The modern history of saving and credit dates back to 1850 when Franz Hermann Schule-Delitzch, German economist and politician[1], established Vorschussvereine (People’s Bank) with the aim of providing credit to traders and craftsmen. The essential requirements of his Volksbanken, or People’s Banks, were the concept of Selbsthilfe (self-help), the general assembly as the main body of governance and the election of the executive and control bodies following the ‘one man, one vote’ principle.[2]
By 1861, 364 credit coops were established under the guidance of Schulze-Delitzsch and had organized 49 thousand members. Another pioneer of credit union, Friedrich Wilhelm Raiffeisen, is known for his initiation to introduce cooperatives in rural Germany for small farmers unlike to Schulze whose credit unions were concentrated in urban. Raiffeisen, set up a credit society based on the principle of “Each for All, All for Each” in 1864 to fight against the viciousness of the poverty in the poorest and infertile regions of Germany. He established the principles of Self-help, self-administration and self-responsibility for bringing about structural improvements in the living conditions of poor people rejecting the concept of charity which would merely increase dependency. While Schulze-Delitzsch is chronologically earlier, Raiffeisen has proven more influential over time.[3]
Later, the idea of credit unions quickly began to spread across Europe before they were consolidated in Germany and in the early 20th in the North America. They were based on the principle of unlimited liability for members; volunteer directors; limited geographic area; and allocation of surpluses to an indivisible reserve. The credit union movement was expedited and in 1934 confederation was formed as Credit Union National Association (CUNA) of US to associate and help for safe operation of credit unions. The establishment of CUNA germinated the seed of World Council of Credit Unions (WOCCU) to strengthen the credit union movements worldwide for improving economic status of people and saving them from usury existing in the developing countries. As a result of constant effort, by the late of 1960s organizations of all over the world had joined to form the world credit union system of today. However, it was only in 1971, when World Council as leading organization of credit unions of the world came into operation.
WOCCU is a part of International Cooperative Association (ICA) and also has an observer status at the UN since 1978. By 2018, it has 50 national associations, 50 direct members, 10 affiliate members, and 2 international members. It incorporates 85 thousand credit unions worldwide which organize 274 million members i.e. 9.4 Percent of world’s economically active population and 22.5 percent of total cooperative members as reported by ICA.
Since WOCCU is the international apex organization for all the credit unions of the world, it has formulated three sets of International Credit Union Principles for the sustainability of organization, protection and growth of the members. At the core of all these principles are the Credit Union’s philosophy of cooperation and its central values of self-help, self-responsibility, equality, equity, democracy and solidarity. At the heart of these principles is the concept of human development and the brotherhood of man expressed through people working together to achieve a better life for themselves and their community.[4]
A. Transparency
B. Compliance
C. Public accountability
B. Continuity
C. Balance
D. Accountability
Integrity
Competence
Commitment
eneral set of rules and policies and constant monitoring of their implementation for achieving goal of any organization through power balance and prosperity of its members. Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. [5]
Even though standard sets of principles and theories have been developed for effective and efficient corporate governance, WOCCU has developed its own three-part system of governance principles for credit unions. The motif of other financial institutions is to maximize profit of the owners’ whereas credit unions tend to work for benefitting members. Unlike to other financial institutions, credit unions benefit members through lower interest rate in loan, higher dividends and the lower services fees. Therefore, WOCCU assumes that governance in credit unions is unique and quite alike to other financial organizations and is the combination of three fold of governance.
The first fold consists of External governance which is assumed to make strong hold of any credit union in the financial market place through transparent operation of institution, compliance with prevailing laws and regulations and accountable to public.
The second fold consists of internal governance which basically defines about the responsibilities and accountability of Board of Directors (BOD), general assembly and staffs of the unions.
It also defines the structure and formation of the board of directors for democratic operation, responsibilities of general assembly for democratic control and administrative functions of the staff for benefitting members. Further, internal governance focuses on the preservation of future balance for the continuation of credit unions and accountability of BOD and management.
The third fold is individual governance which focuses on the integrity, competence and commitment of the BOD which represent the general assembly and the management which administer the credit unions.
Therefore, institutional governance of credit unions or the saving and credit cooperatives Societies (SACCOs) is the consolidation of all the external, internal and individual governance. Any SACCO is considered to have good institutional governance if operated by following the cooperative values and principles in compliance with the national laws, which runs its function in transparent way, which is accountable to the general public, whose BOD is competent and committed to best represent its members’ interest and focuses on the members’ benefit.
SACCOS are member-based co-operatives formed to meet the financial needs of members. They provide formal financial access to the members and assist in their socio-economic development. If institutional governance is maintained in SACCOs, it possibly becomes the means to reduce the poverty. However, some SACCOS cannot strengthen good institutional governance which leads the institutions to be problematic. The institutional governance is affected by the external and internal factors which prevent them from achieving the goal of the members and community at the large.
World Bank points out the member-manager conflict as the major cause of the failure of the Financial Cooperatives (FCs). The key internal conflict is member-manager conflict, also known as the “expense preferences” by managers. Besides, for the proper function of the FCs there should be fit and proper requirements for both governance bodies, and the selection of senior management and their succession, are crucial albeit often loosely defined or simply not observed[6]. The tendency of making decision for investing money by BOD on the self or the nearest ones is generally causing conflict of interest which can be eliminated by introducing proper set of rules and effective internal monitoring.
Financial Stability Institution reports that the most frequently raised issues by surveyed jurisdictions include low attendance in general meetings, lack of renewal of boards and senior management, and the insufficient skill sets, expertise and qualifications of senior managers and members of oversight bodies[7].
Members’ inadequate knowledge on cooperatives and their lack of interest for investing time in their organization, and insufficient knowledge on supervisory committee members regarding internal control create challenge for internal governance.
Internal governance of some FCs seems to be feeble due to insufficient training and education dissemination to members, BODs and management. Similarly, weak accounting system and unorganized record keeping, misuse of funds by BOD and management, undetermined qualification of BOD, weak leadership and institutional capacity, high interest rate on loans and poor loan recovery mechanism are few more challenges for institutionalizing governance in SACCOs.
Insufficient governmental supervision and monitoring might lead SACCOs to the problem if the BOD and senior management work with the vested interest. Therefore, it is the regulatory body of SACCOs that has to constantly inspect and supervise the FCs for operating them according to the cooperative values principle and standards. Similarly, some SACCOs also seem to have been problematic because of the high competition with other financial institutions.
The modern cooperatives movement in Nepal is initiated with the establishment of Department of Cooperatives (DOC) under the ministry of Agriculture in 1953 AD. The first cooperatives Bakhanpur Saving and Credit cooperative was established along with thirteen SACCOs registered in the fiscal year 1956/57 under the executive orders of 1956[8]. A large number of SACCOs were established in country after the promulgation of Cooperative Act, 1992. At present, there are altogether 13578 SACCOS (39 percent of total cooperatives). Moreover, SACCOS hold 74 percent of share, 72 percent of deposits and 66 percent of credit made by cooperative sector.
The apex body or the federation of SACCOs is Nepal Federation of Saving and Credit Cooperative Unions LTD. (NEFSCUN). It aims at promoting, developing and strengthening SACCOs on the basis of principles of international credit union in compliance with national laws. Ministry of Land Management, Cooperatives and Poverty Alleviation and Department of Cooperatives are regulatory bodies at the federal level whereas provincial and local governments are responsible for the regulation in their respective jurisdiction.
The constitution of Nepal has given jurisdiction to the three tiers government for the regulation of cooperatives. In federal level Cooperative Act, 2017 and Cooperative Rule, 2019 direct the registration, promotion and regulation of cooperatives registered and operated under federal law. Similarly, all the provinces and local levels too have promulgated their own cooperative act and rule on the basis of the specimen provided by the concerned ministry at federal level. While preparing the act and rules, the legislators are guided by the cooperative norms, values and principles and have tried to maximize members’ benefit through cooperative development.
Our national laws and policies on cooperatives are developed by carrying the spirit of the cooperatives principles and best international practices. Our constitution, periodic plans and policies, political manifestations, the Guidance Notes to Cooperative Principles, 1995 by International Cooperative Alliance, international best practices, extended consultation with the stakeholders, research and learning from our own past are the major guideline for the present cooperative laws of Nepal.
The supervision of FCs by Registrar’s Office seems quite contrary to what WOCCU advocates that, credit unions supervised by the financial sector regulator enjoy greater public confidence and trust, which results in higher membership and savings growth[9]. However, it is not mandatory for all the FCs to be regulated by the financial sector supervisory body if the prevailing cooperative regulatory bodies are capable of supervising them in order to run them in accordance to the principles of cooperatives. In our context, Cooperative Rules, 2019 has provisioned the supervision of FCs having more than five hundred million annual transactions by Nepal Rastra Bank.
Our national laws have incorporated the provisions of accounting and audit regulations, internal regulations, operational regulations, administrative regulations, enforcement regulations and consumer protection regulations as guided by WOCCU for the good governance of FCs.
All the SACCOs are monitored by the monitoring system of Protection, Effective financial structure, Asset quality, Rates of return and costs, liquidity, Signs of Growth (PEARLS) in Nepal. PEARLS is not only the assessment tool for regulatory body but also it provides credit union managers, directors, and supervisors with concise, easy-to read reports that reveal institutional trends and identity strengths and weaknesses[10].
Similarly, the governance of FCs has internal control by organization’s own by-laws, policies, directives and procedures which are endorsed by governmental regulatory body. NEFSCUN has introduced the ACCESS and PROBATION branding tool of SACCOs developed by ACCU and itself respectively. It gives accreditation to SACCOs if required standards are met. These branding strategies help in establishing cooperatives as different sector from other financial institutions by promoting the cooperative values, norms and principles.
In 2015, Nepal Rastra Bank has mentioned that SACCOs are in problem since they are involved in transaction with non-members, large portion of share belonging to limited members, more FCs in urban areas and banks as their competitor, difference in interest rate of more than 6 percent in saving and credit, investment in unproductive sector like land purchasing and housing etc.
Devkota Taskforce, 2011 has mentioned that major challenges of FCs are to manage increased size of financial transaction, to follow obligations of financial and monitory policies and other prevailing regulations, weak
Regulatory mechanisms for following international principles, and motif of promoting individual business in the name of cooperatives[11]. Karki Commisson concludes that the major problems of SACCOs are arisen from weak self-regulation, inadequate education, distort of financial discipline, activity outside membership, misuse of cooperatives fund, extended membership, investment of FCs in non-productive
15th periodic plan has mentioned that mobilization of the fund according to priority setting of needy members, to invest for income generation and employment creation[13] are the key challenges of cooperatives along with other.
Hence, the key challenges for institutional governance of SACCOs in Nepal are to create financial discipline, to make BOD guided by volunteerism, to discourage fund mobilization in non-productive sector and encourage for cooperatives, and increase regulation by concerned authority for establishment of good governance of cooperatives.
he constitution of Nepal, periodic plans, cooperative laws, cooperatives principles and sectorial policies have envisioned that SACCOs are formed through common bond of lower and middle economical background of people especially in rural areas which lag behind formal financial access. Accordingly, cooperative act and rules have clearly mentioned the demarcation line for SACCOs formation and restructuring in local level, directed for ending double membership in same nature of cooperatives, standards for BODs appointment and responsibilities and rights of General Assembly, guided for fund creation and mobilization, specified the regulatory bodies, provisioned for crime related to cooperatives, and many more for creating good governance in SACCOs. Nevertheless, the federation and SACCOs themselves have to follow the national cooperative laws for promoting internal governance. The BOD has to be competent, committed and inclusive for promoting the cooperative principles and serving the members.
It should check if its member is its own or if belongs to other SACCO too, should know about the number of active members and dissolve the inactive membership according to legal provision, should teach its member about the cooperatives values, should avoid the personal and vested interest, should have business plan and promotion strategy and should have feeling of volunteerism. They should have sound knowledge on financial management and the cooperatives laws so that they can save the cooperatives from being problematic. In addition for the better governance, the member is equally responsible. They should keep interest towards the information related to financial transactions and status of their cooperatives and make BOD and management cautious about their monopolies and strengthen the internal control mechanisms.
Cooperatives have mechanisms for self-control, self-administration and self-regulation. Their owners and clients are the same persons or the members. Principally, they have the best institutional governance. Based on this, it is believed that the role of government should be mostly concentrated in their education, promotion and development. However, the weak regulatory functions of government created by Cooperative Act, 1991 increased not only the number of cooperatives but also their fraudulent activities disrupting the cooperatives principles and financial rules. In this pre-context, prevailing cooperative law has attempted to make strong regulation from regulatory bodies for the preservation of the most democratic principles of cooperatives.
Therefore, now the SACCOs and federation should be guided by the national laws, international principles and best practices for improving the internal governance. If the provision of Cooperative Act and Rules are thoroughly followed by the cooperative movement, it can be presumed that no FC will have status of declaring problematic by government
