Coopératives financières en Haïti : Examen diagnostique du secteur et de son cadre réglementaire et de supervision

Public Disclosure Authorized Financial Cooperatives in Haiti Public Disclosure Authorized A Diagnostic Review of the Sector and Its Regulatory and Supervisory Framework Public Disclosure Authorized Public Disclosure Authorized © 2019 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff and external authors of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. 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This publication was prepared with support of the Financial Sector Reform and Strengthening Initiative, FIRST, which is managed by the World Bank. Photo Credits: World Bank Photo Library and Shutterstock.com WHEN AND HOW SHOULD AGRICULTURAL INSURANCE BE SUBSIDIZED? ISSUES AND GOOD PRACTICES Table of Contents Abbreviations and Acronyms ................................................................................iii Acknowledgements..................................................................................................v Executive Summary ...............................................................................................vii 1. Diagnostic Review of the Financial Cooperative Sector in Haiti ................... 1 2. Sectoral Overview................................................................................................3 2.1 Evolution of Financial Cooperatives in Haiti.................................................... 3 2.2 Organizational Structure of the Sector...........................................................8 3 The Legal, Regulatory and Supervisory Framework...................................... 11 3.1 The Legal and Regulatory Framework ............................................................ 11 3.2 The Supervisory Framework............................................................................ 12 3.3 Additional Oversight Structures..................................................................... 14 4. Diagnostic of the Financial and Operational Soundness of Financial Cooperatives......................................................................................17 4.1 Observations on the Financial Structure and Soundness of Entities.......17 4.2 Governance Structures .....................................................................................22 4.3 Operational and Financial Efficiency .............................................................25 5. Summary Assessment and Recommendations.............................................31 5.1 Summary Assessment....................................................................................... 31 5.2 Recommendations .............................................................................................32 Annexes...................................................................................................................35 Annex 1: List of Entities and Stakeholders Consulted......................................35 Annex 2: Feedback on Governance Structures Received from Individual Cooperatives as Part of semi-structured Questionnaire..........36 Annex 3: In-depth Recommendations and Suggestions..................................38 Bibliography ........................................................................................................... 45 FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK I Box Box 1: Content Included in the Minutes of Board and Committee Meetings....24 List of Figures Figure 1: Evolution of the Assets of Financial Cooperatives (%, Gourdes millions).................................................................................................... 5 Figure 2: Evolution of CFI Membership and Selected Member-related Ratios...6 Figure 3: Organizational Structure of the Financial Cooperative Sector in Haiti...............................................................................................................8 Figure 4: Asset and Liability Structure of Haitian CFIs in Comparison to WOCCU PEARLS............................................................................................................ 18 List of Tables Table 1: Summary of Recommendations...................................................................xii Table 2: Haitian CFI System in the Regional Context ..............................................7 Table 3: Evolution of Selected Performance Indicators (2013–2016) (%).............7 Table 4: Overview of the Financial Structure of Financial Cooperatives (June 2017, as a percentage of assets) ................................................................. 19 Table 5: Drivers of Financial Cooperative Profitability in Haiti (June 2017) .....20 Table 6: Capital Composition of Financial Cooperatives (June 2017)................ 21 Table 7: Ratios and Composition of Operational Costs.........................................26 Table 8: Summary of Recommendations .................................................................33 TABLE OF CONTENTS II Abbreviations and Acronyms ANACAPH National Association of Haitian Credit Unions BRH Central Bank of Haiti CFI Cooperative Financial Institutions CNC National Council of Cooperatives DGRV German Cooperative and Raiffeisen Confederation DID Canadian Cooperative Network Desjardin DGICP Cooperatives Supervision Department, Central Bank of Haiti FIRST Financial Sector Reform and Strengthening Initiative FX Foreign Exchange GDP Gross Domestic Product HR Human Resources IT Information Technology MFI Microfinance Institution NFIS National Financial Inclusion Strategy NPL Non-performing Loan OC Operational Costs ROA Return on Assets ROE Return on Equity USAID United States Agency for International Development WOCCU World Council of Credit Unions FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK III Acknowledgements The Diagnostic Review of the Haitian Financial Cooperative Sector and its Regulatory and Supervisory Framework was led by Juan Buchenau (Senior Financial Sector Specialist, Task Team Leader, World Bank), and conducted and written by Ilka Funke (Financial Inclusion Specialist, Mission Lead, Consultant, World Bank). Alvaro Duran (Financial Sector Specialist, Consultant, World Bank) joined the mission and provided analytical support for the report. This assessment is based on findings from a World Bank scoping mission in June 2017 and an in-depth mission in September 2017. To conduct the diagnostic, the two consultants visited 11 financial cooperatives in 4 departments of Haiti in September 2017. meeting with the core stakeholders in the financial sector (see Annex 1). During these missions, a semi-structured questionnaire was developed and applied during each visit to a financial cooperative. The questionnaire included questions about the financial situation, governance structure, as well as operational aspects of the cooperative visited. In addition, the mission team reviewed a random sample of Board, Audit and Credit Committee Minutes at each cooperative, and assessed the available audited financial statements. Finally, the team received general financial information from the Central Bank regarding the consolidated sector. as well as on the financial cooperatives visited. The team would like to express its deepest appreciation for the excellent support provided by the Central Bank of Haiti (BRH), in particular from the department in charge of regulating and supervising the financial cooperative sector (DGCPH). The department provided valuable insights into the sector’s legal, regulatory and supervisory framework, facilitated the agenda for the field visits, supported the mission with general data on the sector, and provided excellent feedback throughout the diagnostic review. A special thanks also goes to the two peer reviewers of the report, John Pollner (Lead Financial Sector Economist, World Bank) and Juan-Carlos Izaguirre (Senior Financial Sector Specialist, World Bank). The team would also like to thank Zafer Mustafuoglu (Practice Leader Finance and Markets, Latin America and the Caribbean Region, World Bank) and Raju Singh (Sector Leader and Lead Economist, World Bank, Haiti) for their overall guidance and support. Finally, the team is grateful for all the valuable logistical support received from the World Bank Office colleagues in Haiti. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK V Executive Summary The government and the Central Bank of Haiti (BRH) aim to improve financial inclusion to foster more inclusive economic growth. With the support of the World Bank, the government developed a National Financial Inclusion Strategy in 2014. Since financial cooperatives play an important role for financial inclusion, the Strategy calls for an assessment of constraints to their development, as well as the development of an action plan to strengthen and consolidate the sector. This diagnostic report aims to provide this assessment of the sector. It also offers recommendations for reforms that should be incorporated into a sector wide action plan. Overview of the Sector and Its Organizational Structure Cooperative Financial Institutions (CFIs), or Financial Cooperatives, are important providers of financial services to the Haitian population. There are currently an estimated 85-180 financial cooperatives in Haiti. They are mostly located in urban and peri-urban areas of the country, and provide savings and loan services to their members, who are predominantly from the lower income segments of the population. Membership in the sector more than doubled since 2009, reaching roughly 1 million people in June 2017 (compared to an estimated 2 million bank customers). This represents about 15 percent of the adult population. If family members are included, it is estimated to link around 30-40 percent of Haitians to financial services. Some cooperatives also act as agents for Western Union, and offer transfer and payment services to non members, some of whom would otherwise be financially excluded. The assets of CFIs grew substantially over the past few years, but their financial intermediation levels remain low. The sector’s assets currently account for 1.7 percent of gross domestic product (GDP), up from 0.9 percent in 2009. The growth of assets (which increased 101 percent between 2011 and 2016) was in part fueled by deposits (which increased 84 percent). However, it also stems from an increase in capital due to the solid profitability of most entities. The loan portfolio only increased by 66 percent during the same time period, which led to a decline in the loan-to-asset and loan-to-deposit ratios (49 and 72 percent, respectively). With less than 50 percent of assets currently being FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK VII on-lent, the sector has a large unmet potential for supporting economic growth. Second-tier organizations are in place to strengthen the sector, but they still depend on donor funding and need to clarify and prioritize their roles. There are currently two active sector organizations, the National Association of Haitian Credit Unions (ANACAPH) and the federation, Le Levier. They reach out to provide capacity building and technical assistance to over 50 financial cooperatives, including all large ones. Another federation, “Le Societaire,” has recently been created, covering 11 financial cooperatives. In addition to capacity building, Le Levier also provides its affiliates with liquidity management, information technology (IT) and strategic support services. It also explores options for linking its members to the payment system of the country. Although the two existing organizations greatly help strengthen the sector, they lack financial self-sufficiency, and still depend on donor funding for delivering the full range of services. Furthermore, as 85 percent of Le Levier’s members are also affiliated with the ANACAPH, the roles and services of both organizations need to be clarified to ascertain complementarity. Further, both need to prioritize and enhance their services to better fit the needs of the sector. Observations Regarding the Financial and Operational Soundness of Financial Cooperatives Since the occurrence of the pyramid scheme in 2002, the sector has made important progress toward profitability and improving its internal operations. According to BRH data, the authorized financial cooperatives increased their level of profitability since 2013, with returns on assets and equity reaching 5 and 21.7 percent, respectively (2016). The CFIs’ capital-to-asset ratios appear adequate to absorb shocks (26 percent on average EXECUTIVE SUMMARY VIII for the visited CFIs), and well above the 12.5 percent mandated by the BRH. A number of entities also introduced IT systems and improved their internal processes to enhance their performance. These are important improvements and have moved the sector in the right direction. Nevertheless, the overall level of sophistication in the sector continues to be rather basic, and some of the smaller entities still need to become financially sustainable. Although the sector now appears to be financially sound, the quality of financial intermediation needs to improve so that CFIs can better face increasing competition in the financial sector. A number of the entities visited indicated that they had non-performing loans (NPLs) of over 10 percent of their loan portfolios, well above the maximum of 5 percent suggested by the World Council of Credit Unions (WOCCU). Furthermore, the mission noted the existence of market and foreign exchange rate risks that in some CFIs had already led to small losses. The financial cooperatives also had, on average, 35 percent of their assets in non-remunerated liquid assets — with some even up to 73 percent. Given these vulnerabilities in the quality of intermediation, the sector’s profitability largely hinges on being able to charge a high financial intermediation margin of over 20 percent, as well as additional fee income for loan documentation, late fees and the provision of other services. Both are likely unsustainable in the medium term, when modern technologies reduce the costs of service provision of competitors and competition in the financial system intensifies. Thus, the sector urgently needs to increase intermediation levels, reduce non-performing loans and foreign exchange exposures, and enhance its operational efficiency. The quality of governance also needs to be strengthened. Core governance structures are in place, and CFIs are formally required to adhere to core cooperative principles and focus on members’ economic well-being and education. However, the tenure and quality of Board members is not adequately covered in the by-laws and legal framework, and the transparency of information vis-a-vis members is not sufficiently mandated. Furthermore, the quality of governance is weak in practice. There is limited strategic guidance and oversight provided by the Boards and Committees, the tenures of Board and Committee members tend to be long, and participation in General Assemblies is low (less than 5 percent). In addition, the depth and quality of information provided to members appears limited, including the range and pricing of financial products. The noted deficiencies in the governance structures of CFIs need to be addressed as they can facilitate fraudulent activities/capture by small elites, thereby reducing the attractiveness of CFIs for members. The operational efficiency of CFIs remains low. Almost all financial cooperatives visited show elevated operational costs, with 5 of the 9 entities barely able to cover their operational costs through net interest income. Although the provided data was not sufficiently detailed to assess the core drivers of operational expenses, the mission identified credit risk management and inefficient internal credit processes as core deficiencies. For instance, the loan files reveal substantial gaps in the capacity of CFIs to assess and document a borrower’s true repayment capacity, with the credit appraisal process taking several weeks and mostly relying on the availability of cash collateral and a client’s previous credit history. A brief assessment of internal processes also points to substantial gaps in internal accounting practices, a lack of internal controls to foster adherence to policies and manuals, and the limited capacity of managers to assess core financial and operational indicators. Finally, automation in the sector is limited, with the IT system provided by the federation Le Levier in need of modernization. In this context, the vast majority of entities are only partly or not automated. Together, the observed gaps in intermediation and efficiency negatively affect the value proposition of cooperative membership, reducing the sector’s role in supporting inclusive economic growth. Currently, most members receive little or no remuneration for their deposits and social capital. On the other hand, interest and fees for loans are on the high side and require elevated levels of cash collateral. Only around 10 percent of members have a loan, although most managers indicated that the prospect of receiving a loan is the prime motivation for becoming a member. Also, most CFIs do not provide their members and communities with any additional social benefit, leaving the member with limited incentives to actively participate in “their” cooperative and contribute to its oversight. All of this lowers the attractiveness and role of financial cooperatives, making them vulnerable to increased competition in the sector. The Legal, Regulatory and Supervisory Framework A dedicated legal framework for CFIs is in place, allotting the BRH substantial powers to regulate and supervise the sector. The dedicated law for financial cooperatives was put in place after the emergence of the pyramid scheme in 2002. It places a strong focus on the governance of CFIs and in many instances follows international best practice. It also assigns a clear role to the Central Bank for regulating and overseeing the sector, and calls for the creation of a dedicated unit within the Central Bank to fulfill this role. This unit has been created, and regulations have been issued pertaining to the administration and risk management of CFIs. The legal framework also provides for the creation of a stability fund by the BRH, which has not yet been created. Nevertheless, the legal framework has a number of shortcomings, which particularly impede the effectiveness of oversight. Most importantly, the BRH does not have the power to issue monetary FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK IX sanctions for non-compliance of CFIs.1 Under the current law, the implementation of remedial actions largely hinges on moral suasion, as well as on the BRH’s willingness to directly intervene in the management of an entity. In addition, the legal framework has shortcomings regarding the registration, authorization and liquidation of sector entities. The foreseen division of labor between the registration of CFIs by the National Council of Cooperatives (CNC) and the authorization through the BRH is not working well, leaving an unknown number of active cooperatives operating without authorization. Furthermore, liquidations are cumbersome to carry out and involve various players, and have not yet been initiated. These deficiencies have contributed to a lack of consolidation in the sector. The BRH regularly conducts on- and off-site supervision, and through this has greatly helped the sector improve its operations. In addition to monthly off-site supervision, on-site supervision of the authorized financial cooperatives is carried out every 18-24 months. Furthermore, the BRH’s strong focus on governance structures and internal operations is to be commended. Standardized procedures and reporting tools are in place to guide the supervision process and staffing of the dedicated unit for CFI oversight appears adequate for the current scope of supervision. A much-needed IT system to enhance automation of oversight is currently under development. Overall, the streamlined supervision process appears efficient, and the unit regularly follows-up on the implementation of recommended actions. This hands-on approach to supervision has greatly helped enhance discipline in the sector, improving internal procedures and standards. However, supervision should place a stronger emphasis on the quality of governance as well as the risk and efficiency aspects of CFIs. Furthermore, the BRH should enforce the requirement for all entities to become authorized or be liquidated. This would help to maintain solid growth in the sector. Whereas the legal framework mandates external audits, the underlying accounting plan and the quality of the external audits need improvement. The accounting plan issued by the BRH is adapted to the more basic level of operation and automation of the sector. However, it does not require the reporting of non-performing loans. Instead, it only captures information on the net loan loss provisions held.2 Given the rapid write-offs observed in the sector3 and the limited transparency regarding the level of those write-offs during the year, the information is not adequate to reveal the true level of delinquency. Regarding the external audits, the law mandates the federation to carry out external audits of its affiliates. Non-affiliated CFIs are required to use external auditors. This is adhered to in practice. However, in addition to conducting the external audits, Le Levier also provides managerial counseling and support services to its affiliated CFIs. This duality of roles of a federation can create a conflict of interest situation that can impede the quality of the external audits. Therefore, firm barriers (“Chinese walls”) should be put in place separating the two functions with different staffing and coordination. The quality of work of the external auditors for the non-affiliated CFIs appears poor, as evidenced by mistakes 1 The law allows the BRH to request remedial actions and the development of action plans, as well as to intervene in individual entities. 2 Provisioning rules are stricter than those suggested by the financial ratios of the WOCCU’s PEARLS. (PEARLS is a framework to measure the soundness of operations of a credit union, and includes indicators on Protection, Effective financial structure, Asset quality, Rates of return and cost, Liquidity and Signs of growth). It is required that 100 percent of the unsecured loan balance be provisioned after a delinquency of 180 days, and that a 1 percent general provision be held for the performing part of the portfolio. The WOCCU PEARLS calls for a full provisioning after 360 days overdue, encourages write-offs after one year, but suggests that younger non-performing loans should not be written-off. 3 Some visited entities write-off non-performing loans after less than 180 days. EXECUTIVE SUMMARY X identified in audited financial statements. Overall, all external audits stop short of providing a summary of findings and recommendations, and only attest in general terms to the overall compliance with existing norms. A new draft law has been developed that includes some important revisions in the legal framework; however, it falls short of addressing some key issues identified above. The new draft law introduces important measures to enhance transparency and consumer protection in the sector. It also calls for external auditors to be pre-approved by the BRH. These are important reforms that merit approval. However, the draft law does not yet resolve the fragmentation of the registration, authorization and liquidation processes, and it does not provide the BRH with the tool to issue monetary sanctions. Furthermore, the draft law allows financial cooperatives to issue subordinated debt, which given the state of the sector appears premature. More attention also needs to be placed on eliminating conflict of interest situations between the various roles of the federations, and ascertaining that federations have adequate institutional capacity and integrity for fulfilling their respective roles. Furthermore, the federations’ internal regulations and oversight should be mandated to be consistent with all BRH rules. Finally, neither the federations nor the external auditors appear currently suitable for a delegation of supervision, as Article 130 of the draft law will make possible. Recommendations To bring the sector to a higher level of sophistication and further enhance its performance and services, it is paramount that a holistic and consolidated reform effort be undertaken. Reforms are urgently needed to safeguard the medium-term profitability of the sector, as the current high intermediation margin will likely not be sustainable over time. Cooperatives will increasingly be confronted with competition from other financial service providers, who are now starting to reach out to unbanked segments of the population through innovative delivery mechanisms (that is, mobile wallets and non-bank agents), and who are also able to provide payment services to their clients. In addition, the reforms are needed to help deepen financial intermediation in the country and support economic growth, particularly of lower income groups. Table 1 summarizes the recommendations of the report and aims to provide a basis for the development of a sector-wide internal vision and reform strategy. It will be important for the sector to come together in the next few months to develop a joint vision of the sector’s outreach, performance and product mix to be achieved in the next 5 to 10 years, as well as to determine the reform path and sequence to get there. This should ideally be done in collaboration with the government and the BRH, as well as with other national and international stakeholders. For the reform process to be cost efficient and sustainable in the long term, attention will have to be placed on fostering a financially viable support system in the sector’s second and possibly third tier, and to consolidate the sector. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK XI Table 1: Summary of Recommendations Recommendations Time frame Implementation Agency Reforms to consolidate and strengthen the financial cooperatives sector Sector to develop a holistic strategy to strengthen/consolidate the sector and clarify internal organization. ST CFIs, sector organizationsa CFIs to conduct assessment of their income and expenditure structure and develop/implement action plan to reduce costs and enhance efficiency. ST/MT CFIs, sector organizations, donors CFIs to strengthen their focus on member needs and enhance transparency vis-a-vis members. MT CFIs management/ governance bodies Sector organizations to review their division of labor and funding structure, and adjust their services to better align with sector requirements. ST/MT Sector organizations CFIs and sector organizations to define, purchase and maintain IT systems that fit their needs, and launch a massive capacity-building program for staff. MT/LT CFIs, ANACAPH Introduce a stability fund and/or deposit insurance scheme for authorized and qualifying entities. LT BRH/sector organizations Reforms to strengthen the legal, regulatory and supervisory framework BRH to bring unauthorized CFIs into compliance: (i) Carry out stocktaking exercise of unauthorized CFIs, and issue a regulation to enforce the legal requirement to become authorized or cease operations; (ii) Conduct due diligence of unauthorized CFIs to assess their future viability and options; and (iii) Develop a scheme to support the orderly exit of unviable, unauthorized entities. ST MT MT/LT BRH (DGICP), donors Congress and BRH to adjust and approve the revised draft law on CFIs: (i) Introduce revisions in the area of minimum capital, governance, capital, transparency and member orientation of CFIs; (ii) Provide BRH with the sole role in registering, authorization and liquidation of CFIs, as well as the ability to issue monetary sanctions; (iii) Address conflict of interest issues between the promotional and oversight functions of federations; and (iv) Establish a tiered supervisory approach. ST/MT BRH, Congress BRH to revise prudential regulations to introduce a stronger focus on quality of risk management and regulate foreign exchange and term management. ST/MT BRH (DGICP) BRH to (i) enhance accounting and auditing rules, (ii) introduce a certification process for external auditors, and (iii) maintain a list of certified CFI auditors. ST MT BRH (DGICP) BRH to strengthen its internal capacity to switch from compliance to risk-based supervision, introduce an off-site early warning system and enforce liquidations. MT BRH (DGICP) Note: ANACAPH = National Association of Haitian Credit Unions; BRH = Central Bank of Haiti; CFI = Cooperative Financial Institution; DGICP = General Inspection of the Credit Unions; MT = medium term; LT = long term; ST = short term. a Sector organization refer to the ANACAPH, the federation Le Levier and the new federation / sector entity that was recently created. EXECUTIVE SUMMARY XII 1. Diagnostic Review of the Financial Cooperative Sector in Haiti The government and Central Bank of Haiti aim to improve financial inclusion as a means of fostering inclusive economic growth. As confirmed by a recently conducted Financial Capability and Inclusion Survey of the World Bank (FINCAP 2017), only 27.5 percent of the population has access to a savings account, and only 10 percent to a loan at a formal financial institution. To increase the population’s access to formal financial services and foster economic growth, the government developed a National Financial Inclusion Strategy (NFIS) in 2014 with the support of the World Bank. The strategy laid the basic framework for financial sector reforms. It is currently being implemented and updated. As financial cooperatives have a strong presence throughout the country and a substantial membership base, the NFIS includes measures to strengthen and consolidate the sector. The NFIS provides for: (i) an assessment of constraints facing the development of financial cooperatives; (ii) the development of a technical assistance program to strengthen and consolidate the sector; and (iii) a review of the regulatory and supervisory framework to create a conducive environment for the sector’s sound growth. Some reforms to strengthen the sector and improve the regulatory framework were ongoing at the time the NFIS was drafted. However, a holistic assessment of the sector had not yet been conducted. In line with the measures suggested by the NFIS, this diagnostic review assesses constraints to the development of financial cooperatives. It is part of a technical assistance program financed by the Financial Sector Reform and Strengthening Initiative (FIRST) and managed by the World Bank Group, which aims to increase access to responsible financial services in Haiti and to support the implementation of the NFIS. The objective of the review is to provide guidance on cost-effective non-regulatory and regulatory reforms to strengthen and consolidate the sector. For the assessment, the World Bank team reviewed the current legal and regulatory framework, conducted a desk review of available literature and data on the sector, and met with the core sector stakeholders. Furthermore, in June and September 2017, the team visited 11 financial cooperatives in 4 departments of Haiti (see Annex 1). During the visits, the World Bank team used a semi structured questionnaire to guide the interviews, and reviewed the available Board and Committee minutes, annual reports, loan files and audited financial FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 1 statements. The World Bank team is grateful for the excellent support received from the BRH for arranging and conducting these visits. The report is structured as follows: Chapter 2 provides a brief overview of the sector, its evolution and organizational structure. Chapter 3 reviews the core regulatory and supervisory framework of the sector and discusses its implementation. Chapter 4 assesses the sector’s financial soundness, governance, and operational efficiency. This Chapter is based on findings from the field visits to the 11 financial cooperatives. Finally, Chapter 5 summarizes the findings and lays out the core recommendations for reform, which should be included in an action plan for the sector. 1. DIAGNOSTIC REVIEW OF THE FINANCIAL COOPERATIVE SECTOR IN HAITI 2 2. Sectoral Overview 2.1 Evolution of Financial Cooperatives in Haiti The number of financial cooperatives in Haiti is estimated to range between 85 to 180 entities. The National Cooperative Council (CNC) does not have any available data about the sector, but the Central Bank of Haiti (BRH) collects data from the supervised sector on a quarterly basis. In addition, the sector organizations collect some data on their affiliates, albeit in a sporadic manner. However, neither the BRH nor the sector organizations publish their data, (see also Chapter 3.2), leading to a dearth of information about CFIs. As a result, the following assessment of the sector’s evolution relies to a large extent on data received on the 59 financial cooperatives, that have been authorized by the BRH to date. These are the most significant, with the BRH estimating that the 30 largest account for 86 percent of the sector’s assets, and 84 and 89 percent of deposits and credits, respectively.4 CFIs have a strong presence in urban and peri-urban areas of the country, and provide savings and loan products to people of all income groups. Based on available data,5 the sector is widespread throughout Haiti, with headquarters situated in all 10 departments and in 53 locations. The authorized CFIs now have an average of 1.5 branches, of which 18 percent are estimated to be in rural areas.6 CFIs offer savings and loan products to their members, and some also provide payment and transfer services as agents of Western Union. The average deposit balance is small, ranging around 5,000 Haitian Gourdes (~US$ 80) compared to around 45,000 Gourdes (US$ 676) for savings accounts in banks. For loans, the average remaining loan balance is 49,000 Gourdes (US$ 770) per borrower, compared to Gourdes 587,830 (US$ 9,200) for commercial banks.7 These averages indicate that the financial cooperatives cater to a different population 4 BRH (2014). 5 Information regarding the 66 cooperatives and their headquarters was received from the BRH, the CNC and the sector organizations. 6 See Phareview (2015). 7 Based on Phareview (2015), the market segmentation is also reflected in the average loan size for non-bank/cooperative microfinance institutions (22,000 Gourdes) and microfinance institution (MFI) subsidiaries of banks (99,000 Gourdes). FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 3 segment, in particular, the population with moderate to low-income levels. The vast majority of deposits are short-term in nature. The assets of the financial cooperative sector in Haiti have grown substantially in the last few years. The sector has now fully recovered from the financial and reputational crisis in 2002, during which a number of sector entities were discovered to have been pyramid schemes and failed.8 As can be seen in Figure 1, the assets of authorized entities have grown rapidly since 2011, and have more than doubled in both nominal and real terms. While the sector’s assets are not yet systemically important in terms of GDP, they now account for 1.7 percent of GDP (compared to 0.9 percent in 2009). The growth was in part due to a substantial increase in deposits (84 percent in real terms), but also due to retained earnings and third-party contributions to the sector, which boosted the balance sheets. The credit portfolio grew at a lower rate (66 percent in real terms), and now only accounts for 49 percent of assets (compared to 59 percent in 2011). Most loans are for commercial purposes (and are estimated to be between 40-60 percent of total loans), but increasingly also include housing loans. The latter currently ranges about 30-50 percent of loans (in volume) in 6 of the 11 cooperatives visited. With the recent growth, the financial cooperative sector in Haiti now compares well in terms of share of assets and membership with other countries in the region. As can be seen in Table 2, financial cooperatives account for 2.9 percent of the assets of the national financial system in Haiti, comparable to the asset shares of financial cooperatives in Peru and Colombia. A membership of 15 percent of the economically active population is also close to the median level in the region. However, the individual financial cooperatives are very small in comparison to the size of assets reached in other countries. For example, the largest cooperatives in the Dominican Republic, Honduras and Guatemala have between US$179 to 220 million in assets, compared to US$12 million for the largest financial cooperative in Haiti. Although membership in financial cooperatives has reached significant levels, the sector has not yet achieved its full potential role in supporting economic development. Despite its comparatively small volume of assets, the sector caters to a large number of people. In 2015, the sector had already over 800,000 members, up by 136 percent since 2009 (see Figure 2).9 As of September 2017, membership had reached around 1 million. This represents about 15 percent of the adult population, and indirectly links an estimated 30-40 percent of the population to financial services.10 Yet, the sector is highly fragmented, and the majority of entities are small. The size of cooperatives varies greatly, ranging from the largest financial cooperative with over 100,000 members and assets of over US$12 million to many smaller cooperatives with less than 1,000 members and assets below US$1 million. The assets of the largest cooperative are equivalent to only 17 percent of the assets of the smallest bank in the system. Furthermore, financial intermediation is low, as the loan portfolio declined to less than 50 percent of assets and 72 percent of deposits. Only around 10 percent of members have a loan, with the growth of the loan portfolio mostly reflecting larger loans (both in nominal and real terms) and going to existing borrowers rather than a deepening in financial intermediation (Figure 2). 8 For a description of the pyramid scheme, see for example Mattern and Wilson (2013). 9 Phareview (2015). 10 This also accounts for indirect effects on family members of this account. 2. SECTORAL OVERVIEW 4 Figure 1: Evolution of the Assets of Financial Cooperatives (%, Gourdes millions) Having grown by over 100 percent in real terms since 2009, CFI assets now reach 1.6 percent of GDP 10,000 8,000 6,000 4,000 2,000 0Sep-09 Sep-11 Sep-13 Sep-15 Assets/GDP Assets (in million Gourdes) 2.00% 1.60% 0.80% 0.40% 0.20% 0.00% Sep-16 The growth in assets reflects an increase in deposits, as well as retained profits… 10,000 Assets 8,000 Million GourdesLoans (net) 6,000 4,000 2,000 0 Deposits Jan-09 Sep-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 …which was not matched by the growth of the loan portfolio. 75% 70% 65% 60% 55% 50% 45% 40% 35% Sep-09 Sep-11 Jan-13 Jan-15 Jan-16 Loans to assets Savings to Assets Sources: BRH for 2015-2016; Phareview (2015) for 2009-2014; and author’s own computations. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 5 Benefitting from substantial donor support and moderate competition, the sector has increased its profitability over the years, but weaknesses in intermediation and operational efficiency persist. A number of donors have supported the sector over the years. The Canadian Cooperative Network Desjardin (DID) provided ongoing financial and technical support to the sector until 2013.11 The United States Agency for International Development (USAID) provided support through its Haiti Integrated Financing for Value Chain and Enterprise (HIFIVE) Initiative. This initiative has helped individual entities and the sector organizations to automated and cater to agricultural value chains. Given the ongoing support and a high net interest margin of over 20 percent, the sector has increased its profitability over the years. Table 3 shows the rate of return on assets (ROA), which increased from 3 percent in 2013 to 5 percent in 2016 — despite a lower loan-to-assets ratio, high levels of liquidity, elevated levels of non-performing loans,12 and gaps in operational efficiency. This will be analyzed and discussed in more depth in Chapter 3. Figure 2: Evolution of CFI Membership and Selected Member-related Ratios Although membership and loan sizes grew, only a few members have a loan and per person savings remained low. 800,000 60,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 50,000 40,000 30,000 20,000 10,000 0 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Members of which borrowers Average loan size Average deposit size Sources: Author’s computation; Phareview (2015). 11 The Support to Haitian Savings and Credit Cooperatives (ACOOPECH) project spanned 18 years. It provided technical and financial support to help create a second-tier Le Levier federation, introduce an IT system for affiliated entities, and strengthen individual entities on an ongoing basis, including also special support after the earthquake in 2010. 12 See Chapter 3.1. 2. SECTORAL OVERVIEW 6 Table 2: Haitian CFI System in the Regional Context Countries Total Financial System Assets (US$, millions) CFI Assets (US$, millions) Share of National Financial System (%) CFI Membership Members/ Labor Force (%) Ecuador 50,632 9,300 18.4% 5,300,000 79.6% El Salvador 19,224 2,571 13.4% 1,213,192 43.4% Paraguay 23,142 2,507 10.8% 1,488,548 44.0% Costa Rica 54,186 5,469 10.1% 850,000 38.0% Honduras 21,766 1,147 5.3% 843,854 22.7% Bolivia 29,609 1,448 4.9% 1,200,000 22.1% Guatemala 40,546 1,602 4.0% 1,661,080 25.2% Dominican Republic 29,992 1,032 3.4% 708,330 14.5% Haiti 4,366 129 2.9% 800,000 15.0% Peru 120,509 3,486 2.9% 1,663,480 9.7% Colombia 187,328 4,640 2.5% 2,708,428 10.7% Brazil 2,527,209 47,342 1.9% 8,861,040 8.2% Panamá 122,976 1,900 1.6% 203,055 10.6% México 423,140 6,459 1.5% 7,262,024 12.5% Nicaragua 8,301 113 1.4% 70,000 2.5% Chile 320,163 2,872 0.9% 1,301,180 14.3% Uruguay 37,681 315 0.8% 700,000 39.5% Total 4,199,539 92,345 (Average 4.8%) 41,822,697 (Average) 24.3% Source: DGRV (2017). Table 3: Evolution of Selected Performance Indicators (2013–2016) (%) Sep-13 Sep-14 Sep-15 Sep-16 Return on assets (ROA) 3 4 4 5 Net Interest income / total income 82 82 80 83 Provisions / total loans 5 5 4 6 Operational expenses / assets 8 9 9 10 Operational expenses / net interest income 72 74 73 70 Source: Authors’ computation based on BRH data. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 7 2.2 Organizational Structure of the Sector Most countries with large and modern financial cooperative systems have a strong second tier structure that helps the sector to innovate and reap potential economies of scale. Countries such as Brazil, Canada, Germany, and Guatemala have an elaborate system of federations and other second tier support structures in place. Such structures help to manage liquidity and foster innovation, improving the soundness of individual entities. In addition, second tier institutions in those countries also monitor the soundness of sector entities to contain the risk of the second-tier services they offer, thereby reducing the reputational risk to the sector if one entity fails. Similar developments are underway in other countries in the region. In Haiti, the legal framework for financial cooperatives already provides for a strong organizational structure of the sector and includes incentives to federate. The law of 2002 specifies that federations should: (i) help represent the interests of their affiliates and promote their development; (ii) conduct oversight of the affiliates to ascertain their liquidity and solvency; (iii) provide capacity building, technical assistance and other support to affiliates; and (iv) support the integration of the sector. According to the law, a federation can be created by 10 or more financial cooperatives. It should conduct the external audits of the affiliated members and is subject to the accounting and other rules of the BRH. As an incentive to become federated, the law provides for federations to be part of the chamber of compensation, thereby offering their affiliated entities access to the payment system. Furthermore, only federated entities are eligible to receive funding for development under a special support fund to be created by the BRH. Figure 3: Organizational Structure of the Financial Cooperative Sector in Haiti Second tier Between 40-120 unaffiliated entitiesNew ANACAPH • 49 affiliated entities with over 6000,000 members • Representation, capacity building and technical Le Levier • 36 affiliated and 6 associated entities with over 7000,000 members • Representation, technical Federation Central First tier Source: Author’s schematic. assistance Up to 180 financial cooperatives assistance • IT support • Liquidity management Financing Facility Note: ANACAPH = National Association of Haitian Credit Unions; IT= information technology. 2. SECTORAL OVERVIEW 8 In practice, the second-tier system in Haiti is already quite developed, and most of the larger entities are federated. Figure 3 shows that currently one federation and one association provide second tier functions to the sector. Another federation is in the advanced stages of being launched. There is also a large overlap of affiliated CFIs between the organizations, with 85 percent of the members of Le Levier also being part of ANACAPH. In addition, around 40-120 entities — most of them unauthorized — are currently not affiliated. As such, they do not benefit from capacity building and general support. • Le Levier, a sector federation created in 2008 with DID support, currently has 36 affiliated and 6 associated members. The federation has 12 auditors to conduct annual external audits of their affiliated entities (see also Chapter 3.3), 10 counselors to provide capacity building and institutional strengthening support to managers and Boards, and another 28 employees who assist with the joint IT platform, the joint operational manuals, liquidity management and other support services. Overall, Le Levier focuses on creating a strong “brand” for its members. It also provides second tier financial services to its affiliates, such as a Central Financing Facility and a linkage to the national payments system. It is currently working on linking its affiliates to modern payment services and upgrading its IT platform. • ANACAPH, the National Association of Financial Cooperatives, was created in 1998 with the objective of fostering collaboration between its members, supporting their development, and providing ca