Sad end for Credit Union Bank

Poor management has been blamed for the CU Bank's failure, but urgent reform is needed to prevent it from happening again.

"Shareholders were in favour of a turnaround plan, but we were not confident of the management committee's ability to carry it out."

Very few people were surprised when the news of the Trinidad and Tobago Co-operative Development Bank's (CU Bank) collapse was released.

"The Bank had a weak management structure and this was evident from even the mid 1980's when its long down-hill battle to remain solvent started," says Jeffrey Joseph, Manager of Bethel Credit Union, Tobago.

The CUBank eventually lost the battle on November 23, 1995, when its shareholders, mainly local credit unions, voted to wind up its operations and liquidate assets.

"The end result for the bank is sad for two reasons," Joseph adds. "Firstly, it was not necessary, especially now that the other banks in the market were making record profits."

Around the same time the decision was passed to wind up the Co-operative Development Bank, three other financial institutions declared record annual profits in excess of TT$50 million each. One of these banks, increased its after tax profits from $64 million to more than $109 million.

"With so many success stories in the industry and the fortunes of the Credit Union bank still going down, naturally the shareholders' confidence in the management committee continued to slide and over time the shareholders became more unwilling to commit additional funds to saving the bank.

"Over time the credit unions themselves transferred more and more of their business away from the CU bank.

"The decision will adversely affect our Credit Union as our exposure through shares invested was more than $100,000. It is still our members' money," he adds.

But in the long run it will not threaten the capital base of the Credit Union. Bethel Credit Union is considered to be small with an asset base of just more than $7 million.

First Problems

The Bank's fortunes first took a turn for the worse in July 1991, when shareholders and depositors, hearing rumours of problems in the bank's operations, and wary about a lack of return on their investment, made a "run" on their deposits.

This placed the bank on the brink of closure. It only survived this first assault by convincing its larger depositors that all was well, but the bank was still left in the middle of a liquidity crisis.

Short-term measures were adopted to satisfy the immediate demand for funds by depositors. However, in the absence of supportive mechanisms and a reasonable capital base to service the demand for withdrawals of long-term deposits, the bank fell deeper into a hole as short term loans and overdraft proved to be too costly.

Former Marketing Officer, Debra Johnson, said this problem had been reflected in the unusually high cost for funds acquired by the bank.

"With a demand ratio of five units of long term funds for each unit of short term funds available to the bank, it required that long term assets be supported by short term funds or deposits."

"Although it was an asset to the economy, accelerated disbursements for small business loans, quickly aggravated the cash position of the bank by more than $3.3 million.. and the temporary loss of an additional $1.1 million in BCCI did not help the sliding image."

The road has been a long and hard one for the CU Bank, even though there were signs along the way, warning of impending danger.

Turnaround Plan

Previous to the Meeting to wind up operations of the CU Bank in November, a Special Meeting was called in April 1995 to seek funding for a plan to turn- around the bank.

The Meeting included a heated debate between shareholders and the management committee, and eventually the proposal was turned down pending consultations with individual credit union units.

In a last ditch effort to raise the required capital, the management committee received approval from the Meeting to carry their case to the individual credit unions.

At the time, three of the larger credit unions pledged up to $5 million to the effort but the funds would only be granted if the management committee was able to raise the rest of the funds from the other credit unions.

With the collapse of the bank seven months later, their efforts have proven to be in vain.

"Shareholders were in favour of the turnaround plan," says one credit union representative present at the meeting, "but we were not confident enough in the capability of the management committee to carry it out successfully as they were at the helm during the bank's financial crisis."

"They also seemed unwilling to step down for an interim management committee to put measures in place to save the ailing co-operative," he said.

A report presented to the special general meeting by a committee formed to evaluate the various options open to the shareholders concluded that the Bank was insolvent and a recommendation was passed for the movement cut its losses and take up the option to liquidate the bank's assets.

The report noted that members capital had been badly eroded to the extent that deposits were also being threatened, and this would have become worse if operations were to continue. An optimistic estimate based on unaudited financial statements up to September 30, 1995 suggested that net deposits might have been eroded by more than 35 percent.

The report also found that there was mis-management of the affairs and operations of the bank. Also, it concluded that the proposed options offered by management for the restructuring and continuation of the bank's operations "to have no sound basis."

The report noted that salaries and staff benefits amounted to more than 350 percent of the bank's net income and directors expenses were 40 percent of the bank's interest income. Advertising income and legal fees totalled 86 percent and 232 percent of interest income respectively.

Bad Policies

Anthony Pierre, Chairman of the evaluation committee, said one of the major factors leading to the bank's predicament, was the fact that it was borrowing at interest rates as high as 18 percent to lend on a long term basis at a maximum return of 12 percent.

Even though the ratio of the loss to the size of assets for most credit unions may be small, the collapse of the CU Bank may be the little push needed to send a few of them into the red. The end result may be a few consolidations and mergers within the movement.

Huge Deficit

"Liquidation could result in a tidal wave effect with negative implications for several small and medium sized credit unions with investments in the Bank," stated a report tabled at the last AGM which was held in October.

As at September 30, 1995, the bank had $20.3 million on deposit. Up to December 30, 1994 there was an accumulated deficit of $10.1 million. As the major shareholders, the credit union community which owns the bank is estimated to have lost more than $15 million in deposits and shares because of the collapse.

Despite the minimal impact on the wider local and regional financial system, the collapse of the bank may provide a green light for the Trinidad and Tobago Government to step in and regulate the operations of the Credit Union Movement.

The previous administration was developing a plan to regulate Credit Unions Movement by deeming them to be financial institutions, rather than co-operatives, and putting them under the direct regulation of the Central Bank.

The completion and implementation of the plan were delayed pending the establishment of an adequate regulatory framework administered by the credit unions themselves.

However, some experts contend that the collapse of the bank may also be an indicator of further weaknesses within the movement.

One of the main weaknesses identified was the lack of proper training for persons entering the executive of many credit unions across the country.

Supported by funding through the Government and several larger Credit Unions, a committee was established two years ago to develop a stabilization plan for the movement. The plan included the setting up of a stabilization fund and supporting infrastructure to train credit union personnel to properly run their organizations.

University lecturer Dr Carl Theodore, who has been studying the development of the local credit union movement, has been calling for reform within the system for some time. He said the main assumption that credit unions are brotherhood organizations formed mainly to assist there members within the community is good, but the methods used for selecting people to the executive needs to be improved. The election of officers by popular vote often results in persons less than qualified being in charge of large sums of money.

And, with the asset base of the movement conservatively estimated to be in excess of $2 billion, he adds, reform should be given priority.

"Several individual credit unions manage funds totalling more than $100 million, so whoever is elected to the executive must be competent and experienced enough to function in the post."

Many credit union officials also believe that the Credit Union bank was the first casualty in the system and reform is urgently needed to prevent this from happening again.