Financial Cooperatives in Haiti A Diagnostic Review of the Sector and Its Regulatory and Supervisory Framework © 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. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. 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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 for the visited CFIs), and well above the 12.5 percent supporting economic growth. mandated by the BRH. A number of entities also introduced IT systems and improved their internal Second-tier organizations are in place to processes to enhance their performance. These are strengthen the sector, but they still depend on important improvements and have moved the sector donor funding and need to clarify and prioritize in the right direction. Nevertheless, the overall level their roles. There are currently two active sector of sophistication in the sector continues to be rather organizations, the National Association of Haitian basic, and some of the smaller entities still need to Credit Unions (ANACAPH) and the federation, become financially sustainable. Le Levier. They reach out to provide capacity- building and technical assistance to over 50 Although the sector now appears to be financially financial cooperatives, including all large ones. sound, the quality of financial intermediation Another federation, “Le Societaire,” has recently needs to improve so that CFIs can better face been created, covering 11 financial cooperatives. In increasing competition in the financial sector. addition to capacity building, Le Levier also provides A number of the entities visited indicated that they its affiliates with liquidity management, information had non-performing loans (NPLs) of over 10 percent technology (IT) and strategic support services. of their loan portfolios, well above the maximum of It also explores options for linking its members to 5 percent suggested by the World Council of Credit the payment system of the country. Although the two Unions (WOCCU). Furthermore, the mission noted existing organizations greatly help strengthen the the existence of market and foreign exchange rate sector, they lack financial self-sufficiency, and still risks that in some CFIs had already led to small losses. depend on donor funding for delivering the full range The financial cooperatives also had, on average, of services. Furthermore, as 85 percent of Le Levier’s 35 percent of their assets in non-remunerated liquid members are also affiliated with the ANACAPH, the assets — with some even up to 73 percent. Given roles and services of both organizations need to be these vulnerabilities in the quality of intermediation, clarified to ascertain complementarity. Further, both the sector’s profitability largely hinges on being able need to prioritize and enhance their services to better to charge a high financial intermediation margin of fit the needs of the sector. over 20 percent, as well as additional fee income for loan documentation, late fees and the provision of Observations Regarding the other services. Both are likely unsustainable in the Financial and Operational medium term, when modern technologies reduce Soundness of Financial the costs of service provision of competitors and Cooperatives competition in the financial system intensifies. Thus, the sector urgently needs to increase intermediation Since the occurrence of the pyramid scheme in levels, reduce non-performing loans and foreign 2002, the sector has made important progress exchange exposures, and enhance its operational toward profitability and improving its internal efficiency. operations. According to BRH data, the authorized financial cooperatives increased their level of The quality of governance also needs to be profitability since 2013, with returns on assets and strengthened. Core governance structures are in equity reaching 5 and 21.7 percent, respectively place, and CFIs are formally required to adhere to (2016). The CFIs’ capital-to-asset ratios appear core cooperative principles and focus on members’ adequate to absorb shocks (26 percent on average economic well-being and education. However, EXECUTIVE SUMMARY VIII the tenure and quality of Board members is not Together, the observed gaps in intermediation adequately covered in the by-laws and legal and efficiency negatively affect the value framework, and the transparency of information proposition of cooperative membership, reducing vis-a-vis members is not sufficiently mandated. the sector’s role in supporting inclusive economic Furthermore, the quality of governance is weak in growth. Currently, most members receive little or practice. There is limited strategic guidance and no remuneration for their deposits and social capital. oversight provided by the Boards and Committees, On the other hand, interest and fees for loans are the tenures of Board and Committee members tend on the high side and require elevated levels of cash to be long, and participation in General Assemblies collateral. Only around 10 percent of members have is low (less than 5 percent). In addition, the depth a loan, although most managers indicated that the and quality of information provided to members prospect of receiving a loan is the prime motivation appears limited, including the range and pricing for becoming a member. Also, most CFIs do not of financial products. The noted deficiencies in the provide their members and communities with any governance structures of CFIs need to be addressed additional social benefit, leaving the member with as they can facilitate fraudulent activities/capture by limited incentives to actively participate in “their” small elites, thereby reducing the attractiveness of cooperative and contribute to its oversight. All of CFIs for members. this lowers the attractiveness and role of financial cooperatives, making them vulnerable to increased The operational efficiency of CFIs remains low. competition in the sector. Almost all financial cooperatives visited show elevated operational costs, with 5 of the 9 entities barely able to cover their operational costs through The Legal, Regulatory and net interest income. Although the provided data was Supervisory Framework not sufficiently detailed to assess the core drivers of A dedicated legal framework for CFIs is in place, operational expenses, the mission identified credit allotting the BRH substantial powers to regulate risk management and inefficient internal credit and supervise the sector. The dedicated law for processes as core deficiencies. For instance, the financial cooperatives was put in place after the loan files reveal substantial gaps in the capacity emergence of the pyramid scheme in 2002. It places a of CFIs to assess and document a borrower’s strong focus on the governance of CFIs and in many true repayment capacity, with the credit appraisal instances follows international best practice. It also process taking several weeks and mostly relying assigns a clear role to the Central Bank for regulating on the availability of cash collateral and a client’s and overseeing the sector, and calls for the creation previous credit history. A brief assessment of internal of a dedicated unit within the Central Bank to fulfill processes also points to substantial gaps in internal this role. This unit has been created, and regulations accounting practices, a lack of internal controls to have been issued pertaining to the administration and foster adherence to policies and manuals, and the risk management of CFIs. The legal framework also limited capacity of managers to assess core financial provides for the creation of a stability fund by the and operational indicators. Finally, automation in BRH, which has not yet been created. the sector is limited, with the IT system provided by the federation Le Levier in need of modernization. Nevertheless, the legal framework has a number In this context, the vast majority of entities are only of shortcomings, which particularly impede the partly or not automated. 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 has greatly helped enhance discipline in the sector, the current law, the implementation of remedial improving internal procedures and standards. actions largely hinges on moral suasion, as well However, supervision should place a stronger as on the BRH’s willingness to directly intervene emphasis on the quality of governance as well as the in the management of an entity. In addition, the risk and efficiency aspects of CFIs. Furthermore, the legal framework has shortcomings regarding the BRH should enforce the requirement for all entities registration, authorization and liquidation of sector to become authorized or be liquidated. This would entities. The foreseen division of labor between help to maintain solid growth in the sector. the registration of CFIs by the National Council Whereas the legal framework mandates external of Cooperatives (CNC) and the authorization audits, the underlying accounting plan and the through the BRH is not working well, leaving an quality of the external audits need improvement. unknown number of active cooperatives operating The accounting plan issued by the BRH is adapted to without authorization. Furthermore, liquidations are the more basic level of operation and automation of cumbersome to carry out and involve various players, the sector. However, it does not require the reporting and have not yet been initiated. These deficiencies of non-performing loans. Instead, it only captures have contributed to a lack of consolidation in information on the net loan loss provisions held.2 the sector. Given the rapid write-offs observed in the sector3 The BRH regularly conducts on- and off-site and the limited transparency regarding the level of supervision, and through this has greatly helped those write-offs during the year, the information is the sector improve its operations. In addition to not adequate to reveal the true level of delinquency. monthly off-site supervision, on-site supervision Regarding the external audits, the law mandates the of the authorized financial cooperatives is carried federation to carry out external audits of its affiliates. out every 18-24 months. Furthermore, the BRH’s Non-affiliated CFIs are required to use external strong focus on governance structures and internal auditors. This is adhered to in practice. However, in operations is to be commended. Standardized addition to conducting the external audits, Le Levier procedures and reporting tools are in place to guide also provides managerial counseling and support the supervision process and staffing of the dedicated services to its affiliated CFIs. This duality of roles of unit for CFI oversight appears adequate for the current a federation can create a conflict of interest situation scope of supervision. A much-needed IT system to that can impede the quality of the external audits. enhance automation of oversight is currently under Therefore, firm barriers (“Chinese walls”) should development. Overall, the streamlined supervision be put in place separating the two functions with process appears efficient, and the unit regularly different staffing and coordination. The quality of follows-up on the implementation of recommended work of the external auditors for the non-affiliated actions. This hands-on approach to supervision 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, Recommendations all external audits stop short of providing a summary of findings and recommendations, and only attest To bring the sector to a higher level of sophistication in general terms to the overall compliance with and further enhance its performance and services, existing norms. it is paramount that a holistic and consolidated reform effort be undertaken. Reforms are urgently A new draft law has been developed that needed to safeguard the medium-term profitability of includes some important revisions in the legal the sector, as the current high intermediation margin framework; however, it falls short of addressing will likely not be sustainable over time. Cooperatives some key issues identified above. The new draft will increasingly be confronted with competition law introduces important measures to enhance from other financial service providers, who are now transparency and consumer protection in the sector. starting to reach out to unbanked segments of the It also calls for external auditors to be pre-approved population through innovative delivery mechanisms by the BRH. These are important reforms that (that is, mobile wallets and non-bank agents), and merit approval. However, the draft law does not who are also able to provide payment services to yet resolve the fragmentation of the registration, their clients. In addition, the reforms are needed to authorization and liquidation processes, and it help deepen financial intermediation in the country does not provide the BRH with the tool to issue and support economic growth, particularly of lower monetary sanctions. Furthermore, the draft law income groups. allows financial cooperatives to issue subordinated debt, which given the state of the sector appears Table 1 summarizes the recommendations of premature. More attention also needs to be placed the report and aims to provide a basis for the on eliminating conflict of interest situations between development of a sector-wide internal vision and the various roles of the federations, and ascertaining reform strategy. It will be important for the sector that federations have adequate institutional capacity to come together in the next few months to develop and integrity for fulfilling their respective roles. a joint vision of the sector’s outreach, performance Furthermore, the federations’ internal regulations and product mix to be achieved in the next 5 to 10 and oversight should be mandated to be consistent years, as well as to determine the reform path and with all BRH rules. Finally, neither the federations sequence to get there. This should ideally be done nor the external auditors appear currently suitable in collaboration with the government and the BRH, for a delegation of supervision, as Article 130 of the as well as with other national and international draft law will make possible. 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 Time- Implementation Recommendations frame Agency Reforms to consolidate and strengthen the financial cooperatives sector Sector to develop a holistic strategy to strengthen/consolidate the sector ST CFIs, sector and clarify internal organization. organizationsa CFIs to conduct assessment of their income and expenditure structure ST/MT CFIs, sector and develop/implement action plan to reduce costs and enhance organizations, efficiency. donors CFIs to strengthen their focus on member needs and enhance MT CFIs management/ transparency vis-a-vis members. governance bodies Sector organizations to review their division of labor and funding ST/MT Sector structure, and adjust their services to better align with sector organizations requirements. CFIs and sector organizations to define, purchase and maintain IT MT/LT CFIs, ANACAPH systems that fit their needs, and launch a massive capacity-building program for staff. Introduce a stability fund and/or deposit insurance scheme for LT BRH/sector authorized and qualifying entities. organizations Reforms to strengthen the legal, regulatory and supervisory framework BRH to bring unauthorized CFIs into compliance: BRH (DGICP), (i) Carry out stocktaking exercise of unauthorized CFIs, and issue a ST donors regulation to enforce the legal requirement to become authorized or cease operations; (ii) Conduct due diligence of unauthorized CFIs to assess their future MT viability and options; and (iii) Develop a scheme to support the orderly exit of unviable, MT/LT unauthorized entities. Congress and BRH to adjust and approve the revised draft law on CFIs: ST/MT BRH, Congress (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. BRH to revise prudential regulations to introduce a stronger focus on ST/MT BRH (DGICP) quality of risk management and regulate foreign exchange and term management. BRH to (i) enhance accounting and auditing rules, (ii) introduce a ST BRH (DGICP) certification process for external auditors, and (iii) maintain a list of MT certified CFI auditors. BRH to strengthen its internal capacity to switch from compliance to MT BRH (DGICP) risk-based supervision, introduce an off-site early warning system and enforce liquidations. 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 sector and discusses its implementation. Chapter 4 the excellent support received from the BRH for assesses the sector’s financial soundness, governance, arranging and conducting these visits. and operational efficiency. This Chapter is based on findings from the field visits to the 11 financial The report is structured as follows: Chapter 2 cooperatives. Finally, Chapter 5 summarizes the provides a brief overview of the sector, its evolution findings and lays out the core recommendations for and organizational structure. Chapter 3 reviews the reform, which should be included in an action plan core regulatory and supervisory framework of the 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 median level in the region. However, the individual to low-income levels. The vast majority of deposits financial cooperatives are very small in comparison are short-term in nature. to the size of assets reached in other countries. For example, the largest cooperatives in the Dominican The assets of the financial cooperative sector in Republic, Honduras and Guatemala have between Haiti have grown substantially in the last few US$179 to 220 million in assets, compared to US$12 years. The sector has now fully recovered from million for the largest financial cooperative in Haiti. the financial and reputational crisis in 2002, during which a number of sector entities were discovered Although membership in financial cooperatives to have been pyramid schemes and failed.8 As can has reached significant levels, the sector has not be seen in Figure 1, the assets of authorized entities yet achieved its full potential role in supporting have grown rapidly since 2011, and have more than economic development. Despite its comparatively doubled in both nominal and real terms. While the small volume of assets, the sector caters to a large sector’s assets are not yet systemically important number of people. In 2015, the sector had already in terms of GDP, they now account for 1.7 percent over 800,000 members, up by 136 percent since 2009 of GDP (compared to 0.9 percent in 2009). The (see Figure 2).9 As of September 2017, membership growth was in part due to a substantial increase in had reached around 1 million. This represents about deposits (84 percent in real terms), but also due to 15 percent of the adult population, and indirectly retained earnings and third-party contributions to links an estimated 30-40 percent of the population to the sector, which boosted the balance sheets. The financial services.10 credit portfolio grew at a lower rate (66 percent in Yet, the sector is highly fragmented, and the real terms), and now only accounts for 49 percent of majority of entities are small. The size of assets (compared to 59 percent in 2011). Most loans cooperatives varies greatly, ranging from the largest are for commercial purposes (and are estimated financial cooperative with over 100,000 members to be between 40-60 percent of total loans), but and assets of over US$12 million to many smaller increasingly also include housing loans. The latter cooperatives with less than 1,000 members and currently ranges about 30-50 percent of loans (in assets below US$1 million. The assets of the largest volume) in 6 of the 11 cooperatives visited. cooperative are equivalent to only 17 percent With the recent growth, the financial cooperative of the assets of the smallest bank in the system. sector in Haiti now compares well in terms of share Furthermore, financial intermediation is low, as of assets and membership with other countries the loan portfolio declined to less than 50 percent in the region. As can be seen in Table 2, financial of assets and 72 percent of deposits. Only around cooperatives account for 2.9 percent of the assets of 10 percent of members have a loan, with the growth the national financial system in Haiti, comparable of the loan portfolio mostly reflecting larger loans to the asset shares of financial cooperatives in Peru (both in nominal and real terms) and going to existing and Colombia. A membership of 15 percent of the borrowers rather than a deepening in financial economically active population is also close to the 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 2.00% 8,000 1.60% 6,000 0.80% 4,000 0.40% 2,000 0.20% 0 0.00% Sep-09 Sep-11 Sep-13 Sep-15 Sep-16 Assets/GDP Assets (in million Gourdes) The growth in assets reflects an increase in deposits, as well as retained profits… 10,000 Assets 8,000 Million Gourdes 6,000 Deposits 4,000 Loans (net) 2,000 0 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 individual entities and the sector organizations to moderate competition, the sector has increased automated and cater to agricultural value chains. its profitability over the years, but weaknesses in Given the ongoing support and a high net interest intermediation and operational efficiency persist. margin of over 20 percent, the sector has increased A number of donors have supported the sector over its profitability over the years. Table 3 shows the rate the years. The Canadian Cooperative Network of return on assets (ROA), which increased from Desjardin (DID) provided ongoing financial and 3 percent in 2013 to 5 percent in 2016 — despite a technical support to the sector until 2013.11 The lower loan-to-assets ratio, high levels of liquidity, United States Agency for International Development elevated levels of non-performing loans,12 and gaps (USAID) provided support through its Haiti in operational efficiency. This will be analyzed and Integrated Financing for Value Chain and Enterprise discussed in more depth in Chapter 3. (HIFIVE) Initiative. This initiative has helped 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 50,000 600,000 500,000 40,000 400,000 30,000 300,000 20,000 200,000 100,000 10,000 0 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 Total Share of CFI Assets Members/ Financial National CFI Countries (US$, Labor Force System Assets Financial Membership millions) (%) (US$, millions) System (%) 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% (Average (Average) Total 4,199,539 92,345 41,822,697 4.8%) 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 In Haiti, the legal framework for financial the Sector cooperatives already provides for a strong organizational structure of the sector and Most countries with large and modern financial includes incentives to federate. The law of 2002 cooperative systems have a strong second tier specifies that federations should: (i) help represent structure that helps the sector to innovate and the interests of their affiliates and promote their reap potential economies of scale. Countries such development; (ii) conduct oversight of the affiliates as Brazil, Canada, Germany, and Guatemala have an to ascertain their liquidity and solvency; (iii) provide elaborate system of federations and other second tier capacity building, technical assistance and other support structures in place. Such structures help to support to affiliates; and (iv) support the integration manage liquidity and foster innovation, improving of the sector. According to the law, a federation can the soundness of individual entities. In addition, be created by 10 or more financial cooperatives. second tier institutions in those countries also It should conduct the external audits of the affiliated monitor the soundness of sector entities to contain members and is subject to the accounting and the risk of the second-tier services they offer, thereby other rules of the BRH. As an incentive to become reducing the reputational risk to the sector if one federated, the law provides for federations to be part entity fails. Similar developments are underway in of the chamber of compensation, thereby offering other countries in the region. 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 ANACAPH Le Levier • 49 affiliated entities • 36 affiliated and with over 6000,000 6 associated entities members with over 7000,000 Second tier • Representation, members Between 40-120 New capacity building • Representation, unaffiliated entities and technical technical Federation assistance assistance Central • IT support Financing • Liquidity Facility management First tier Up to 180 financial cooperatives Source: Author’s schematic. Note: ANACAPH = National Association of Haitian Credit Unions; IT= information technology. 2. SECTORAL OVERVIEW 8 In practice, the second-tier system in Haiti is of their operations. ANACAPH has 12 full time already quite developed, and most of the larger staff, including two dedicated to IT questions. entities are federated. Figure 3 shows that currently It also works with a number of consultants to meet one federation and one association provide second capacity-building needs upon demand. tier functions to the sector. Another federation is • Another federation is being launched by selected in the advanced stages of being launched. There is CFIs. It aims to provide its affiliates with a joint IT also a large overlap of affiliated CFIs between the platform and technical assistance. organizations, with 85 percent of the members of Le Levier also being part of ANACAPH. In addition, The support provided through the two existing around 40-120 entities — most of them unauthorized sector entities greatly facilitated the institutional — are currently not affiliated. As such, they do not strengthening of the sector. With donor support,13 benefit from capacity building and general support. both institutions have provided capacity-building programs to their affiliates and played a crucial role • Le Levier, a sector federation created in 2008 in linking their members with IT systems to automate with DID support, currently has 36 affiliated their operations. All of the financial cooperatives and 6 associated members. The federation has visited have benefitted at one point from training 12 auditors to conduct annual external audits through ANACAPH. They considered the quality of their affiliated entities (see also Chapter 3.3), of the training to have been good and helpful. The 10 counselors to provide capacity building and services of Le Levier, in particular for auditing and institutional strengthening support to managers IT support, were also highlighted as helpful, and and Boards, and another 28 employees who assist the affiliated member cooperatives also praised with the joint IT platform, the joint operational the support they received from their counselors for manuals, liquidity management and other support strategic planning and organizational development. services. Overall, Le Levier focuses on creating a strong “brand” for its members. It also provides However, both active second tier organizations second tier financial services to its affiliates, such still depend on donor support to fulfill their full as a Central Financing Facility and a linkage to the roles. Despite being profitable and not having to pay national payments system. It is currently working for BRH oversight, the financial cooperatives visited on linking its affiliates to modern payment services feel that they cannot afford higher contributions to and upgrading its IT platform. Le Levier or ANACAPH. Likewise, they cannot earmark additional funds for participation of their • ANACAPH, the National Association of Financial staff and management in capacity-building programs. Cooperatives, was created in 1998 with the As is, membership fees for ANACAPH cover objective of fostering collaboration between its only around 40 percent of their regular expenses, members, supporting their development, and with some additional fee income being generated providing capacity-building services to them. through capacity-building programs. The rest must It currently has 49 members (35 of which are be bridged with donor funding, which is volatile. Le also part of Le Levier), who benefit from around Levier can support its basic operations from income 85 training and capacity-building programs, generated through liquidity management and annual operational manuals and support for automation 13 For example, from DID and USAID. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 9 membership fees. However, programs such as the Finally, there is currently no stability fund or launch and maintenance of an IT platform and sector deposit insurance scheme in place. The BRH has computerization are funded by donors, with the not yet implemented the stability fund provided for sector currently not paying any fees for maintenance in Articles 60-62 of the CFI law,14 which could help or upgrading. The IT system is now in dire need provide temporary support for entities in distress. of upgrading and revamping, and Le Levier is Furthermore, no deposit insurance scheme is considering changing the funding structure for the foreseen in the legal framework, and the sector itself platform to a member-financed system. has not created such a scheme. In some countries, such a stability fund or deposit insurance scheme In future, the roles of the individual sector is managed by the sector itself, giving the second- organizations need to be clarified and activities tier structures additional incentives and roles in prioritized to better fit the needs of the sector overseeing the sector and ascertaining its soundness. and to be economically efficient. There is a strong In Haiti, only Le Levier provides some form of overlap between the membership in ANACAPH and liquidity / stability fund for its members. Currently, Le Levier. This can be beneficial and help eliminate though, there is no solid scheme in place to shield conflicts of interest, if the roles are clear. However, the estimated 800,000 members from losing their in Haiti, both sector associations play a role in deposits in case of financial distress among the representation, and provide some form of capacity cooperatives. building and IT support to the sector. In the absence of a holistic strategic vision for development, which is developed from within the sector or defined by law / regulations, the provided support is in many instances still driven by donor priorities. 14 Based on Articles 60 and 61 of the CFI law (2002), each CFI would be obliged to contribute to a stability fund to be held at the BRH. The BRH is to be in charge of managing the fund and is authorized to levy annual contributions of 10 percent of CFI profits for the fund. The BRH also determines the conditions for disbursements. 2. SECTORAL OVERVIEW 10 3. The Legal, Regulatory and Supervisory Framework 3.1 The Legal and Regulatory Framework A dedicated legal framework for financial cooperatives in Haiti is in place. The law of 2002 covers the registration, organization, and liquidation of financial cooperatives and their federations, and frames their respective roles and financial products. It complements the general decree of March 31, 1981, which determined the basic organizational form of cooperatives. The law of 2002 allocates substantial powers to the BRH to regulate and supervise the sector. According to Articles 14 and 15, the power to issue prudential and market conduct regulations is fully vested with the BRH. In particular, the law provides for the BRH to issue regulations regarding capital requirements, credit, risk management, liquidity, and maturity structures. The law also calls for a dedicated and adequately funded unit within the BRH to supervise and sanction all authorized financial cooperatives and their federations. Further, it gives the BRH the power to conduct on-site visits, request information, and mandate remedial actions in case of violations of the legal and regulatory framework. Although the BRH has overall relatively strong powers to intervene, it lacks the nimbler instruments of monetary sanctions. Articles 82-93 of the law mostly cover the right of the BRH to assess entity’s or federation’s books and other information, and in the case of noted infractions or problems, to require action plans for remedial actions. However, no monetary fines are foreseen as a tool for the BRH to push for remedial action. Instead, BRH’s only tools in the case of non-compliance with action plan implementation consist of: (i) restricting the entity in carrying out certain activities; (ii) suspension of management/ Boards; or (iii) placing a financial cooperative under conservatorship/initiating liquidation. Only the courts are authorized to issue monetary sanctions for non- compliance, including to people who are operating a cooperative scheme without formal registration or authorization. This leaves the BRH with an incomplete set of sanctions. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 11 Furthermore, the roles for registration and from deposit and credit services to the provision authorization of financial cooperatives are divided of general financial services. Furthermore, it between the CNC and the BRH, with limited introduces important transparency and consumer sanctions foreseen for infractions. To become a protection-related provisions. The draft law calls for legally registered entity, financial cooperatives only external auditors to be pre-approved by the BRH, need to present their constituting documents to the and it includes additional provisions regarding National Council of Cooperatives, which operates the sanctioning regime. This allows the BRH the registry. The documentation requirements to consider implementing a mandatory deposit for registration do not include minimum capital insurance scheme. However, the aspects pertaining requirements, any economic viability considerations, to registration, monetary sanctions and liquidations or fit and proper information regarding the are not addressed. Additionally, the draft law would management/Board, as suggested best practice by allow cooperatives to seek funding and sub-ordinated the WOCCU.15 The latter are only to be provided capital from legal entities. Given the current stage of for receiving authorization by the BRH, with the development and the observed lack of membership information request to be channeled via the CNC after focus in the sector, this appears premature. the entity is already registered. Furthermore, while More attention also needs to be placed on Article 17 specifies that no financial cooperative eliminating conflict of interest situations between should become operational prior to having received the various roles of the federations (especially its authorization from the BRH, Article 142 does not between the oversight and promotional roles), explicitly provide for a sanction by courts for any and ascertaining that federations have adequate infringement of these provisions. institutional capacity and integrity for fulfilling Similarly, the closing, liquidation and de- their roles. The federations’ regulations and registration of financial cooperatives is spread oversight of its affiliates should also be mandated among various players. The BRH has a clear to be consistent with all BRH rules. Finally, while mandate for initiating the closing of a financial the draft law foresees a potential delegation of the cooperative (Article 131), as well as to call for supervision process to an independent auditor, the an administrator (Article 132). However, the actual implementation currently appears premature liquidation itself is to be carried out by a committee given the quality of external auditors and the conflict of 3 members nominated by the General Assembly of interest situation of the federations (see also 3.3.). (Article137) of the respective financial cooperative, The draft law is still pending discussion and approval and the de-registration is to be carried out by the by the Parliament. CNC. This makes de facto liquidation more difficult, as discussed below in Chapter 3.2. 3.2 The Supervisory Framework A new draft law has been developed, which A dedicated unit within the BRH has been addresses some of the noted weaknesses discussed created and is regularly conducting on- and throughout this report. The new law places a off-site supervision of the authorized entities. stronger focus on the member’s economic wellbeing In September 2017, there were 30 people working as the overall objective of the financial cooperative. in the BRH’s General Inspection Directorate It also broadens the scope of financial intermediation for Financial Cooperatives (DGICP), of which 15 See WOCCU Model Law (2015). 3. THE LEGAL, REGULATORY AND SUPERVISORY FRAMEWORK 12 15 were supervisors of CFIs.16 This appears adequate Over time, the supervision should transition to for the current scope of supervision. The off-site a new scheme that pays stronger attention to the supervision is based on the received monthly quality of governance structures,19 as well as risk financial statements. However, given the limited and efficiency aspects. For example, the BRH could computerization in the sector, this frequently must be develop a methodology for assessing efficiency manually converted into electronic data.17 This is not indicators and the financial intermediation margin, only time-consuming, but also costly and can lead and then incorporate this into the supervision to errors in the data. Furthermore, the DGICP is still process. If possible, this shift in focus should now working on putting in place a computer program to be introduced for the larger and more sophisticated support off-site supervision. financial cooperatives. Furthermore, where stand- alone IT systems are used, these would have to be On-site supervision of each authorized financial covered during the supervision process as well. These cooperative is conducted every 18-24 months and aspects are currently missing. Furthermore, these follows a standardized inspection program. The reforms would require increased DGICP staffing assessment emphasizes governance, correctness and funding levels, as well as the enhancement of its of accounts, adherence to internal processes, and institutional capacity. observance of selected exposure ratios.18 The streamlined supervision process, which is reflected Follow-up regarding the implementation of in the supervision reports, appears efficient, and required remedial actions largely relies on moral the strong focus on governance issues is to be suasion, as the BRH does not have the power commended. However, the supervision still largely to issue monetary sanctions. The BRH usually focuses on compliance, which is useful in the initial mandates the development of corrective action plans phase of transitioning into supervision. However, to follow-up on findings from the supervision report. it becomes insufficient for the larger entities. As such, it conducts follow-up visits to foster de facto Furthermore, financial cooperatives that are not yet implementation. This approach has helped the sector authorized are not fully supervised, with supervision become more professional. Indeed, it was mentioned being irregular and more focused on institutional as helpful by all sector entities visited.20 However, strengthening rather than compliance. it is a rather labor-intensive and slow process, and 16 Of the 30 employees of the unit, 15 are supervisors and qualified to conduct on- and off-site supervision. Most of the staff are located in Port au Prince, and some are also located in the BRH branches in the north and south of the country to follow-up on recommendations and action plans. 17 Around 80 percent of the entities still send the information in paper form as they lack adequate automation. 18 The on-site supervision manual clearly details the information and aspects to cover during supervision, and accordingly provides standardized forms. The manual calls for verification of selected internal processes, an audit style verification of accounts, an in-depth assessment of governance structures, and an assessment of connected lending and exposure limits to the largest debtors and creditors. In the area of governance, the inspection manual covers the length of tenure on Boards and committees, information pertaining to the Board and Committee meetings, lists of connected persons, and any information about savings and credit products used by the connected persons and their financial terms. 19 This includes evidence of strategic discussion and analysis of financial soundness and operational efficiency in Board minutes, quality of work and findings of the audit committee, transparency of disclosure vis-à-vis members, and so on. 20 The mission noted for example that most cooperatives are now recruiting internal auditors to improve adherence to procedures, as frequently highlighted in the supervision reports. Furthermore, accounting mistakes and the financial statements were revised and adjusted in line with findings. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 13 does not provide strong incentives to the institutions that no longer operates. However, in the absence for implementing remedial actions. In the absence of of formal liquidation, it continues to be listed on monetary sanctions, the BRH can only remove the the BRH website and the CNC registry. In another management or Board if the implementation of the location, there was a sign for a cooperative, which action plan stalls or other larger infractions are noted. neither appeared in the registry nor on a list of To date, the BRH has only done this in one case. authorized entities of the BRH. Furthermore, it was not clear whether it was operational. Although the As in many other countries, the coordination BRH can mandate the liquidation of the entity, the between the two entities in charge of registration process itself is cumbersome, time consuming and and authorization of financial cooperatives is not costly, and involves various players. As such, it has working well, leaving an unknown number of not yet initiated any liquidation processes. active entities without authorization. The CNC focuses on its role as promoter of cooperatives For these reasons, there is no reliable information and does not have the capacity to solicit and about the sector. The registry of the CNC includes verify information from new and existing financial 58 registered financial cooperatives, and the BRH cooperatives. Therefore, the information in the lists 59 formally authorized financial cooperatives registry is not reliable. There is also a substantial and monitors another 20-30 unauthorized entities.22 time delay between registration by the CNC and the In addition, there are between 50 to 100 unregistered authorization of entities by the BRH, although many and unauthorized financial cooperatives operating of the registered — but not yet authorized — financial throughout Haiti.23 cooperatives are operational and take deposits.21 For instance, the mission visited one cooperative 3.3 Additional Oversight Structures with 5,000 members, which has been operating for 13 years. Only recently was it considered sufficiently In line with international best practice, the legal developed to receive formal authorization from the framework requires financial cooperatives to be BRH. Furthermore, for cost-benefit considerations, subject to annual external audits; however, the the BRH does not formally authorize and supervise quality of the audits is highly uneven and needs financial cooperatives with assets of less than improvement. According to the legal framework, 5 million Gourdes (~US$80,000). Although this is the federated cooperatives are subject to an external cost-efficient, it is not foreseen in the law. audit by their federation. Le Levier has specialized auditors for this, and the quality of their work Moreover, inactive financial cooperatives are appears largely adequate. However, the auditors are not formally liquidated, which contributes to employees of Le Levier, which can create a conflict the lack of reliable information about the sector. of interest in the auditing process, as the Board The mission learned about one financial cooperative 21 The law clearly states that the authorization should be granted “prior” to starting operation (Article 24), but this is not applied in practice. Instead, the BRH is monitoring a number of unauthorized entities, and supports them through regular visits and recommendations for reforms. 22 This is based on a list of entities received from the CNC and the publicly available information about sector entities on the BRH’s website. Two of the entities authorized and supervised by the BRH were not on the CNC list, and one financial cooperative on the CNC list was no longer authorized by the BRH. 23 Some unauthorized cooperatives are listed as affiliates or associated members of the ANACAPH or Le Levier. The CNC and a number of publicly available reports about microfinance institutions in Haiti estimate the total number of financial cooperatives to be in the range of 150. 3. THE LEGAL, REGULATORY AND SUPERVISORY FRAMEWORK 14 of the Federation is composed of representatives Le Levier also supports the implementation of from member institutions.24 Non-federated entities required enhancements, which can create a can freely choose their external auditor, as there is conflict of interest situation with its auditing no requirement to use auditors from a list of pre- function. The federation employs 10 counselors, approved auditors by the BRH. The two reviewed who regularly visit the affiliated entities and discuss audits from external auditors were of questionable with the managers and their boards the steps and quality and did not fulfill their purpose of verifying measures to take in implementing the findings from the financial data. For instance, one audit had a the audits and other reviews, such as governance mistake in the calculation in the cash flow section, reviews. Some of the managers also indicated that and the other added instead of subtracted the loan the counselors helped them to extract financial loss provisions to the revenue, turning a de facto loss information and ratios from the centralized IT system, into a profit in that year. Overall, the audit reports do and assess the performance of the entity. They also not include any opinion or observations regarding the discussed performance enhancement measures quality of data and internal processes. Furthermore, and strategic aspects. While this direct supervision the auditors do not formally verify internal control can be very effective for strengthening individual mechanisms and compliance of processes and entities, attention has to be placed on preventing manuals with the requirements of the regulatory conflict of interest situations and governance-related framework. This reduces the value of external audits issues. There are currently no firm barriers (“Chinese for members as well as the supervisor. walls”) between the auditors and counselors of Le Levier. This could lead to a conflict of interest, as auditors eventually review suggestions and measures introduced by their own colleagues. 24 In Germany, for example, if the Federation supervises a financial cooperative whose manager is on the Board of the Federation, another Federation is assigned the task of supervision. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 15 4. Diagnostic of the Financial and Operational Soundness of Financial Cooperatives This chapter is based on information received during the field visits to 11 financial cooperatives, as well as data from the financial statements of these entities provided by the BRH. The assessment of the financial health of institutions (Chapter 4.1.) is predominantly based on information from the financial statements of these entities, complemented by qualitative information and observations from the field visits. The sub-chapters on governance and operational efficiency are mostly based on qualitative feedback received from the management of the entities, as well as from randomly selected minutes from the Board, Audit and Loan Committees, as well as loan files and annual reports provided by management. 4.1 Observations on the Financial Structure and Soundness of Entities The BRH mandates the usage of a harmonized accounting plan; despite its shortcomings, it is largely sufficient in capturing the financial situation of the entities. The standardized accounting plan, which was issued by the BRH in 2007, includes guidance material regarding the underlying accounts as well as a model Excel spreadsheet.25 Although it does not follow international accounting standards, it is sufficiently detailed to reflect the operations of both small and larger financial cooperatives in Haiti, while also taking the still rudimentary automation of entities into account. However, the financial accounts do not require reporting of non-performing loans, and instead only capture information about the net loan loss provisions.26 Given the rapid write-offs observed in the sector27 — and limited transparency on the level of those write-offs during the year — the information is not adequate to reveal the true level of delinquency, 25 A new standardized accounting plan was issued in 2017 and is currently under implementation. 26 Provisioning rules deviate from those suggested by the financial ratios of the WOCCU PEARLS. 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 call for a full provisioning of the loan after they are 360 days overdue. It encourages write-offs after one year, but suggests that more recent non-performing loans should not be written off. 27 Some entities write-off their non-performing loans after less than 180 days. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 17 Figure 4: Asset and Liability Structure of Haitian CFIs in Comparison to WOCCU PEARLS The asset composition of Haitians CFIs differs substantially from the WOCCU recommendation… Other Assets Other Assets 11% 5% Liquid Assets 16% Liquid Assets 34% Credit Portfolio 55% Credit Portfolio 79% …. while the strong capitalization stands out in comparison on the liability side. Equity (minimum) Equity 11% Others 26% Liabilities (max) 5% Savings 66% Others Liabilities 8% Savings 84% Source: Author’s compilation based on data provided by the BRH. 4. DIAGNOSTIC OF THE FINANCIAL AND OPERATIONAL SOUNDNESS OF FINANCIAL COOPERATIVES 18 which is elevated in many of the visited entities. the 11 entities have high levels of non-productive Furthermore, some entities only reflect their written- assets (with 12 percent on average compared to off loans in the profit and loss statement and move the recommended maximum of 5 percent by the them out of the balance. At the very least, this needs WOCCU), as written-off loans are in part captured to be harmonized, and annual reporting about the as other assets. Furthermore, several entities have or annualized level of non-performing loans should are investing in new locations and buildings. These be made mandatory. Nevertheless, the data is still peculiarities in the financial structure reveal low expected to provide a good enough indication of the levels of financial intermediation, with many entities financial structure and sector, as provisioning rules having only a fraction of their deposits channeled are in place and adhered to, and efforts are generally into loans (see also Chapter 4.3.). made to recover written-off loans. Despite the low level of financial intermediation, The assessment of financial accounts reveals most of the financial cooperatives are profitable, substantial inefficiencies in the financial structure, as they benefit from substantial financial particularly elevated levels of liquidity and other intermediation margins and additional fee- assets. Figure 4 shows that the 11 visited financial based income. Table 5 shows that 9 of the visited cooperatives have on average 35 percent of their 11 financial cooperatives reported positive returns assets in liquid assets, with some showing liquidity on assets (ROA), with an unweighted average of levels of up to 73 percent. This is considerably 4.7 percent. Given high capitalization levels in the above the maximum of 16 percent suggested by sector, this elevated profitability only translates the WOCCU PEARLS. (see Table 4). Also, nine of into an average Return on Equity (ROE) of Table 4: Overview of the Financial Structure of Financial Cooperatives (June 2017, as a percentage of assets) Liquid Credit Other Other Assets Savings Equity Assets Portfolio Assets Liabilities (in Gourdes) (%) (%) (%) (%) (%) (%) CFI 1 91,165,448 73.0 22.3 5.4 62.1 16.8 21.1 CFI 2 728,250,911 23.8 68.0 9.0 65.9 9.8 24.3 CFI 3 86,871,402 61.9 36.0 3.2 63.0 5.0 32.0 CFI 4 451,194,313 19.6 52.0 29.8 55.3 28.7 16.0 CFI 5 519,041,550 31.5 59.1 11.4 68.8 6.5 24.7 CFI 6 666,897,028 43.8 47.4 8.8 69.4 2.3 28.4 CFI 7 97,321,870 24.4 73.6 11.0 73.3 6.1 20.5 CFI 8 104,884,433 37.0 52.9 12.7 36.1 2.0 61.9 CFI 9 20,599,268 10.4 73.3 29.5 83.0 3.0 14.0 CFI 10 75,193,362 34.6 71.5 2.0 68.4 2.7 28.9 CFI 11 784,035,933 22.9 69.2 11.4 81.1 4.5 14.4 Source: Author’s compilation based on data provided by the BRH. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 19 15.6 percent. The comparatively comfortable (iv) fee income for loan processing and other levied profitability is achieved despite limited financial charges. In some entities, the fee income comes to intermediation levels, elevated ratios of non- over 3 percent of assets. performing loans, as well as operational inefficiencies The profitability helps entities bolster their capital (see Chapter 4.3). The profitability mostly stems base, although the composition of capital needs from: (i) a comfortable financial intermediation to improve. On average, the financial cooperatives margin between deposits and loans of, on average, have a capital-to-asset ratio of 26 percent, well 23 percent (Table 5); (ii) a positive interest margin above the 12.5 percent mandated by the BRH in its between deposits held in banks; (iii) the close to zero prudential regulations for the sector (Table 6). It is percent of interest paid for member deposits; and Table 5: Drivers of Financial Cooperative Profitability in Haiti (June 2017) Profitability Financial Intermediation Margin Average Average Additional Average Margin Fee Interest Interest Margin Interest (liquid Income/ ROA ROE Paid on Received (Loans/ on Liquid assets/ (%) (%) Member on Loan Deposits) Assets Assets deposits) (%) Deposits Portfolio (%) (%) (%) (%) (%) CFI 1 2.7 12.9 0.5 23.6 23.1 3.6 3.1 2.4 CFI 2 6.4 26.5 1.1 20.5 19.5 3.2 2.1 2.0 CFI 3 5.8 18.2 0.3 21.8 21.5 3.7 3.4 2.2 CFI 4 4.9 30.5 1.4 25.7 24.3 4.8 3.4 3.2 CFI 5 6.3 25.7 0.4 22.4 22.1 1.1 0.8 1.7 CFI 6 7.1 25.1 0.3 28.6 28.3 11.2 10.9 4.0 CFI 7 5.7 27.9 0.8 30.0 29.2 n.a. n.a. 7.0 CFI 8 10.1 16.3 0.4 26.5 26.1 4.2 3.8 1.6 CFI 9 -5.5 -39.4 0.6 20.6 20.0 0.2 -0.4 1.8 CFI 10 3.7 12.7 0.2 8.6 8.4 0.0 -0.1 2.5 CFI 11 n.a. n.a. 1.1 n.a. n.a. n.a. n.a. 2.8 Unweighted Average 4.7% 15.6% 0.6% 22.8% 22.3% 3.6% 3.0% 2.8% Source: Author’s compilation based on BRH data. *Note: The data reflects a substantial one-time write-off of non-performing loans to correct for past deficiencies. n.a.= not available 4. DIAGNOSTIC OF THE FINANCIAL AND OPERATIONAL SOUNDNESS OF FINANCIAL COOPERATIVES 20 Table 6: Capital Composition of Financial Cooperatives (June 2017) Total Member General Contingency Social Fund Non-distributed Capital/ Shares/Total Reserves/ Reserves/ /Total Profits/Total Assets Capital Total Total Capital Capital (%) (%) Capital (%) Capital (%) (%) (%) CFI 1 21 9 5 32 0 54 CFI 2 24 7 5 44 0 44 CFI 3 32 10 6 55 0 29 CFI 4 16 8 6 52 0 35 CFI 5 25 5 9 65 1 19 CFI 6 28 10 8 61 2 19 CFI 7 21 16 9 54 0 21 CFI 8 62 2 7 64 0 26 CFI 9 14 64 10 -34 0 60 CFI 10 29 13 7 57 0 23 CFI 11 14 17 9 36 0 38 Unweighted average 26% 15% 7% 44% 0% 33% Source: Author’s compilation based on data provided by the BRH. also above the net institutional capital of 10 percent as it leaves a lot of flexibility for management. of assets suggested by the WOCCU.28 Member The Basel Core Principles establish that these types shares, which according to the legal framework can of accounts should not be greater than the first-tier be withdrawn, only account for a small fraction of capital (generally social capital and legal reserve) capital in all but one entity. The remaining capital for purposes of counting as institutional capital, is mostly composed of contingency reserves with both tier one and qualifying tier two together and non-distributed profits, which can be spent reaching a capital ratio of at least 8 percent. If this upon the discretion of the management, whereas standard were to be applied, one of the cooperatives general reserves (true tier two capital, according would not have adequate capital levels. Furthermore, to the Basel Core Principles) only account for an the data shows that hardly any funds are earmarked average of 7 percent of total capital. This imbalance for social activities. As discussed in Chapter 4.2, the between general reserves, contingency funds lack of social activity of financial cooperatives is an and non-distributed profits should be remedied important weakness. 28 According to the definition used by the WOCCU, the net institutional capital would include all legal reserves, retained earnings, as well as surplus provisions. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 21 The visits to individual entities also revealed some exchange rate risk. Five of the 8 visited financial potential vulnerabilities arising from market, cooperatives that offer foreign exchange (FX) credit, and foreign exchange rate risks; such deposits experienced some losses from foreign risks require attention and adequate regulatory exchange fluctuations in recent years, whereas the guidance. Liquidity risk does not appear to be a others mostly hedge the received foreign exchange problem, as most entities have liquidity levels far deposits by re-depositing these funds in banks in above the already high prudential norm established foreign currency. Consideration should be given to by the BRH of 25 percent of short-term deposits.29 authorizing only those entities with solid internal Exposure limits are set by BRH regulations, and processes and sophistication to offer FX deposits adequately limit the exposure to individuals and to their members, as well as to determine limits for connected parties. However, potential vulnerabilities the FX risk position. are noted in the following areas: • Market risk: The financial cooperatives are only 4.2 Governance Structures allowed to operate in one department of Haiti, and The legal framework determines the core cannot branch out across departments to diversify governance structures for financial cooperatives. their risks. Furthermore, individual cooperatives It calls for annual General Assemblies, sets voting have a portfolio of over 50 percent in commercial rules of “one member, one vote”, mandates the or housing credit, exposing them to substantial existence of a Board, Audit and Credit Committee, market risk in a small geographic area. and determines fit and proper requirements for participation on the Board and Committees. It also • Maturity risk: Most financial cooperatives have determines the scope of work to be conducted by only current or short-term deposits, but offer the respective governance bodies and clarifies that credits of up to 3 years. Given the elevated capital the Audit Committee should oversee complaint base, this currently does not appear to pose a risk. handling. However, it should be watched and regulated over time. Although many of these provisions are broadly in line with international best practice, a few gaps • Credit risk: Most entities reveal elevated levels of were noted. For example, there is no requirement to non-performing loans, pointing in part to a poor have an uneven number of members on the board, overall repayment discipline as the underlying and the tenure of Board / Committee members and reason. Although no reliable data was presented, the frequency of meetings are not covered.30 There 7 of the 11 entities are estimated to have NPLs is also no provision for larger cooperatives to have of over 10 percent or in one branch (if calculated a person with accounting or auditing knowledge considering the annual provisions and write-offs). on the Audit Committee. Furthermore, neither Foreign exchange rate risk: There is no • the federation to which a cooperative belongs nor regulation regarding the management of foreign the BRH can request an extraordinary General 29 Three entities have liquidity of around 100 percent in terms of short-term deposits, and 3 have liquidity of 46 percent and above. BRH’s liquidity indicator should be adjusted downwards over time. The WOCCU suggests having a liquidity ratio of 15-20 percent of assets. A comparative study carried out by the German Cooperative and Raiffeisen Confederation (DGRV) shows that most supervisors in Latin American countries use a liquidity requirement of 15 percent. 30 This could be done through setting a minimum frequency of Board meetings per year, or setting term limits for the reelection of Board or Committee members. 4. DIAGNOSTIC OF THE FINANCIAL AND OPERATIONAL SOUNDNESS OF FINANCIAL COOPERATIVES 22 Assembly to discuss identified issues during the by the ANACAPH, the CNC or the Federation, supervision/auditing process. Finally, there is a which reportedly was useful. Although Board and requirement to have an external auditor verify the Committee meetings are taking place on a regular accounts. However, there is no requirement to use basis, the quality of discussion and decisions taken a pre-approved auditor by the BRH to ascertain and are questionable. As shown in Box 1, the minutes of affirm a minimum level of quality audits. These gaps the Board and Committee meetings include limited to in the legal framework can negatively influence the no traces of a discussion of financial and operational quality of governance structures currently in place. indicators, or of strategic issues or general oversight. The mission also noted a low turnover in the Board The legal framework also falls short of and Committees, with the president of the Board transparency of information-sharing with being occupying this position for over 10 years in members. For example, there are no requirements 6 of the 8 financial cooperatives (see Annex 2).32 to: (i) inform members about price changes and This low turnover can lead to capture, and create periodically discuss pricing policies in the General conditions under which fraudulent activities such as Assembly; (ii) visibly display the terms and conditions pyramid schemes may emerge (as it has happened in in branches (and in easily understandable terms); and Haiti and other countries). This should be carefully (iii) make available to the public the annual report, watched. the financial accounts and the names of candidates for vacant Board and Committee positions prior to In the absence of legal requirements, the de facto the General Assembly. Furthermore, minutes of the transparency of information toward members is Annual Meeting are to be prepared, but there is no inadequate. General Assemblies are held annually, obligation to make them easily accessible to members but the participation of members is generally less or to publicly disclose the core information. Members than 5 percent (see Annex 2). Topics to be discussed, can only request to see the pricing information or the such as information about the financial performance ledger with the minutes in the branch or receive a of the cooperative or members to be elected for copy of selected information — for a fee. This is a office, are usually not disclosed upfront, and are cumbersome process and requires members to know also not frankly discussed in the annual reports about their rights to demand such information. (if there is a report). Few annual reports reveal the true level of non-performing loans, which in many In practice, all financial cooperatives adhere to the entities is estimated to be a double-digit number, or mandated governance structures, but substantial include information about the members to be elected weaknesses in the quality of governance were for office.33 The mission did also not learn of any noted. The cooperatives generally had 7 members effort to disclose the results of the General Assembly on their Board, and 3 members each on the Auditing to members, such as posting information about and Credit Committees. Most financial cooperatives elected members and the distribution of profits on indicated that their Boards and Committee Members bulletin boards. With regard to pricing transparency, have a higher level of education.31 Furthermore, only one cooperative had pricing information visibly some had participated in a one-time training provided 31 They finished school or had a university degree. 32 Due to time limitations, only 8 of the 11 visited cooperatives were asked this question. 33 The accounting manual for the sector does not require disclosure of the non-performing loans, and instead only mandates disclosure of the provisions. Furthermore, many financial cooperatives quickly write-off loans, so that reported NPLs appear lower than the true rate. This makes it difficult for both Boards and members to understand the true level of non-performing loans and incurred losses to the cooperative. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 23 Box 1: Content Included in the Minutes of Board and Committee Meetings In almost all of financial cooperatives visited, the mission team took a brief look at the minutes of the Board, Audit and Credit Committee meetings and discussed governance aspects with management. The following was noted. Board Meetings There are limited signs of strategic discussions taking place at Board meetings. Only a few managers confirmed that they regularly assessed core financial and performance indicators, with most revealing a focus only on liquidity, as well as on growth of savings and credits. These are also the numbers presented at Board meetings. The mission found only very limited evidence of discussion about the elevated levels of non-performing loans in entities. If the topic was discussed, the focus seems to have been more on what the Board can do to help recover some of the loans. Some managers also indicated that they rely on the Le Levier counselor to compile and discuss financial information with them. Overall, the Board minutes mostly cover the approval of individual expenses, such as generators, repairs, replacement purchases, and so on. Furthermore, some discussions about other activities (funeral, retirement, limited social activities) are evident, as well as approvals / selection of new staff (internal auditors). In many instances, there is no information about the votes taken or of members present at the meetings. Audit Committee Meetings The review of the minutes highlights the mixed quality of the work of the audit committees. Although the audit committee seems to be very active in some entities, the minutes do not indicate a careful verification of adherence to internal guidelines and manuals in over half of the visited entities. In many instances, the minutes only state what type of verification was done (that is, the counting of cash in the safe, the review of a ledger). They do not reflect any results of the audit, issues identified, or recommendations for improvements. Credit Committee Meetings The Credit Committee minutes do not indicate any discussions about the viability of a loan application, or request for additional information to assess the presented loan files, which in many cases lack adequate information to form an opinion about a person’s repayment capacity or actual income. Overall, many minutes do not include information on the number and names of participating members, or the results of votes. Some minutes were not in chronological order. 4. DIAGNOSTIC OF THE FINANCIAL AND OPERATIONAL SOUNDNESS OF FINANCIAL COOPERATIVES 24 displayed in the branch. Two others displayed financial cooperative law (2002) already includes information of deposit interest rates “up to …”, as a guiding cooperative principle the fostering of whereas the vast majority of their members received the economic participation of members, and the no or less than 1 percent of interest on their deposits. engagement with the community (Article 3). Article Finally, fees and commissions for services were not 64 also provides for the creation of a social fund, into publicly disclosed, and even some of the assessed which up to 10 percent of the disbursed profits can loan files fell short in making pricing information be placed, once the required reserves and provisions fully transparent. have been created. In practice, however, only the larger cooperatives make some funds available for These governance and transparency problems social projects and outreach, whereas the others offer negatively impact the cooperatives’ capacity to only some training about cooperative principles or cater to member needs and economic well-being. economic management to their members. This lack Although managers indicated that people’s prime of member and social orientation in cooperatives motivation for joining the cooperative is the prospect reduces member incentives to actively and of receiving a loan, only between 1-10 percent voluntarily participate in “their” cooperative, and of members have a loan. Most cannot provide the to play a vital role in the internal oversight of their required cash collateral of 25 to 30 percent of the cooperative. As noted, this in turn contributes to the loan amount and are therefore ineligible. In factoring weaknesses in governance. in the cash collateral, it should also be noted that loans are quite expensive. In addition, members receive limited to no remuneration for their deposits 4.3 Operational and Financial and member shares, as most cooperatives do not pay Efficiency dividends on members’ social capital. They offer Almost all financial cooperatives show elevated only between 0-2 percent of interest on sight deposits operational costs, and 5 of the 9 entities barely and cash collateral. Given the inflation rate of around cover their operational costs from the net 12 percent, this translates into a negative real interest interest income. The WOCCU PEARLS suggest rate on member savings. Finally, a number of the as a reference point a ratio of operational expenses larger financial cooperatives offer bill payments and over assets of below 5 percent. Only 2 of the 11 other transaction services (in many cases as agents visited financial cooperatives achieved this. The for banks or as money transfer operators). However, average operational expense ratio is 7.7 percent these services are also accessible to non-members and (see Table 7), with 5 entities having operational are fee based. Given the observed range of products expenses of 8.8 percent and higher. Some of the and services offered — including their elevated cooperatives were only barely able to cover their costs — the value proposition for members appears operational expenses from the net interest income unclear, thereby leaving the cooperatives vulnerable alone (see the third column of Table 7). This can to member drift, as well as reducing interest in being in part be attributed to elevated operational costs. an active member. However, it is also the result of low levels of financial The limited focus on social and community intermediation of the CFIs, which keeps the net support also lowers member incentives to play an interest income below potential. The net profitability active role in governance. In many countries, social therefore currently depends on additional income engagement in the community sets cooperatives generated from: apart from other financial institutions, creating trust • Fees for credit processing of 1.5 to 3.7 percent of and a strong common bond among members. The the loan amount; FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 25 • Penalty fees for late payments’ and training are currently lower than expected. CFIs associated with Le Levier are not required to pay a • Out of balance sheet recovery of written-off loans; fee for the usage of the IT platform and its upkeep, • Fee income from services, such as government and non-affiliated CFIs frequently do not have a full check cashing; and IT system (see discussion below). The costs for IT are therefore below the costs that are to be expected • Received grant funding or free services. in a modern and automated sector. Furthermore, The data is not sufficiently detailed to assess few cooperatives report being able to afford training the core drivers of the operational expenses for their staff, mostly relying on in-house training. and determine areas for reforms. As seen in Accordingly, financial accounts with more details do Table 7, over one third of the operational expenses not reveal any expenses for the training of their staff. are incurred as “other costs”, which includes costs for Finally, given the limited participation of members cash provision, IT, training, the General Assembly, in the General Assemblies, the costs for these and costs for services such as consultants, among annual events are also not expected to be excessive. other costs. However, based on information from Therefore, it is not clear why the “other costs” reach the field visits, costs for IT, the General Assembly 36 percent on average. The costs for staff also appear Table 7: Ratios and Composition of Operational Costs Ratios for Operational Composition of Operational Costs (OCs) Costs (OCs) OCs/ OCs/Net HR Costs/ Costs for Amortizations/ Other OCs/ Assets Interest OCs Premises/ OCs OCs (%) Income (%) (%) OCs (%) (%) (%) CFI 1 5.5 96.6 40.1 7.5 11.9 40.4 CFI 2 6.0 58.0 41.0 12.0 12.8 34.2 CFI 3 4.0 54.5 37.0 14.3 8.2 40.6 CFI 4 9.2 91.0 46.2 8.6 6.9 38.3 CFI 5 6.3 63.3 38.2 6.9 5.4 49.4 CFI 6 11.7 86.5 39.3 7.2 12.8 40.8 CFI 7 15.3 96.0 50.9 2.1 12.2 34.8 CFI 8 5.1 44.7 56.4 4.0 19.6 20.0 CFI 9 10.7 97.4 76.0 0.0 0.7 23.3 CFI 10 2.5 54.1 51.1 8.2 2.1 38.6 CFI 11 8.8 n.a. 41.8 12.3 9.2 36.7 Unweighted 7.7% 74.2% 47.1% 7.5% 9.3% 36.1% Average Source: Author’s compilation based on BRH data Note: HR = human resources; n.a.= not available 4. DIAGNOSTIC OF THE FINANCIAL AND OPERATIONAL SOUNDNESS OF FINANCIAL COOPERATIVES 26 excessive in a number of the entities. A more detailed only start the follow-up process after the loan assessment of the underlying cost categories should has been 1 to 3 months overdue, which is late for be conducted to derive a holistic set of measures effective loan recovery. When following up on non- for increasing the operational efficiency of individual performing loans, financial cooperatives tend to use entities. comparatively strong and potentially unfair recovery techniques, such as posting the names of defaulters A common source of operational inefficiency is inside and outside of the branches or employing credit risk management. Based on a random debt collectors with tough enforcement practices. review of credit applications and the minutes This needs to be monitored. In addition, the BRH of the Credit Committees, most financial needs to issue some guidance to ascertain adherence cooperatives have a limited capacity to appraise to sound practices in line with consumer protection credit. The loan files usually present a short balance principles. of income and expenditures of the prospective client. However, in many instances, they do not provide The mission also noted several deficiencies in a solid assessment of the borrower’s repayment internal processes: capacity. For example, several files did not provide • While most financial cooperatives have someone, any verification of the stated salary or show the who is trained in accounting, the mission team underlying calculations necessary to understand how notes some deficiencies in the presented accounts, the monthly income of a merchant was calculated. as well as variation in the registration of similar None showed income from remittances, and few transactions. This points to a need for more training showed the diverse sources of income of a typical and guidance on the applicable accounting rules. household in Haiti. The expenditure calculation was For instance, one cooperative had written off loans, mostly rudimentary and did not show much deviation but had not adjusted its provisions accordingly. In in expenditure levels between households of different another CFI, there was no evidence of a change sizes. The credit appraisal and disbursement process in the level of provisions from one year to the take up to two months, due to inefficient processing other. In another cooperative, the provisions were in a number of entities. The two core factors for the added (not deducted), thereby turning a de facto appraisal are the ability of the client to provide the loss into a profit. The detection and correction cash collateral, and the previous credit history with of these problems is made more difficult by the the financial cooperative. However, these two factors lack of internal controls, as well as by the lack not only lower the number of eligible borrowers in of automation in the sector. This in turn makes it a cooperative, they are also imperfect predictors of more difficult for the BRH to assess the underlying the person’s capacity to repay. Thus, the loan data and identify problems. appraisal process needs to be revamped in order to increase the level of financial intermediation • Although the accounts are prepared monthly, in financial cooperatives and lower the ratio of many managers do not seem to understand the non-performing loans. accounts or what to look for. Some indicated that the accounts are pulled or presented automatically, While most financial cooperatives should be but they do not really understand how to interpret praised for making efforts to recover their non- the data. In other entities which had more than one performing loans, some gaps and problematic branch, the data needed to be compiled manually practices were noted. In some entities, management from the IT system, as the IT system does not did not reveal clear timelines regarding follow-up on allow for automatic compilation across branches. late payments and procedures. Most cooperatives FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 27 This makes it more difficult for management system. This is to be commended. The non-affiliated to maintain an overview of the situation of the entities or those not yet full members of Le Levier financial cooperative and detect any inefficiencies. usually only use Excel for accounting purposes, with the financial transactions largely being processed • Finally, there seems to be a lack of internal manually. Accordingly, they only transmit print-outs controls to ascertain adherence to internal or basic Excel files to the DGICP. Furthermore, in policies and manuals. The BRH supervision many instances, they do not regularly generate core reports highlight many instances of gaps between financial soundness and profitability indicators to manuals and actual practices, and the BRH has properly guide management. made substantial efforts to foster the recruitment of internal auditors in the cooperatives. To date, Progress toward automation will also be needed only one financial cooperative had an internal to allow financial cooperatives to participate auditor, and 2 others were in the process of in the payment system and to provide services hiring one. such as remittance transfers to its members. To be competitive in the medium term, financial Despite ongoing efforts to automate the sector, cooperatives need to make progress toward offering the IT systems are still rudimentary. Of the visited electronic payments to their members. These entities, only 7 entities affiliated with Le Levier have services are increasingly offered by banks and non- IT systems, which included an accounting, savings bank payment service providers and allow clients and credit module. However, the IT system of Le to reduce transaction costs and times. Furthermore, Levier is based on software developed in 2000. With electronic payments also facilitate the transmission limited updating, it has become outdated34 and poses / reception of remittances. According to the World a considerable technological risk. Furthermore, Bank Remittance Database, personal remittances to although the IT system allows for the automatic Haiti are equal to 29 percent of GDP (2016). Only generation of financial accounts by branch, it a few financial cooperatives currently offer payment cannot provide consolidated information for entities or remittance transfer services, and none reported with several branches. Therefore, the larger CFIs using remittances for linking members with financial must manually compile the consolidated financial services. As members represent around 15 percent statements to assess their situation internally, as well of the total adult population in Haiti, this is an as to comply with the monthly reporting requirements important opportunity for cooperatives to improve of the DGICP. In addition, cooperative staff do not their services, enhance member retention and appear to be sufficiently comfortable with the IT satisfaction, and deepen financial intermediation. system, with management reporting many small This would require improved IT systems, which can human errors that need to be rectified. conduct transactions in real time, have an adequate Le Levier is currently in the process of exploring data transfer infrastructure and security systems, as options for acquiring a new system and developing well as access to the Central Bank’s payment system a cost-sharing model with its affiliates. In doing so, or a direct link to payment service providers such as they will be able to afford regular maintenance of the Western Union, MoneyGram and others. 34 The centralized IT system has many problems, including: (i) almost all processes are still done manually; (ii) the system has only has limited operational times; (iii) it does not yet automatically generate consolidated financial indicators; (iv) it is cumbersome with regard to solving problems, as this can only be done by the IT specialists of Le Levier; and (v) it requires ongoing connectivity, which in many areas is still a problem. 4. DIAGNOSTIC OF THE FINANCIAL AND OPERATIONAL SOUNDNESS OF FINANCIAL COOPERATIVES 28 The BRH is currently exploring options to will also require substantial support for capacity support the uptake of debit cards and electronic building of staff, liquidity management, and overall payments among the population, and including risk management. Furthermore, the launch should financial cooperatives in the effort. Although this be accompanied by adequate financial education is generally to be commended, linking financial measures for members to help them understand cooperatives with advanced payment options will the new payment mechanisms and learn about require a holistic approach and substantial support their rights and responsibilities. Although linking for implementation. A detailed assessment of what financial cooperatives to the payment system will be is required to directly link financial cooperatives to costly and require lots of effort from all stakeholders, the payment system will be needed. It will also be the benefits are expected to outweigh the costs over necessary to develop criteria for linking financial the medium to long-term, helping to deepen financial cooperatives indirectly (that is, through agent intermediation and foster economic linkages. services for third parties) to payments. The launch FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 29 5. Summary Assessment and Recommendations 5.1 Summary Assessment The authorized financial cooperatives in Haiti have reached profitability; however, in many instances, they are still at a basic level of operation. Despite elevated levels of non-performing loans and high liquidity, the majority of financial cooperatives are profitable. They have been able to build reserves and contingency funds as a cushion to mitigate potential risks. Basic accounting systems and operational manuals are in place, and several entities use an IT system to automate part or all their operations. However, the IT and accounting systems still appear to be rudimentary. A similar situation exists in the area of governance, where the core governance structures are in place, but the exercised quality of oversight remains questionable. The mission did not meet with unauthorized entities, but there is some indication that they have not yet reached this basic level of operation. In this context, they would still need substantial strengthening to enhance their performance and strengthen their operations. The sector still has substantial gaps in efficiency and reports low levels of financial intermediation. External factors such as the informality of the economy certainly contribute to these gaps. However, the low efficiency and financial intermediation are mostly due to internal weaknesses in operations, as well as the lack of orientation toward member needs. For instance, accounting, risk management and business planning are deficient in many entities, mostly due to gaps in human capacity and a lack of internal controls. In the area of credit risk assessment, decisions are largely based on available collateral and not on a solid evaluation of the member’s repayment capacity, thereby excluding a large number of members from loan eligibility. Most members receive no or little remuneration for their deposits and social capital. At the same time, credit interest rates are elevated to cover operational inefficiencies. Second tier Support structures exist and help reap economies of scale, but they still need to enhance their services and become self-sufficient. The two existing sector organizations provide capacity building and technical assistance to their affiliates. They also offer IT services and systems. The federation also provides liquidity management and oversight. However, both largely depend on FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 31 donor funding to sustain their services and some of also needed to help deepen financial intermediation the products (IT) are outdated. Another federation is in the country and support economic growth. With being created. their rootedness in the communities and focus on retail clients, financial cooperatives are important A dedicated legal and regulatory framework is players in reaching out to lower income groups. in place for the sector, and the BRH is regularly conducting on- and off-site supervision of the It would be useful if the sector could come authorized entities. The legal framework gives the together to develop a joint vision of the outreach, BRH a clear role in the authorization and supervision performance and product mix to be achieved of financial cooperatives, but registration is still in the next 5 to 10 years, as well as to develop a being conducted with another government entity. joint strategy to determine the reform path and The BRH also does not have the power to impose sequence. The strategy should ideally be developed monetary sanctions for infractions, which impedes by representatives of the sector,35 and involve the the implementation of corrective actions. Finally, government, the BRH, as well as national and neither the foreseen stability fund nor a deposit international stakeholders. The final action plan insurance fund has so far been created to support should be prioritized and sequenced, and funding reform implementation and, if needed, help to close sources should be identified. Furthermore, for the the unviable entities. Given these circumstances reform process to be cost efficient and sustainable and the cumbersome legal procedures, the BRH over the long term, attention must be given to foster has not yet initiated the liquidation of unviable or an adequate and self-sufficient support system on the dormant entities. sector’s second and possibly third tier. The following recommendations aim to provide 5.2 Recommendations a basis for the development of an internal To bring the sector to a higher level of sophistication sector vision and reform strategy, which can and further enhance its performance and services, be implemented and supported as part of the it is paramount to undertake a holistic and National Financial Inclusion Strategy. In line with consolidated reform effort. Reforms are urgently the action plan of the National Financial Inclusion needed to safeguard the medium-term profitability of Strategy, the recommendations are divided into the sector, as the current high intermediation margin three subcategories: (i) reforms to consolidate the is unlikely to be sustainable over time. Financial financial cooperatives sector, (ii) reforms to enhance Cooperatives will increasingly be confronted with the automation in the sector; and (iii) reforms to competition from other financial service providers, strengthening the legal, regulatory and supervisory who are now starting to reach out to the unbanked framework. Ideally, the three areas should be segments of the population through innovative implemented simultaneously. Annex 3 provides a delivery mechanisms (that is, mobile wallets and more in-depth description of the individual reform non-bank agents), and who are able to also provide recommendations. payment services to their clients. The reforms are 35 This includes the CFIs, the Federations and the ANACAPH. 5. SUMMARY ASSESSMENT AND RECOMMENDATIONS 32 Table 8: Summary of Recommendations Time Implementation Recommendations frame Agency Reforms to consolidate and strengthen the financial cooperatives sector Sector to develop a holistic strategy to strengthen / consolidate the ST CFIs, sector sector and clarify internal organization. organizations a CFIs to conduct assessment of their income and expenditure structure and ST/MT CFIs, sector develop / implement action plan to reduce costs and enhance efficiency, organizations, donors CFIs to strengthen their focus on member needs and enhance MT CFIs management/ transparency vis-a-vis members. governance bodies Sector organizations to review their division of labor and funding ST/MT Sector organization structure, and adjust their services to better align with sector requirements. CFIs and sector organizations to define, purchase and maintain IT systems MT/LT CFIs, sector that fit the needs of the sector, and launch a massive capacity-building organizations program for staff. Introduce a stability fund and deposit insurance scheme for authorized and LT BRH/sector qualifying entities. organizations Reforms to strengthen the legal, regulatory and supervisory framework BRH to bring unauthorized CFIs into compliance: BRH (i) Carry out stocktaking exercise of unauthorized CFIs, and issue a ST (DGICP), donors regulation to enforce the legal requirement to become authorized or cease operations; (ii) Conduct due diligence of unauthorized CFIs to assess their future MT viability and options; and (iii) Develop a scheme to support the orderly exit of unviable, MT/LT unauthorized entities. Congress and BRH to adjust and approve the revised draft law on CFIs: ST/MT BRH, Congress (i) Introduce revisions in the area of minimum capital, governance, capital, transparency and member orientation; (ii) Provide BRHs with the sole role in registering, authorization and liquidation of CFIs, as well as 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. BRH to revise prudential regulations to introduce a stronger focus on ST/MT BRH (DGICP) quality of risk management and regulate foreign exchange and term management. BRH to (i) enhance accounting and auditing rules, (ii) introduce a ST BRH (DGICP) certification process for external auditors and (iii) maintain a list of MT certified CFI auditors. BRH to strengthen its internal capacity to switch from compliance to MT BRH (DGICP) risk-based supervision, introduce an off-site early warning system and enforce liquidations. Note: 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 organizations refer to the ANACAPH, the federation Le Levier and the new federation/sector entity that was recently created. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 33 Annexes Annex 1: List of Entities and Stakeholders Consulted Acronym Name Community CFIs visited SOCOLAVIM Sosyete Koperativ pou lavi Miyò St-Marc CPF Caisse Populaire Fraternité Cap-Haitien KPEGM Kès Popilè Espwa Gros-Morne Gros-Morne COOPECLAS Coopérative d’Epargne et de Crédit de Lascahobas Lascahobas CODECREM Coopérative d’Epargne et de Crédit de Mirebalais Mirebalais CAPOR Caisse Pop pour la Réussite de Gros-Morne Gros-Morne KPLKM Kès Popilè Leve Kanpe Milo Milot Caisse Populaire Union de Plaisance Caisse Populaire des CPUP Plaisance Employes du S CPBS Caisse Populaire Bon Secours Gonaïves UCEC Urgence Caisse d’Epargne et de Crédit Pétion-Ville KOTELAM Koperativ Tèt Ansanm pou lavi Miyò Port-au-Prince Second tier sectoral institutions LE LEVIER Fédération Le Levier Pétion-Ville ANAPH Association Nationale des Caisses Populaires Haïtiennes Pétion-Ville Government institutions participating in oversight of the sector La Banque de la République de Haïti (Département BRH (DGCPH) Port-au-Prince Générale de Caisses Populaires de Haïti) CNC Conseil National de Coopératives en Haïti Port-au-Prince FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 35 Annex 2: Feedback on Governance Structures Received from Individual Cooperatives as Part of Semi-structured Questionnaire General Assembly Board and Committees Members Percentage Number Tenure of Members Annual Report attending of members of members (Boards / Committees) CEC 1 400-500 9% No distribution; some 7 12-15 years for information us shared President and other on Facebook. Board members CEC 2 500 0.5% Report provides some 7 Average tenure is 7 detail and discusses the years, although it some- reduction of NPLs. times lacks people CEC 3 Only makes annual 7 Long tenures. Secretary statements available in served on Board for 27 the General Assembly. years, and former President served for 12 years. CEC 4 100 4% No information 7 Long tenures. President served on Board for 15 years; only 2 new members. CEC 5 2,848 25% They distribute financial 7 No information statements before the General Assembly, and sometimes an auditor presents the findings. Annual report includes some discussion. CEC 6 700-1,000 3% No information 7 President serves 9 years, 3 of the 6 Board Mem- bers are new, including the Secretary ANNEXES 36 Annex 2: Feedback on Governance Structures Received from Individual Cooperatives as Part of Semi-structured Questionnaire (continued) General Assembly Board and Committees Members Percentage Number Tenure of Members Annual Report attending of members of members (Boards/Committees) Annual report includes President in office for information regarding a 1,500- 15 years; only 1 new CEC 7 5% vision, and some infor- 7 2,000 member on the Board mation from the com- and Committees mittees. President in office for 12 years;, only 2 new CEC 8 600 7% No information 7 Members on Board/ Committees Yes, annual report also discusses some long- term strategies and goals 1,000- CEC 9 2% (for example, long-term 7 No information 1,200 borrowing to cover demands for long-term loans). Current president has served 5 years on the 2,000- CEC 10 5% 7 Board, the last 2 as 3,000 President. Six new Board members. Current president has served on the Board for Report discusses evo- 14 years (with a break 1,200- lution, but not NPLs. CEC 11 3% 7 of 6 years in between), 1,300 Information provided is Secretary has served 5 shallow. years; no new members in last 2 years. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 37 Annex 3: In-depth Recommendations and Suggestions In order to provide more in-depth guidance regarding It would be beneficial for the second-tier the suggested reforms and sequencing, this Annex organizations to assume a central role in details the suggested reform path and content. The developing and implementing the reform strategy Annex is structured along the two broad reform to strengthen financial cooperatives, including: themes of consolidation and strengthening, as well as • Based on the review findings. the second-tier the regulatory framework. The individual paragraphs organizations should agree on an internal sectoral aim to summarize reforms to be carried out by the division of labor for these institutions and introduce respective stakeholders. financial reforms to achieve self-sufficiency over the medium term. Reforms to consolidate and strengthen the financial cooperatives sector • To support the consolidation and strengthening of the sector, a concerted and cost-efficient effort Several assessments should be conducted as should be made to provide tailored capacity- inputs to the development of the reform strategy building and technical assistance to financial and as a guide to individual reforms, including: cooperatives to help them develop and implement • A stocktaking exercise of unauthorized entities to institutional strengthening plans. This would also determine their number, location, and membership include strengthening their internal operations base, as well as to gather basic data about their and governance and, where needed, to become financial situation and size (BRH). authorized. • An in-depth assessment of the income and • To strengthen the human capacity of Management, expenditure structure of the sector to identify the Boards and Committee members, the second-tier core drivers of the noted inefficiencies (sector organizations should consider: organizations, with the support of the donors and — Hands-on training and refresher programs to the BRH). foster knowledge of CFI financial indicator • A needs assessment to quantify the human capacity analysis, operational assessments and best development needs of management, governance practice in financial intermediation; bodies and internal auditors of CFIs, as well as — Regular regional workshops in which Board / other capacity-building areas identified as part of Committee members can exchange experience the strategy (sector organizations, BRH). and ask questions; • A review of the services and division of labor — Provision of information and examples of between the second-tier organizations in social programs that have helped improve the combination with a review of their internal overall economic well-being of members and funding structure. This would be done to enhance communities, helping to reduce social and the efficiency of service provision and put them on economic vulnerabilities; and a path to self-sufficiency (sector organizations in collaboration with the CFIs). — Programs to help members of cooperatives understand cooperative principles and their rights and obligations as members. ANNEXES 38 • Finally, efforts should be made to affiliate viable BRH and the federations during their supervision unauthorized entities, helping them to reap processes. The minutes should also reflect and economies of scale and adopt joint processes/ document this work. technologies. This requires a strong member • The CFIs should improve their reports and orientation of the second-tier organizations and documents (that is, their annual reports, financial enhancement of their products and services. statements, pricing information, and contracts) The financial cooperatives should strengthen to enhance transparency, improve the depth of their focus on member needs, enhance the quality information, and facilitate better understanding of governance and foster transparency vis-a-vis among their members. their members. Ideally, this would include the To put all financial cooperatives on a stable following reforms: development path, the BRH should enforce the • The Board and management of financial legal requirement for CFIs to become authorized. cooperatives should place a much stronger focus Based on the results of the stocktaking exercise on the financial needs of their members and regarding unauthorized entities, this entails the communities. This requires stronger transparency following: in conveying information, as well as a more • Issuing a regulation to clarify the transition process member-centric approach to services. Specifically, and establish realistic timelines for unauthorized the offered products and services should be adapted entities to become authorized. The timelines could to the needs of the broad member base, and pricing be sequenced by size of entity or location, and the structures should be reformed so that members asset thresholds should be established for depth of receive adequate remuneration for their deposits. supervision.36 • The CFI sector should foster the provision of • Conducting due diligence processes to classify the training for their Board members, including their unauthorized financial cooperatives according to participation in technical and hands-on training, their level of viability and quality of operations. congresses and information events. Regarding Such as assessment will help to determine the capacity building, special attention should be actions to be taken during the transition process placed on financial indicator analysis, operational toward authorization or liquidation. assessments, and the understanding of international best practice in intermediation. Adequate funds • Developing a scheme to support and finance the should be earmarked for training in the annual orderly exit of entities that are not viable. To financial plans of the CFIs. cushion the impact on the members, consideration could be given to transfer assets to viable financial • Boards should conduct regular strategic reviews, entities, enforce repayment of outstanding loans, work with management on action plans to and introduce some form of compensation scheme reach the expected goals, and consistently for depositors who lose their funds due to the monitor implementation. They should take into closure.37 consideration suggestions for reforms made by the 36 For example, a formal threshold for supervision has been introduced in Mexico. 37 For example, this was done by FIPAGO in Mexico. It provided financial support for mergers and liquidations of entities that had to be closed during the transition process. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 39 Regarding the authorized and adequately • The BRH should maintain a list of qualified performing entities, the introduction of a stability external auditors and make it mandatory to use an fund and deposit insurance scheme could be auditor from this list. considered. The definition of clear performance To reduce operational costs over the medium criteria to participate in such a fund — possibly term and enhance the quality of operations, it is be the first of its kind in Haiti — could be a strong paramount to foster automation of the sector. To incentive to enhance the performance and operation achieve this, the rudimentary and / or partial IT of the CFIs. The stability fund and deposit insurance systems currently in use need to be replaced: scheme could be managed by an autonomous sector entity that regularly conducts independent due • Prior to purchasing IT systems, the stakeholders diligence of the participating entities in order to (Federations, CFIs) should determine the core ascertain their viability. As such, it would also have standards and features of the new IT systems a suitable governance scheme.38 Alternatively, it (including security features). They should could be managed by the BRH as a fund without any decide whether a single core banking system additional due diligence function. run on a server at a federation would be the best solution for the sector, or whether individual core To enhance the quality of the sector’s financial banking systems that are interoperable and can information, the quality of the external and be consolidated at the federation level would be internal audits of sector entities would also need preferable. to be strengthened: • Furthermore, the federation(s) and individual • A massive capacity-building program should be stakeholders should assess which functionalities launched to: the new IT platform should be able to incorporate. — Help accountants understand core accounting In addition to the normal financial intermediation practices, the accounting manual and rules to products, this could include the following: apply, as well as how the IT systems work; and — Mobile payments; — Train managers and boards to better understand — Credit or debit cards; and analyze the statements, know what to look for, and which ratios to compute or analyze. — Virtual branches; For medium- to large-sized cooperatives, • — Access to the central bank’s payment system, accounting should be carried out by persons and the new automatic clearance house; trained for this purpose — and never by employees — Compliance with International Financial who have other responsibilities. At the same Reporting Standards; and time, an internal control model must be created that guarantees the proper accounting of all — Compliance with the BRH framework. transactions. • A certification process for external auditors should be introduced and made mandatory by the BRH (including for auditors of the federations). 38 Mexico has implemented an interesting scheme along these lines (FOCOOP). ANNEXES 40 • The system should also allow for continuity of Reforms to enhance the legal, regulatory business; agility in the credit, cash and payment and supervisory framework processes; as well as the generation and transfer of financial accounting information in automatic Most of the suggested reforms can be form to the BRH. implemented without a revised legal framework. However, reform implementation and efficiency • Regarding the implementation of the new IT would greatly benefit from revisions to the legal system(s), attention should be given to secure framework and more power allotted to the BRH funding for the one-time investment into the new to enforce the legal framework. It would therefore hardware and software, as well as to regularly be beneficial if the legal framework is adjusted in earmark funding for IT maintenance and updates. line with the suggested draft law and the additional If the system is to be run by a federation, the suggestions made in this review. These would then affiliated member entities should pay a service be approved by the Parliament. The revisions should fee adequate to maintain the platform, updated include the following: core system and allow for a timely response to all service calls. • Enhance the BRH’s role in registering, authorizing and liquidating sector entities in order to facilitate • Furthermore, individual entities should reassess the process, and allow the BRH to enforce and adjust internal processes and procedures prior adherence. Ideally, the BRH should be the sole to introducing automation. entity in charge of these three processes. • A massive capacity-building campaign will be • Strengthen minimum capital requirements to foster needed to help managers, staff and Board members a consolidation of the small entities and include understand and operate the IT system. Furthermore, transition rules and timelines for entities that are training will be needed for managers to help them not yet authorized and supervised. understand and evaluate the information generated by the new system. • Provide the BRH with the power to issue monetary sanctions in case of non-compliance with mandated • As an incentive, entities that are sufficiently remedial actions. Furthermore, in addition to the automated could be allowed to participate in the provisions of Article 139, paragraph 4, the BRH delivery of cash transfers from the government, should have the power to remove members of the thereby receiving access to fee-based income and Board of Directors when there is clear evidence support in reaching out to new clients. of non-compliance or bad corporate governance practices that put the financial stability of a CFI • The existence of adequate computer systems could at risk. also facilitate the entities linkage to the national payment system, thereby allowing remittances to • Introduce a tiered supervisory approach in the be directly transferred into member accounts. legal framework to provide for cost-effective supervision. • Require auditors to be chosen from a pre-approved list of qualified / certified auditors. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 41 Introduce additional • consumer protection — Introduce a requirement to publish visibly regulations related to: and in simple terms the core decisions of the General Assemblies (profit distribution, — Transparency of prices; elected Board / Committee members, other — Transparency of recourse mechanisms; important decisions taken) in the branch. — Transparency of information around annual • Introduction of a requirement to establish a fund meetings; and for social purposes (currently voluntary) and make contributions to the fund independent of the — Introduction of one-page fact sheet for disbursement of profits to members. Consideration contracts, with the core financial information could also be given to making it mandatory to place and a payment plan. a share of the profits into a social and educational Furthermore, the new law should also include fund (as has been done in several countries). provisions to foster an orientation of CFIs toward To enhance the quality of the governance their members and community: structures, the BRH should consider issuing a • Revision of the articles regarding the objectives, governance regulation, with the aim of: principles and distribution of profits to foster a • Introducing – at least temporarily to change stronger member and community orientation vis- the culture – a regulation on Board training and à-vis the cooperatives. competence requirements. For example, this could • Facilitation of disbursement of profits to members include a requirement to participate in one training by eliminating the requirement to disburse profits program per year, making it mandatory for new based on the member’s transaction volume. Board/Committee members to attend a training Disbursement can be based on the social capital course and become certified. provided by the members, or it may include a • Introducing rules on maximum terms for Board mixed form of dividend, that is, the average /Committee members and considering the deposits in a year in combination with a lump introduction of more stringent fit and proper sum disbursement per member (favoring the more requirements for larger cooperatives. vulnerable). Allowing alternative forms of conducting • • Fostering transparency of information towards the General Assemblies to enhance member members: participation, in particular in larger cooperatives. — Require the public disclosure of core fees and For example: interest rates. — Discussion of core topics in smaller regional or — Require a one-page fact sheet for loan sub-group meetings, and selection of a delegate conditions and repayments, including total to represent the participating members in the cost concept. cooperative-wide meeting; and39 39 For example, this was done in a cooperative in Costa Rica, which reaches 99 percent of representation in the General Assemblies this way. In the meetings where delegates are selected, core issues are being discussed and working groups on important topics are formed. Then a representative (1 for 15 members) is elected. In the General Assembly itself, only the decision points are discussed. ANNEXES 42 — Allowing delegation of votes, with a participating ­ — CFIs could create an account within the member being allowed to represent up to 5 social capital accounts denominated “Non- other members based on their written consent. redeemable Capital Stock” into which the This should come with a requirement to make profits of the previous year can be placed. the delegation of votes transparent to members, • for the medium to long term, the BRH should bring as well as educate them about their rights and the accounting rules in line with the generally responsibilities as members. accepted accounting principles. These could be The BRH should revise its prudential regulations the International Accounting Standards or national to introduce a stronger focus on risks, and standards. enhance the quality of risk management: Finally, the BRH should require that auditors • Where missing, new regulations should be include more information about observations and introduced, for example, in the area of foreign findings in their audits. In addition, consideration exchange risk management and maturity structure. could be given to make it mandatory for external auditors to participate and discuss the financial • A stronger focus should also be placed on fostering accounts in the General Assembly. integral risk management systems in the entities. To date, the BRH has issued separate regulations to The capacity and automation of the DGICP establish prudential rules and guidelines regarding should be improved to enhance supervision and individual risks (for example, credit and liquidity resolve non-performing entities: management) and focusing on checking the • The DGICP should move from the compliance- compliance with these rules. In future, a stronger based supervision toward a more risk-based attention to integral risk management systems and supervision, at least for the larger and more approaches would be warranted. advanced financial cooperatives. To enhance the accounting rules and the — This would require a redesign of the supervision transparency of information, the BRH should manual and forms, as well as a stronger focus on revise its current accounting plan for financial the quality of processes, systems and capacities cooperatives: compared to a checking off of compliance with • The transparency of information in the financial rules. statements should be enhanced, particularly — As suggested, this would also include an ­ through the inclusion of information about non- assessment of the risk management system and performing loans, cash collateral, and types of adequacy of policies. investments. — The BRH may also wish to consider developing • Profits should be adequately distributed toward a methodology for assessing the efficiency reserves, with sufficient attention given to indicators and financial margin of cooperatives, increasing the tier-one capital of entities: and then incorporating this assessment in their — CFI profits could be credited to the individual supervision process. capital accounts of each associate in proportion to the member’s social capital. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 43 • To facilitate off-site supervision, the BRH should and Caribbean region use such early warning make it mandatory for financial cooperatives to send systems to help identify looming risks, facilitate their financial information in electronic format. standardization of assessments, and enhance the For small and rural entities, a threshold could be quality of off-site supervision. established to selectively exempt them from this Finally, the BRH should regularly issue reports requirement. This would foster automation of the about the sector. This should include basic sector, reduce errors through reprocessing of data, information from the financial accounts, as well as and increase the efficiency of the BRH. performance-related indicators about the sector, and • Furthermore, as is already planned, the BRH if possible individual entities. This would foster should introduce an early warning system to transparency vis-à-vis the public and allow entities facilitate and automate off-site analysis of the data to benchmark their own performance to their peers. provided. Most supervisors in the Latin American ANNEXES 44 Bibliography Annual reports of the financial cooperatives for 2015 and 2016. Audit reports of the financial cooperatives for 2015 and 2016. BRH. 2014. Annual Report. Port-au-Prince : Haïti. German Cooperative and Raiffeisen Confederation (DGRV). 2017. Regulación y Supervisión de Cooperativas en América Latina y el Caribe. San Jose y Ecuador, October. Mattern, Max and Kim Wilson. 2013. “Cooperating for Financial Inclusion: A Case Study on The Federation of Haitian Credit Unions, Le Levier.” The Fletcher School/Tufts University, Boston, September. Phareview. 2015. “An Assessment of the Haitian Microfinance Sector in 2014.” United States Agency for International Development (USAID). 2016. “Final Performance Evaluation of the Haiti Integrated Financing for Value Chain and Enterprise (HIFIVE) Project.” Washington, D.C. June. WOCCU Model Law. 2015. FINANCIAL COOPERATIVES IN HAITI: A DIAGNOSTIC REVIEW OF THE SECTOR AND ITS REGULATORY AND SUPERVISORY FRAMEWORK 45 46