Credit Unions In Romania by jolinmilioncherie


									Credit Unions In Romania

Current status, statistics, presentation of the legal framework for operations,
development perspective.

Current Status
During 2002-2005 the process of adapting the Romanian legislation to EU’s regulations
continued and the Employees Credit Unions’ activity was influenced, as well.

Currently the Credit Union system is reorganizing itself based on the new legal
framework for the non financial credit institutions created and promoted by Ministry of
Finance and National Bank of Romania.

The law of Credit Unions no 122/ 1996, amended by the laws 135/2003 and 186/2004
does not allow to the CU to use the members’ deposits as source for its micro-credit

At the end of the financial year 2005, 3134 credit unions registered balance sheets and
they were affiliated to 40 territorial unions which reported 1,188,615 members.

          Employees Credit Unions Number of Members during 2002- 2005

                                          Number of members
        1600000                          1444632





                          2002            2003     Year    2004      2005

The number of employees’ credit unions at the end of 2005 decreased with 761 units
when compared to 2002 and the number of their members registered a decrease with
337,458 persons. The major causes that determined the decline in the number of
employees ‘credit unions and their members were the substantial process of personnel’s
laying off and restructuring of this system of employees’ credit unions.

Overview of the Romanian Credit Unions
          Number of Employees Credit Unions

                                     Number of Employees' Credit Unions





          2,000         3,895
                                     3,618        3,446
                                                            3,134          Employees' Credit Unions



                       2002         2003          2004     2005

The annual balance sheets reflect an accurate image of financial performance and credit
unions’ position, of loans’ dynamics and other information regarding the employees’
credit unions’ activities.

On 30th of June 2005, the credit unions converted the initial and final balance accounts
and turnover into new currency (RON) according to Law no. 348/2004 regarding
denominating the national currency (1 RON= 10,000 old ROL).

Based on the information presented in the annual financial statements, the main
indicators permit analyzing the business activity during the reference period – 2002-2005.

Indicators of the Employees’ Credit Unions Activity during 2002-2005
                                                                                        Million RON
Crt.     Indicators                2002      2003         2004      2005   2005        2005 (relative
no                                                                         (absolute   variations)
1        Equity capital            54,70     70,22        74,32     90,3   35,60       65,1
2        Total equity    808,0               859,12       868,92    905,   97,34        12,0
                         6                                          4
3        Members’ social 753,3               788,90       794,60    815,   61,74        8,2
         fund            6                                          10
4        Members’ loans 1458,                1519,5       1435,2    1390   -67,75       4,6
         value           45                  1            0         ,70
5        Total assets    871,1               928,93       935,28    983,   112,19       121,8

Overview of the Romanian Credit Unions
                                   1                                    30
6        Liquid assets             66,63          58,96      56,90      73,4   6,77       10,2
7        Total revenues     175,7                 177,40     168,84     166,   -9,13      5,2
                            3                                           60
8        Loan     interests 165,8                 169,37     161,90     157,   -7,99      4,8
         revenues           6                                           87
9        Total expenses     108,4                 110,88     97,20      100,   -7,54      6,9
                            4                                           90
10       Net surplus        67,29                 66,51      71,64      65,7   -1,59      2,3
11       Allocations from 19,43                   19,50      19,77      21,6   2,20       11,3
         surplus        to                                              3

Sums that represent the base of calculating these indicators were adjusted with the
inflation rate on the specific period of time and they are presented in comparable numbers
of the year 2005.

Based on interpreting these indicators, correlated to other data from the financial
statement it can be noticed that total equity regarded as members’ loans financing source
increased during 2005 when compared to 2002 with 12% (97,3 million RON) and
reached the level of 905,4 million RON.

This increase was due to the equity capital’s growth with 35,6 million RON and to
members’ social fund’s growth with 61,7 million RON.

Equity Capital dynamics is presented below.
                                                       Total Equity

                     2005                      905.4

                     2004                 868.92

                                                                                       Total Equity
                     2003                859.12

                     2002      808.6

                        750              800           850            900       950

In the equity capital structure, the risk reserves and statutory reserves have the major part
comparing to other components, their level reaching, at the end of 2005, 79,9 million

Overview of the Romanian Credit Unions
RON. The statutory regulations impose the reserves proportion in total assets to be of
minimum 10%. During 2005 the reserves and the other equity capital elements
represented only 9.1% which lead to the idea that the level reached by the credit unions’
reserves remains insufficient.

In the next period of time, the credit unions management has to proceed to greater
allocation quota from registered results for growing their own reserves and insure the
financial stability. In the projected budget for 2006, employees’ credit unions established
the goal to increase their own reserves with 17,9 million RON.

Although the number of members decreased in reporting period, their social funds
registered an increase with 8.2% comparing to 2002 and reached the level of 815,1
million RON at the end of 2005.

In 2005 the members social funds were used for giving loans in a total value of 1390,7
million RON, the number of loans was of 966,213 and the average sum for the given loan
was of approximate 420 euro.

                                          Members Loans Value
     1520                          1519.51
     1460          1458.45
      1420                                     1435.2
                                                                     Members Loans Value
      1360                                               1390.7
                   2002                                            Members Loans Value

 Through their financial politics, the employees’ credit unions insured a funds’ prudential
management, as provisions were constituted for the overdue loans, reaching the sum of
0.2 million RON in 2005. For limiting the loan risk, it is necessary that the provisions
level along with the risk reserves level cover for the overdue loans registered at the end of

From the moment loan’s reimbursement uncertainty occurs, the procedures stipulated by
the statute are required to have been setting up and used by the employees’ credit unions
(notification of warrant persons, compensation of liabilities with the social members’
fund, forced loan execution according to the law). At the end of 2005, total assets are in
value of 983,3 million RON which show an increase with 112,1 million RON and

Overview of the Romanian Credit Unions
represents a 12.8% raise when compared to 2002. Although the value of loans given to
members decreased during this period of time, the increase in the value of total assets
reflected itself in the structure of other components, respectively in the amount of
invested sums in bank deposits and territorial unions’ liquidity funds.

During 2002 and 2005 the liquidity funds registered a decrease, but it can be noticed that
their level increased with 16,5 million RON in 2005 up to a total amount of 73,4 million
RON. The liquidities’ level increasing can be explained by the fact that there was a
relative increase of the financing sources and the volume of loans given to members
decreased generating extra liquidity that was being placed in bank deposits or in
territorial unions’ funds.

In 2005, credit unions constituted bank deposits and made deposits at liquidities funds in
a total amount of 25,4 million RON. The credit unions have in current accounts 48
million RON, which represent an increased amount of 27.9% when compared to 2002.
Through the prudential politics regarding the liquidity risk, credit unions maintained the
liquid funds between 7.1% and 9% of the total amount of social funds.

Using the existing funds available by credit unions, there were registered 166,6 million
RON total revenues in 2005, a decreased level when compared to 2002 which represents
91% from the budgetary forecast. The decreased revenues are due mainly to the interests’
reduction, the decrease in volume of loans and the decrease in the rate of funds rotation in
the loans’ system.

In 2005, out of total revenues, 94,7% represent the members loans’ revenues in a total
amount of 157,8 million RON. Bank deposits interests’ revenues and liquidity funds
deposits’ interests have a total amount of 2,7 million RON and the account interests are
of 0,3 million RON. Donations and sponsorships’ revenues are in amount of 3,3 million
RON and revenues from activities without a patrimonial purpose- 2,5 million RON.
                                               Total Revenues

                     2005       166.6

                     2004         168.84

                                             177.4                    Total Revenues

                     2002                  175.73

                        160          165        170      175    180

The registered revenues made possible spending money on credit unions’ functioning in a
total sum of 100,9 million RON, which represents 92.1% from the budgetary forecast.
During this period of time, there were registered an expenses’ decrease with 6.9% and a

Overview of the Romanian Credit Unions
revenues’ decrease with 5.2%. Out of total reported expenses at the end of 2005,
personnel’s expenses represent 58.5% and material and services expenses 41.5%.

                                                   Total Expenses

                     2005          100.9

                     2004      97.2

                                                                           Total Expenses
                     2003                    110.88

                     2002                  108.44

                        90         95        100       105     110   115

During the analyzed period, the net surplus reflects various decreasing trends registered
in the dynamics of revenues and expenses. It registered a level of 65,7 million RON,
which is under the amount registered in 2002, a decrease with 2.3%- from 67,2 million

According to the budgetary forecast, the net surplus that is to be registered in 2006 is of
65,2 million RON with 0,5 million less that in 2005, which represents a decrease of 0.8%.
The surplus registered was assigned to statutory destinations (reserves, members’ social
fund, reserve fund for support in case of decease and to cover the loss resulted in the
former years).

The percentage of assigning the surplus to reserves increased year by year from 28.8% in
2002 to 32.9% in 2005 and it has been registered an increase of 4.1%, which led to the
equity capital’s increase of the credit unions.
This process of equity capital’s growth must be carried on in the next period of time, as it
creates financial stability and independence, leads to costs reduction and security to
social members’ funds.

Overview of the Romanian Credit Unions
                                                   Net Surplus



                     68                                                        Net Surplus
                             67.29       66.51
                     64                                          65.7

                             2002        2003          2004      2005

During 2005 credit unions registered 1893 employees, with 771 persons less than in 2002
and 18030 associates and managing councils’ members, a number with 9179 less than in

                           Percentage of expenses in total revenues

                                38.3       37.5          42.4      39.5
                                                                               Total Revenues
                                61.7       62.5          57.6      60.5        Expenses
                              2002       2003           2004      2005

                          Percentage of Equity Capital in Total Assets

                100%           6.3         7.5            7.9           9.1


                              93.7         92.5           92.1                  Equity Capital
                 40%                                                            Total Assets


                            2002         2003           2004       2005

Overview of the Romanian Credit Unions
The strategic objectives for developing the credit unions system

The employees’ credit unions system, one of Europe’s oldest systems is in a rough
moment of its evolution, as the diversified financial needs of their members require major
changes in the operating system of the credit unions.
According to ICA’s types of credit unions’ regulations, they are grouped in three stages
of development (initial, in developing and mature). The credit unions in Romania are
placed at the higher place of the stage “in developing” and its main characteristics are:

     -         assets’ value over 200 million euro;
     -         there are no specific regulations for the credit unions in the EU and the EU
               decree 2000/12/CE was assimilated by the Romanian legislation arbitrarily
               and restrictively;
     -         members associating rules are being adjusted to realities in continuous
     -         adapting the financial services’ offer to the financial market conditions and to
               members’ requests;
     -         developing financial and training consultancy services, elaborating and
               implementing projects at central level.

The development perspective involves:
   -      a flexible and unrestrictive legislation framework;
   -      respecting high performance standards comparable to those existing in UE
   -      consolidating the credit unions;
   -      efficient and personalized communication systems for attracting members;
   -      differentiate the services offered to the market and promoting them;
   -      quality services at low costs;
   -      extending the associating criteria beyond the regional and territorial level;
   -      a computerized environment in which the technologic, communication and
          electronic deliver of information is widespread;
   -      social orientation and organize based on market principles;
   -      a professional management (the operational personnel is in a greater
          proportion than the voluntary personnel);
   -      development of consultancy and training services, IT services, elaborating and
          implementing internal and external projects;
   -      products and services standards;
   -      strict management of activity and enhancing the business – financial
   -      a mechanism of warranty for members’ social funds.

As regulations regarding EU credit unions’ functioning, Basel Agree concerning the
equity tolerable for the financial institutions, studies and recommendations made by the
IMF and World Bank representatives impose quality and prudential standards for the

Overview of the Romanian Credit Unions
institutions that operate on the Romanian financial market, thus implying greater
expenses for these institutions, the credit unions plan to:

     -         enlarge the communication line with the other credit unions from Europe,
               especially those from Ireland, England and Poland in order to observe the
               impact of these standards’ implementation on the credit unions;
     -         reopening the discussions with the authorities regarding the Romanian
     -         elaborating the standards’ regulations these credit unions should comply with.

By consolidating the credit unions’ supervisory activity, the financial performance’
standards can be rigorously verified.
The supervisory activity insures the prudential financial standards to be confirmed and
the members’ social funds to be protected.

The strategic directions consist of:

     -         an improvement of the existing supervisory system (functioning regulations,
               financial indicators, reporting system, rating system) according to the credit
               unions best practice in EU countries;
     -         credit unions’ performance increasing, their inclusion in a superior class of
               rating by applying complex procedures of anticipation and preventive risk
     -         statutory regulations achievements (level of statutory and risk reserves,
               amount of expenses, liquidity rate, provisions).

Credit unions are solid financial institutions which offer a large variety of financial
products and services. There are discrepancies between the developing credit unions
movements in Europe and credit unions in Romania (in 2003, in Ireland functioned 622
credit unions with 2.8 million members and total assets of 13.9 million euro, in Poland
there were 109 credit unions with 924,153 members and total assets of 900 million euro
while in Romania there were 3,895 credit unions with 1,526,076 members and total assets
of only 179 million euro).

In this process of credit unions’ consolidation a key role is being played by the liquidity
funds. There will be new funds created within the territorial unions and National Credit
Union and the existing ones will be developed by attracting external funds at competitive
costs, these liquidity funds representing an important mean of supporting the credit

Through consolidating the credit unions, total assets’ amount will increase and for the
next period of time the priorities are:
   -       mergers of credit unions without business potential;
   -       development of external liquidity funds (attracting new financial sources);
   -       implementation of financial services comparable to those offered by other
           financial institutions which are present on retail market and possibility of high

Overview of the Romanian Credit Unions
               costs absorption generated by the quality and prudential standards’

Credit unions are social oriented and organized based on market principles. Their
members can be employees with reduced incomes which have restricted access to loan
and saving services from a bank’s portfolio or other financial institution. The credit
unions’ network facilitates to other employees to be informed on the services offered.
Credit unions’ strategy consists of:
   -       extending their area of activity, including entrepreneurs from the urban area,
           agriculture producers and other services providers from rural area;
   -       there will be new credit unions created in the areas of interest for attracting
           new members;
   -       territorial credit unions will be involved in the process of extending the credit
           unions network and may support it financially by offering reimbursable funds
           for activity’s start-up;
   -       adapting the credit unions products and services to the market competitiveness
   -       credit unions products and services promoted by territorial credit unions and
           National Credit Union;
   -       creating the advertising and publicity fund.

     As the functional differences between the financial products and services offered by
     commercial banks, insurance companies, brokerage firms and credit union tend to
     disappear, this financial services’ convergence will affect the credit unions, as well
     and the main actions will be:
     -      to improve the communication with the credit unions members, a deep
            knowledge of their financing needs, taste tendencies for various types of
            products and services;
     -      a redesign of the products and services offered (inclusion in the credit unions
            portfolio of medium and long term loans, loans for buying goods or houses).

     As regarding the credit unions IT systems, the plan is to satisfy members’ financing
     needs by designing a full-service system, to initiate and develop a system of
     credit/debit cards for their members and acquisition of electronic systems.

     In a very competitive financial services environment, credit unions have to find their
     way to get a competitive advantage. This system doesn’t have the necessary resources
     to compete with other financial institutions on the components of products and
     services differentiating and personalizing, but their offer for physical persons is
     comparable to a bank’s, though based on low costs (low material and personnel
     For promoting this competitive advantage through low costs, specific measures of
     cost management are required and presentations of the credit unions financial
     services’ advantages during members’ meetings.

Overview of the Romanian Credit Unions
     Insuring to credit unions business and financial performance requires strengthening
     the credit unions’ management.
     Territorial unions don’t always succeed in efficiently controlling the credit unions’
     activity and the imposed steps are:
     -       to involve in this process of credit unions activity’s controlling the National
     -       apply methods and procedures that are according to standards;
     -       IT management systems integrated at credit unions and at territorial and
             national level.

In the next period of time, credit unions’ strategy involves developing the training and
consultancy services and writing projects. These services are provided only by National
Union and territorial unions and the actions will be taken in the area of creating new
specialized centers at regional level which will collaborate with other training centers and
provide high quality services to credit unions’ personnel.
National Credit Union underlines that it is oriented towards building-up strategic
partnerships for attracting new market niches and liquidity funds.

Overview of the Romanian Credit Unions

To top