategies look like wish-lists of the different MF services providers. Resulting strategies I have seen define MF as a tool to build an inclusive formal financial sector, but they often focus on credit to micro-enterprises or to other specific target groups (e.g. poor people, rural citizens, peasants, women, youth). A national strategy in which MF is a tool to provide access to financial services to all citizens should not focus on one or a few financial services, nor should it focus on specific categories of clients. Doing so increases the risk of making such strategies exclusive instead of inclusive, or of making them sensitive to political influences, which represents a powerful opponent of using Microfinance as a tool in financial sector development (FSD). Another important consequence of deciding that MF is a tool for building an inclusive formal financial sector is that the un-banked or alleged non-bankable citizens will be considered as full citizens and thus have rights as anybody else. They are not victims of society, but citizens with effectively protected rights on accessing and using financial services, including legal protection and education. Recognising that every citizen requires financial services and support to be able to efficiently use these services, government, civil society and foreign partners need to accept that unbanked poor people can hold them accountable for results. Governments and other stakeholders need to be conscious of the importance for long-term collaboration and commitment, transparency and consistency in achieving such results in MF/FSD. Cooperative societies represent a specific legal and practical form for organising economic activities. Cooperative societies that provide financial services need to undertake these services in a professional manner but they continue to be cooperatives as well. Even Cooperative Banks in developed countries have to comply with cooperative rules as well as with rules established by financial authorities. This makes regulating financial services cooperatives complex. Furthermore, as everyone knows and which will be explained in the next chapter, financial services coops are based on voluntarism and a common bond between members. They normally start small and often operate in remote areas with low population density. That makes regulating and supervising them more difficult and more costly. All regulation is costly, but financial sector regulation is even more so; government has to ensure that the money it issues is safe and soundly managed, otherwise the entire society and economy maybe destabilised. One should be careful comparing money and financial services with other goods and services. Financial sector regulation is most often triggered by three factors: (i) does the financial services provider in question bear systemic risks, (ii) are deposits/savings of the general public in danger, especially those of lower income people, and (iii) do issues exist that obstruct market-oriented development of the financial sector? As financial sector regulation is costly and requires full compliance, financial regulators and supervisors apply a risk-oriented approach and focus on financial institutions that can destabilise the entire financial system. As most financial cooperatives are small, not integrated into the financial sector and depend mainly on member shares and deposits for their operations, they do most often not bear systemic risks. Cooperatives are created, funded and controlled by their members. They determine their own rules and application and thus do not endanger public deposits. Risks thus increase with their scale of operations; the number of clients and their interaction with the financial sector and other parts of the economy. The market-orientation of the financial sector, the stable value of money and the quality of financial services all depend on free choice and transparent performance measurement in that specific market. Financial authorities want to ensure transparency on offer and demand, they want to ensure fair trading practices and they want to ensure that there are sufficient incentives for a wide and deep banking sector. Only an inclusive financial sector can ensure stability and be a strong support for sustained and broad economic growth and job creation. Government can only regulate activities that exist and can be verified. Regulation is not an instrument that promotes the creation of financial coops. In South Africa two laws were developed with international support, but still there does not exist even one Cooperative Bank; not even one Financial Coop created with important political, financial and technical support was able to develop into a sustainable financial institution that can be regulated. Effective supervision obviously demands that data can be collected and verified. In many countries the regular production and reporting of reliable data is the main challenge of the Microfinance sector; regulating organisations that cannot produce verifiable data and that cannot be held accountable for such weakness does really not make sense. This is often true also for financial coops. For all the above reasons, it can thus be concluded that financial authorities need to collaborate with cooperative authorities for the regulation of financial coops. What are the general principles of financial services cooperatives that policies, laws and regulations need to comply with at all times? III.A. The importance of agreed Cooperative principles in the MF context There are different definitions of financial services cooperatives and different interpretations of their rules and operations. Variations concern profit objectives, set-up on different levels (local, regional, national), ownership, governance, management, board members, operations, competition, liquidity management, working with banks. All these issues need to be integrated into the regulatory framework in a consistent manner depending on a countrys strategy for developing its cooperatives. Madagascar is a good example of how different definitions and interpretations of financial services coops can be and how in turn that makes it quite impossible for financial authorities to effectively regulate them and encourage them to provide sustainable professional financial services to otherwise unbanked people. Several donors identified cooperative societies as an ideal legal status and operational model for microfinance in Madagascar, one of the worlds largest islands with a widely dispersed, poor population (of over 19 million, about 85% of who live below 2 US$ a day) and an underdeveloped infrastructure. In the 1990-ies the lead development aid agency the World Bank coordinated a MF strategy in which the island was subdivided to allow simultaneous development of MFIs that would not compete with each other. The cooperative MFIs were created and supported by donors such as World Bank itself, UNOs UNDP-UNCDF and FAO, the European Union, ILO, the African Development Bank, IFAD, WOCCU, the French government aid agency AFD, Canadian Desjardins, Swiss government, USAID, French NGOs SIDI, ICAR, FERT and CIDR, French cooperative bank Credit Agricole, Dutch cooperative RABO bank and the German GTZ who supported the national MF association for the cooperative MFIs. These donors and coops experts held and still hold different views and definitions on cooperative societies and they did not support the idea of having a strong local public authority on financial cooperatives. Consequently there is no list of agreed principles for cooperative MFIs. It is thus no surprise to find that long-term managers of such MFIs do not understand some basic rules for the good governance and sustained growth of their organisations. Consequently, they have virtually no discussions on such principles between themselves and with government. As a result, with tens of millions of US$ pumped into the MF sector over nearly two decades, the coverage of MF is still some 3% of the Madagascar population and the cooperative MFIs face important challenges. An important lesson to be drawn comparing the West African UEMOA region with its large coverage and Madagascar is that only one donor and technical advisor, DID Canada, worked with the regional central bank on the MF Law that strongly favoured cooperative societies as the legal status for MFIs. Hence it is essential to agree on one set of Principles for Cooperative societies that provide financial services to help ensure effective regulation and supervision, to empower the local population to own its process and produce sustained results, and to ensure that foreign donors effectively support the local process. III.B. Proposed set of Financial Cooperatives Principles In order to establish a set of effective principles for cooperative societies offering financial services, it is important to properly define them. I would like to propose that they are organisations that are owned and controlled by members and provide financial services such as deposits, savings, loans and transfers to members based on both principles of business (safety of member deposits, profitability, professional management) and solidarity (equitable return on savings as a fixed interest rate, affordable prices and interest rates on loans and other financial services, reinvestments of profits focusing on strengthening and growing the organisations). Based on this definition eleven principles can be highlighted:- Member ownership Savings oriented Common Bond, Solidarity Non-profit Objective Obligatory reserves (statutory reserves) Voluntarism Rigorous Governance structure, rules Small markets, non-competition Different levels of Cooperative societies Gradual transformation into banks Specific Regulation, Supervision. 1. Ownership Cooperative societies are set up and owned by their members. This means that the initiative and funding come from the members. Such initiative can only come when the founding members fully understand what they want to establish and also know and can comply with the countrys applicable regulatory requirements. It also means that the members commit their own money to establish and operate their bank. Creating a banking-like organisation costs a lot of money. It requires safe, strong buildings where surrounding environment and access roads can be safeguarded. It requires skilled and committed staff who can be held accountable. It requires reliable, stable, equipment, transport, electricity, telecommunication etc. Governments, donors can decide to help communities to start financial cooperatives but they need to ensure that members keep ownership and act as real owners. In many cases, the shares that members pay for have a minimal value that does not compare to the overall value and the cost of operations of the organisation. In many cases members do not understand either that as owners their capital is the first line of defence when an organisation starts up and/or when it traverses a crisis period; members will then be asked to put in extra money. This lack of understanding weakens ownership. Members need to understand and be committed to the fact that only when they act as real owners will their organisation be able to become and grow into a self-sustainable regulated financial institution. Consequently, if such financial coops are set up with support of governments and donors, this principle needs to be worked out specifically. That is also the reason for which the value of the support measures (grants, subsidies, concessional parts of funding) needs to fade into the value of the shares over a short period of time. 2. Savings oriented Financial services coops need to be savings-oriented. As a matter of principle their loan funds need to be financed by the deposits of the members. These deposits need to be turned into specific, longer term savings allowing loan and investment diversification for better returns and risk management. What is surprisingly often ignored by Microfinance experts is that the problems of poverty and exclusion, from banks and the formal economy, are caused by a lack of money. In the unstable less protected informal sector, called the survival economy, providing poor people with (micro-) credit does not seem to be the most logical solution. Many performance evaluations of Micro-Credit activities and institutions increasingly repeat that statement. Even the micro-credit champion GrameenBank focuses more now on strengthening clients assets (shares, deposits, savings) rather than on giving them more and bigger loans. Some micro-credit promoters ignore that the funding base for commercial banks are normally client deposits. The current global crisis, which was caused by overreliance on consumer spending, credit and investments in un-transparent capital funds rather than in banks, has already elucidated the new USA President on the importance of savings. The second argument for savings orientation of financial coops is again to ensure that members are actively involved in the control over the management of their banks as they have their own money at stake. 3. Common Bond, Solidarity The Cooperative society is a legal status for a group of people that put their capital and capabilities together to set up a company which they could not have done individually. As succession and transfer are the main dangers for the existence of a company anyway, specific rules need to be put into place and their compliance ensured for the sustainability of a company which is set up as a cooperative society. First and foremost is the Common Bond. Members need to share specific characteristics and objectives that enable them to work together and make sacrifices for their common good, conscious of the fact that access to professional financial services is important for their lives and that of their families. Such shared characteristics can be their economic activities, the place where they live, even their cultural or religious activities. They know most if not all of the members and their families and thus may forge a local community. For the common good of that community each member commits capital and extra work. This commitment means that if someone passes through difficult times others will show their solidarity. A common bond requires considerable efforts, especially during the start-up period. The common bond needs to become part of the logic of the cooperative, a quantifiable and manageable result of sustained internal dynamics. It also requires specific rules on ending membership and disaffiliation of primary coops from the union or federation. 4. Non-profit Objective A cooperative society is a non-profit organisation. This means that profits are in principle not distributed to the shareholders-members, but re-invested in the organisation for the good of everyone. This objective does not mean that the organisation cannot make profits. On the contrary, as a financial services business the cooperative needs to be profitable to strengthen the organisation, to ensure its sustainability and to be able to continuously improve services and costs for its member-clients. The main goal of the financial cooperative is that all members have sustained access to professional financial services. The next important goal is that they have such access at an affordable price, taking into account the little money they have and the difficult environment in which the (mostly poor and rural) members live. Equitable return on their savings is important, a good interest rate on their deposits (and certainly on their longer term savings). Money lent out to members needs to be repaid on time with a profit as a margin between the deposit/savings interest rates and those of the loans, which margin funds operations, the salaries of professional managers, the buildings, equipment, members training, the repair and replacement of buildings and equipment, reserves for loan performance crises etc. Some cooperative experts believe that members of financial cooperatives should receive dividends and others that a cooperative does not need profits or a profit objective. In my view and based on my experience financial coops do need to make profits but these profits (or surplus) should not be directly aimed at the individual members. It needs to be well understood that ensuring professional financial services for normally non-bankable citizens requires enormous business efforts, more so than for normal commercial business. A non-profit objective, such as the humanitarian or cultural objectives of NGOs or Associations, puts at risk the existence of a financial services cooperative. Furthermore, individual profit-taking by members related to their share value does in my view go against the solidarity principle; in social democracies citizens are recognised to all be different, which also justifies that more benefits can go to weaker individuals (in particular situations). A financial coop is used first and foremost to allow people who normally do not have access to traditional banks, to organise and create for themselves an organisation that can provide members with professional financial services on a sustainable basis. That means that, as was explained in the first point, members need to have full ownership of the financial services coop from the start. That ownership is different from owning other forms of companies or any other assets; it requires extraordinary efforts of poor people whose capital -the money they have for day-to-day life- is already threatened by many expenditure obligations. That is why capitalisation conditions need to be kept at a minimum, share value needs to correspond with the real value of the financial institution and such ownership should not be aimed at profit sharing. The legal status of cooperative society of a financial services company also provides tax advantages and less financial sector requirements (than banks); only the above social commitment and non-profit objective justify such government support. 5. Obligatory (and statutory) reserves The creation and development of reserves are a specific way for financial coops to safeguard their organisations and enable them to grow. Some reserves need to be created as a legal obligation, the (legal or) regulatory reserves, such as minimum capital requirements, bad loan provisions, training. As cooperatives require active membership, in particular in control functions members require special and continued training, so that a training reserve is often a regulatory reserve for financial coops. Other specific reserves can be statutory, such as for amortisation purposes, to replace and/or improve buildings, equipment or for growth. In WOCCUs rating system PEARLS the s means strength meaning data showing sustained growth (of members, new agencies, creation of a higher level coop, more staff, more deposits, longer term savings, more loan products, etc.). Every year at the General Assembly Meeting, members will need to discuss and decide on the level of the reserves and how they are funded, from retained earnings or from additional contributions from members. 6. Voluntarism Cooperatives are established by members out of their free will and based on their full understanding. The weakest cooperative movements are those that have been initiated by governments and foreign donors. Rather, it is the free will of members who put their own capital at risk, which determines the self-sustainability of a financial cooperative. Only when their own livelihoods are at risk will members fully commit to participate in committee and assembly meetings to control the management of their own and comrade members moneygiven all of the other demands that are placed on their lives. The members will then take on an important responsibility for their communities. Obviously, its the voluntary basis of coops which poses a problem for politicians, donors and technical agencies, as they cannot determine the objectives of the coops or plan their achievements over time. Supporting coops is difficult. Such government and donor support needs to be flexible and organic, waiting for financial coops to be established and grow based on the individual capabilities of the members and their organisations. It is impossible to anticipate timing and quantity of support measures required by these voluntary organisations. If government and external partners are committed to the development of financial services coops, then they need to accept the complexity of the task at hand and fully respect the poor people they set out to help, their capabilities, their self respect and the solidarity to help themselves and their own communities. 7. Governance structure The appropriate governance structure and specific rules for financial coops depend on combining low cost systems and operations with high-level professionalism that financial services require. Their funding needs to be autonomous, especially in their start-up phase when they do not have commercially based linkages with the rest of the financial sector. Their control should remain autonomous, led by the member-clients, reflecting the solidarity principle (developing their community together, respecting the unequal capabilities and needs of each individual and his/her family). The main governance rules that require mentioning here are the following: The cooperatives main decisions are taken in (regular or exceptional) General Assembly Meetings (GAM); In the GAM each member has one vote, regardless of how many shares s/he owns; Members are elected by the GAM to work on the Board and in the two important sub-committees, the Credit Committee and the Supervisory Committee; Members effectuate these functions on a non-remunerative basis, as a part of the voluntarism principle. This rule is essential to keep down costs and maintain strong commitment and solidarity; Committee members need to be selected on fit & proper conditions according to statutes. Participation should rotate, not be politically motivated and members should be freely able to dismiss board members who do not undertake their functions well (subject to reasons and procedures in the statutes that have been discussed and decided on by members and not copied from external sources); Daily Management of the coop needs to become independent and professional (remunerated staff) as soon as possible and members, in particular those in board and committees, should not interfere too strongly in daily management; As members can only effectively control the management of the services for the community they know (the other member-clients with they share a common bond), financial services coops need to be small (especially during the start-up phase and in countries/regions with underdeveloped infrastructure). This rule thus means that when finance coops grow beyond a certain size, they require splitting up and the creation of new organisations; Other specific Governance rules are the same as with other financial institutions such as the four eye principle (all cash movements require the control and decision of two officials) and the bookkeeper directly reporting to the Board. 8. Different levels of Cooperative societies As explained, financial coops start small and need to remain sufficiently small to allow the Common Bond and self-control systems to determine the successful development of these organisations. However, global experience shows that support services -especially in liquidity management, training, technical assistance, control & supervision and advocacy- can be effectively organised as a part of the local development process of the financial cooperative movement. If a primary financial cooperative, operating on the grass-roots level, becomes too big for ensuring its principles and governance rules, the GAM needs to decide to either split into two different coops or to create another one and determine their respective geographic territories. Such decision needs to be based on thorough market analysis and discussions between the members to ensure viability. In the case that more primary cooperatives justify such possibility, a joint GAM may decide on creating a regional secondary cooperative that will be responsible for all or part of the above-mentioned support services. Tertiary coops that provide specific support services can be created on a larger regional and even national level provided they enjoy the right national strategy and support measures ensuring again the basic principles of homogeneity and professionalism at a lowest cost. Finally, on a fourth level after rigorous preparatory work examining the viability and conformity with principles and governance rules, a national level confederation of financial services cooperatives may be created. Such second-/third- and fourth level financial coops need to obtain a specific license as a (micro-) financial institution depending on (micro-) financial regulation. In such cases both the cooperative and the financial sector legislation apply and their compliance needs to be the result of a close collaboration between the two authorities concerned. Research shows that closely integrated federated financial services cooperatives are more successful than individual coops or loosely federated associations. Finally, in order to make growth of financial services coops as vibrant as possible, the coop and financial authorities need to work under the highest executive to work out a long-term strategy, consistent policies and a regulatory framework that ensures their successful implementation. 9. Small markets, non-competition Common bond and member activism prerequisites effectively limit the scale of services which may be provided by financial coops. As they become bigger more coops need to be created or they need to be split up. To ensure their viability and solidarity -both internally and between each other- to build up a national multi-layer financial cooperative movement which can integrate all unbanked citizens who are committed to cooperative ideals and rules, cooperatives need to decide between each other that they will not compete with one another. They will agree on their geographic markets and will not try to convince members of one coop to become member of another. So long as they are small and pose no threats to commercial banks (not operating in their areas or not interested to provide services to these citizens as their core business), the success of financial coops depends on the activities of the members and the success of the management of the coops. Competition with other financial institutions, including other coops, will threaten their existence and jeopardise their development more than they will be stimulated by it (versus the case in formal economies where fair competition is an important factor pushing performance and better services for consumers). 10. Gradual transformation into banks Financial services cooperatives are an effective alternative for the sustainable provision of professional financial services to unbanked people. Poor people need banks, not banks for the poor or social businesses. That is why the final objective of financial services cooperatives should be to become banks. This does not mean that such banks are profit maximisers that ignore the interests of poor and rural people, rather its the contrary. Coop banks can stimulate the development of a diversified banking sector, diversified in its vision, mission, profit objectives, clientele, products and services. Such diversification contributes importantly to the stabilisation and inclusiveness of a financial sector (as wealthy nations demonstrate). A cooperative bank should continue to operate on the basis of cooperative principles and rules. Strong adherence to such principles and rules will allow them to compete successfully with purely commercial banks whilst remaining faithful to their social commitment as expressed by extensive outreach in terms of poorer clients and more remote, less populated areas. 11. Regulation, Supervision From the other principles it becomes clear that financial services coops require a specific regulatory framework (legislation, regulation, statutes, guidelines, and effective supervision ensuring full compliance of the framework). However, regulation only monitors, it does not determine coop activities nor their success. Regulation structures activities that exist and it may accompany and guide the growth and transformation of the organisations. Financial coops are not an end in itself; they must eventually evolve into formal sector financial institutions, banks. In many countries, banks can only be established as companies, not as cooperative societies. In most if not all countries of the European Union, banking laws do allow banks to be established as cooperative societies and indeed some of the worlds largest banks are European and cooperatives, such as Credit Agricole (France), Raiffeisen (Germany) and Rabo Bank (Netherlands). In the USA regulation of financial coops (credit unions) is separated from that for banks. Their supervisory board is nominated by the President of the USA and they benefit from government management of the deposit insurance fund (funded by CUs) and of government support for a CU development fund. This separation has resulted in opposition from commercial banks and demonstrates the risks of politicisation, which is in my view the biggest risk MF/FSD faces. The reality of political risk is expressed by the US government handling the financial crisis, through the demise, bail-outs and nationalisation of banks and social housing finance institutions, and the reactions from the opposition party. It is clear that the costs of regulating and supervising financial coops are high compared to the size of their operations and reflects the fact that they often operate in rural, remote areas with underdeveloped infrastructure. This factor needs to be incorporated into making an appropriate regulatory system. What are the benefits and pitfalls of working with foreign donors and experts? Assistance to the development of cooperatives has been provided to developing countries for many decades. It has often not been fruitful. Different services providers often brought limited comparative experience, having worked only in one country or even one organisation. Recipient countries and organisations did not decide on what kind of cooperative societies they wanted to develop and how they could guide them into the local financial sector. They often do not have a cooperative culture with home-grown cooperative experts. Some assistance undermined the common bond principle of member clients, negatively affected governance or frustrated relations with the local authorities. Foreign aid thus requires a lot of preparation for it to be effective. What foreign partners first need to understand and endorse is that even when no systemic risks are involved in financial sectors or public savings, successful financial coops will result from locally motivated and managed processes based upon the successful collaboration with local authorities. Foreign aid agencies and experts often claim that they are not legally responsible and cannot be held accountable for MF failures in recipient countries. They argue that they implement strategies and policies that are developed and signed off on domestic policy objectives in their home countries. In the mid-nineteen nineties MF donors agreed that their individual activities often produced misunderstanding, duplications and contradictions; effective coordination would improve impact. The World Bank established a Pink Book as a result of such coordination and in 2002 it was reviewed and updated under the auspices of CGAP. Although coordination of donor efforts in development finance was indicated as a high priority in the famous Monterrey, Paris and Doha declarations, no effective change can be found on the ground; it is there where MF donor projects are being carried out. Local authorities thus have a duty to hold foreign aid agencies accountable and to welcome them on the condition that they integrate into the local policies and regulatory framework. How can the process of building up a financial cooperatives system in a country that has witnessed earlier failures with the model, look like? What basic steps do Governments need to make in countries with massive poverty challenges when they agree with civil society and foreign donors to support the creation, reinvigoration and/or development of financial services cooperatives? They first need to define a national Microfinance Strategy that is part of the their Financial Sector development (FSD) strategy; The national MF strategy, as part of the FSD strategy should be the basis for establishing MF/FSD policies; Policies of other departments that impact MF/FSD (and often have microfinance or micro-credit components) such as Agriculture, MSME, Social Development (women, youth, unemployment, handicapped and other marginalised people), Rural and Agricultural Development (these policies are called Flanking Policies) need to be consistent with MF/FSD policies and regulations; A MF/FSD Regulatory framework should be developed that is consistent with the above policies and in which cooperative societies should occupy a specific chapter; The Central Bank should play a key promotional role (as technical expert) in MF/FSD, recognising that it cannot regulate and effectively supervise all MF services providers, only those that bear systemic risk, risks for public depositors and striving to keep the supervisory system financially viable; Government should develop and increase local know-how and capacity building on cooperative societies that provide financial services; It should put into place a national authority on cooperatives to also oversee the registration of financial coops which works hand in hand with the Central Bank. They should establish a central database on financial coops and procedures to encourage their integration into the formal financial sector; Government should establish a national Coordination Body at the highest executive level of Government to oversee the implementation of MF/FSD. All local and foreign programs, institutions, and government agencies should be required to send their directors to participate in this body; The Central Bank, The Financial Cooperatives Authority and the National MF Coordination Body should work together to undertake promotional, educational and technical initiatives for the achievement of the MF/FSD strategy goals and should work together to increase awareness of the potential of financial services coops and their principles and governance rules. Conclusion Cooperative societies are in my view an essential pillar for building an inclusive financial sector and help to achieve the final objective of microfinance: poverty alleviation. However, history and common sense dictate that only a common understanding of the cooperative status of these MF services providers, a clear concise MF/FSD policy and strong coordination by public relevant authorities can achieve the promises that these financial services organisations hold. The current global economic crisis which was triggered by public authorities and financial institutions in the USA unable to manage a housing financing system for their low-income citizens, provides us with many lessons on how financial cooperatives can be successfully introduced, re-introduced, revitalised and built into an inclusive financial sector; a sector that is stable professionally and equitably. That financial cooperatives can be successfully integrated into the formal financial sector and transformed over time into cooperative banks, is proof that all citizens do have sufficient basic finance management skills. But there is also evidence that bankers can be citizens committed to the societies they work in and who can champion businesses that aid weaker citizens to become fully respected and contribute together toward sustained socio-economic growth. Indeed, getting out of the global crisis may partly depend on the quality of support provided to financial coops; common qualities where stakeholders (including foreign ones) respect and work towards shared goals set together and act and respond locally to local processes. REFERENCES This paper is inspired by my discussions with two authors of classics on rural and informal finance, Dale ADAMS and Professor Hans-Dieter SEIBEL of the University of Cologne (Germany), with Zvi GALOR (an Independent consultant on cooperatives) and Malcolm HARPER (a well-known author on poverty issues with a critical attitude towards microfinance). These four people are well-known veterans in development finance and the possible role of financial services cooperatives with experience in all corners of the world. I would like to thank them very much indeed for their collaboration. Finally I thank Mr. David MONKMAN, independent consultant on small enterprise development for his editing assistance.  SCULT in Tanzania (S&C Union League), the Commission for Cooperative Development in the Department of Tourism, Trade & Industry in Uganda, the Kenyan Union of S&C Cooperatives KUSSCO.  GTZ, ICA, WOCCU, Desjardins, Danida, DfID and many others.  DID Desjardins, Canada, the consultant arm of the Desjardins cooperative banks.  Source: the regional central bank BCEAO at  HYPERLINK "http://www.bceao.int" www.bceao.int  Source:  HYPERLINK "http://www.saccol.org.za" www.saccol.org.za  There exist two mutual banks, operating as building societies and established well before the Act (Venda BS established in 1982 and Grahamstown BS in 1877).  In the 2008 Action Plan, I proposed to change the name into Savings & Credit Unions (SCU).  ACLEDA Bank, funded by IFC, FMO, DEG, Triodos Doen Foundation.  Developed for the ECs Directorate General for Social Affairs, Employment and Equal Opportunities.  European MF Network (EMN) for activities within the EU, and the European MF Platform (e-MFP).  It is even a part of the 2015 United Nations Millennium Development Goals (MDG).  Such education should not be limited to financial training but also include basic education. Experts working with illiterate citizens admit that these basic skills are necessary to improve their lives.  As mentioned before, people who have no access to banks and manage to organise financial services provision in some manner, have the desire to call these organisation theirs and refer to those as banks to give them an image of reliability and professionalism. Such popular organisations are therefore often called village or community banks.  It is an established principle of accounting that aid does not figure on the balance sheet. It should be on the Income & Loss account, be spent on support activities over a year. Left-overs or funds in a multi-year project can be on a balance sheet as deferred program expenses, but again experience says that such subsidies often lead to governance issues.  Such as mentioned in the 1926 Cooperatives Act of Pakistan (from the time that it was still part of India; the law is still effective).  This difference of opinion can also be explained by the difference with coops that help members to produce and sell goods and services. A financial services coop has a financial intermediation function that is more distant from members and requires autonomous management. This autonomous financial intermediation function is expensive (safe building, high quality staff, equipment, regulatory costs etc.).  Some cooperative experts avoid the term profit and prefer to use the term Surplus which is meant as operating surplus and equals pre-tax profit minus depreciation.  Not the efforts that seem to demand a social business. In the book Creating a World without Poverty - Social Business and the Future of Capitalism, Professor Dr. Muhammad Yunus (founder of Bangladeshi GrameenBank and Nobel Peace Prize laureate 2006) and Mr. Karl Weber, July 2008, promote the new term social business referring to business activities that require real business skills but are undertaken for social objectives. In my view the term mixes social and business interests, skills and objectives in a manner that weakens the extraordinary business efforts that are required to make goods & services for the poor of good quality, affordable and on a sustainable basis.  In fact even fully integrated Cooperative Banks remain committed to a high level of financial autonomy, to not depend on inter-bank lending, outside investors or government.  Cooperatives in several countries complain about this requirement, as good members often have to combine these functions with their normal income generating activity. Cost compensation and some additional compensation can be considered without the weakening the principle.  Some experts indicate that a maximum of 10.000 members is possible in such situations.  A federative and closely integrated cooperative system tends to optimise support activities (TA and financial) and improve democratic processes and decision-taking in the local agencies. This is especially true for cooperatives in economic activities that are both highly technical and complex (such as financial services). In Saccos, such integration focuses on resource management and surveillance, which covers financial reporting, performance monitoring, internal and external controls, as well as supervision. Read for instance the DID report in 2002.  This can be different for specific countries; in South Africa the National Treasury (Finance Ministry) had little competence and authority in financial sector development and regulation. Also the central bank had little effective say on MF and financial coops. The National Credit Regulator who performs non-prudential supervision on all financial institutions that provide micro-loans has a strong role in financial sector development although it operates under the ministry for trade and industry. Strong opposition to MF regulation comes from the commercial bank association that is dominated by four commercial banks three of whom are foreign owned. And then there is the dominant political party ANC, the countrys most powerful trade union Cosatu, civic society, foreign public and private donors who have a strong voice in MF and FSD. This hinders developing a national strategy with consistent policies and an effective regulatory framework. Most stakeholders do not consider a strong common mindset for MF necessary; they seem to prefer to hold on to their privileges in their different trenches.  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