CONTENS Page ICBA MISION 2 INTRODUCTION by the President

CONTENS: ICBA MISION INTRODUCTION by the President SPEAKERS: Leszek Balcerowicz Opening Speech Eugeniusz Laszkiewicz Mission of cooperative banks in the world experiences and prospects Miguel Cardozo The uruguayan co-operative banks way to obtain capital COFAC’s experience Hassan El Basri How cooperative Moroccan banks strengthen their equities Arnold Kuijpers Rabobank, capital structure and development Jean-Claude Detilleux Presentation of the Development fund for social economy in Central and Eastern Europe (COOPEST) Kalmanne Toth The institutional protection fund of the hungarian savings co-operatives (OTIVA) Michał Mazur Presentation of National Cooperative Banking Fund of Credit Guarantees ICBA ADRESSES Page 2 3 5 8 14 17 24 29 34 38 44 1 ICBA MISSION The International Co-operative Banking Association (ICBA) is a specialized organisation of the International Co-operative Aliance (ICA). The ICBA was set up by national co-operative banks and financial organisations: • To exchange information; • To promote co-operation among co-operative banks; • To promote the development of new co-operative banks trough advice and assistance; • To research and study projects of common interest, i.e. capital formation, co-operative values as applied to banking etc. Membership is open to all banks and central thrift and credit organisations through one of the several Regional Committees or by direct membership of the Central Executive Committee. Our membership brings together representatives of co-operative banks and financial institutions worldwide, including the International Raiffeisen Union, European Association of Co-operative Banks and the World Council of Credit Unions. The Association is, therefore, a true global and democratically-elected specialized organisation of the ICA, representing the views of co-operative financial institutions all over the world. This Journal contains presentations prepared for International Co-operative Banking Association Seminar held in Warsaw, Poland, 21 st September 2004. 2 President INTERNATIONAL CO-OPERATIVE BANKING ASSOCIATION EUGENIUSZ LASZKIEWICZ INTRODUCTION BY THE PRESIDENT The cooperative banking is growing in strength all over the world. Although many cooperative banks focus mainly on the local markets, some of them are more often opening out to foreign and stock markets. The nature of their operations is becoming similar to commercial banks. In many countries, such situation provokes unfavourable reports concerning the impact of cooperative banking on the development of financial markets and the source of their economic potential being the public aid. One of the tasks of the International Cooperative Banks Association is to counteract such negative opinions and trends. The objective of the Seminary held for the first time this year in Warsaw, was to partially clarify the controversial issues concerning conformity with the mission of the cooperative banks by individual entities. The Seminary was attended by numerous recognized representatives of cooperative banking from 5 continents: Europe, Asia, North America, South America and Africa. Based on a broad experience, it was possible to conduct an in depth analysis of the historical and current model of cooperative banking, its role in the economic and financial sectors, as well as the manner in which the equity is obtained by cooperative banks on each continent. Presentations encompassed the examples of cooperative banks with a very strong capital base as well as the banks from the countries which in the last few years underwent a deep economic 3 crisis. The central theme of the Seminary’s afternoon session was the noble cooperative principle of cooperative solidarity. A concept which is reflected in the national guarantee funds established by cooperative banks, or supra-national organizations, such as the Development Fund for Social Economy for Eastern European countries. The Funds have a manifold role to play, ranging from the assistance in safeguarding the stability of the cooperative banking sector that translates directly into their customers’ trust, to the support for small and medium-sized enterprises or even for local initiatives. The Seminary opens a series of symposiums of the International Cooperative Banking Association, which is to propagate a positive image of cooperative banking worldwide. A subsequent Seminary will be held in September 2005 in Cartagena, Columbia. Even today, I would like to encourage all those interested in the topic to participate in this Seminary, and I hope you enjoy reading this publication. Eugeniusz Laszkiewicz President 4 The President of the National Bank of Poland Leszek Balcerowicz was born in 1947, in Lipno; in 1970, he graduated cum laude from SGPiS (Central School of Planning and Statistics) - (now Warsaw School of Economics -SGH), with a degree in foreign trade; in 1974 he was awarded an MBA at St. John’s University in New York and in 1975 he received his Ph.D. in economics at SGPiS; in 1992 he became Professor at the Warsaw School of Economics; in 1989 - 1991 and 1997 - 2000 he was Deputy Prime Minister and Minister of Finance; in 1995 - 2000 he was President of Unia Wolności (Freedom Union); since January 2001, Dr. Balcerowicz has been the President of the National Bank of Poland; he is an author of numerous books and economic publications issued in Poland and abroad. He bears the “Honoris Causa” title of numerous universities from all over the world and has received many prestigious international awards. LESZEK BALCEROWICZ OPENING SPEECH Ladies& Gentlemen, Thank you very much for invitation and President Laszkiewicz for his kind words. I think it would be tactless, if in my introduction I talked in detail about the activities of cooperative banks. You know the particulars of this sector much better than anyone else. Let me commence by saying that in Poland, similarly to other countries, the cooperative movement begun and developed in the 19th century. This had not only economic but also, I would say, patriotic significance. At that time, Poland was divided among three power states and the cooperative movement was 5 an expression of the longings towards a kind of economic emancipation of Poles. The Second World War was an enormous blow followed by the 50-year rule (or I should say system) based on the contradiction of freedom, including market freedom. The underlying creed of socialism was to oppress the rights of individuals. Private enterprise was, in fact, a crime. Market was nothing but a grey zone. Today, we know that numerous misleading opinions on the system have been coined, especially in the West. Nowadays, we are more than certain that a system based on depraving individuals of their freedom, is not only anti-humanitarian, but also wasteful and anti-developmental. No one has ever and no one will ever succeed in eradicating poverty and bridging the gap in development, through the employment of the state domination which suppresses the free market. If a poor country is to have a chance to develop, the state should focus on the implementation of the following basic tasks: ensuring proper law, i.e. the law which gives a wide spectrum of individual freedom and which protects this freedom, instead of taking it away. When we realise that the intention of the socialist system was to deprive people of their freedom, it becomes clear, that there was no room for the authentic cooperative movement. It was a cooperative movement in nothing but name, as the true cooperative movement requires freedom for a cooperative and its members, it requires freedom to manage and to choose the authorities. This, stood in opposition to the fun- damental nature of the socialist system based for example on the nomenclature, which meant that the heads of all central organizations had to be appointed or accepted by the party authorities. In Poland, the opportunity to revive the genuine cooperative movement as opposed to the formal one, surfaced after the year 1989, when Poland became a free country and consequently it was possible to introduce the principle of individual freedom. These two things went hand in hand. The beginnings were difficult not because the direction of transformation was faulty in principle, but because of the backlog accumulated within the last 50 years. And it was not necessary the question of mental backlog, as people were able to adapt quickly, it was rather the backlog of a structure, in a form of economic links, which could exist only on account of permanent subsidising at the cost of the rest of economy and the rest of the society. This system was a false one. What was socially expensive was cheap. Food, for example, was artificially under priced. Obviously, such non-marketable pricing system rendered the appropriate management impossible. Returning to realistic prices is at times connected with painful economic transformations. Without them, however, Poland would be doomed to stagnation, to total regress, to pauperization. There are countries which still stick to socialism. It is easy to observe the condition they are in. They are not even able to maintain the “status quo” from the decline of the socialism era in 6 1989. The quality of life in those countries is inevitably deteriorating. The socialist system is lethal for development. The beginnings of transformations were undeniably difficult also for the cooperative movement which regained its freedom, but had to face the issues of transformation. At that time, the authorities decided, and I am happy to say I formed a part thereof, that those who want to help themselves should receive support so as to stop them from relying on the support in the future. We treated this as investment. This support was directed towards the cooperative movement, and while I am not a kind of person who easily bestows praises on people, I wish to stress the fact that this investment was a good one. In other words, it paid off both for the cooperative movement and for the country. The cooperative movement has not only become authentic, but also it has started to gradually eliminate the problems and strengthen its position in the new Polish economic system. The National Bank of Poland exercises a kind supervision over the cooperative banks, however it needs to be noted that the true kindness does not mean toning down the requirements. This kind supervision gives me an opportunity to observe the cooperative banks from a closer perspective, to become acquainted with people who hold managerial positions in those banks. Consequently, I am convinced that cooperative banking has a leading role to play. There are tasks which can be better performed when in close, someti- mes direct touch with a customer. I believe that each and every robust economy will require a dynamic growth, launch of new, initially small enterprises, which should have partners originating in the financing system. In Poland, cooperative banks are examples of such partners. Finally, I would like to corroborate the statement that the revived cooperative banking constitutes an example of a successful transformation, a phenomenon that was foreign to some post socialist country. In this regard, Poland is an outstanding example. It is one of the successes of our post socialist transformation – revival of the cooperative banking in the competitive environment. The real success in the economy comes when a given entity is able to sustain and strengthen its position in the atmosphere of a healthy competition. This is something that people who have contributed to this success can be proud of. I am deeply convinced, that the revitalized cooperative banking in Poland is to play an important role in symbiosis and in close contact with the existing and future entrepreneurs, in symbiosis and in close contact with local societies. This is a point when two reforms come together: this of a cooperative banking and that of local governments, in particular at its most important level, i.e. the lowest level, the closest to people. The National Bank of Poland as a regulatory and supervisory body will continue to exercise its kind supervision. It does constitute a pre-requisite for development in the competitive environment. Thank you very much. 7 President INTERNATIONAL CO-OPERATIVE BANKING ASSOCIATION He is working voluntary and professionally in co-operative banking for 30 years. For many years President of SB of Co-operative Bank in Legnica. From 1993 he is the President of National Union of Co-operative Banks. In consequence of his managerial working co-operative sector gains very good banking – financial results. Consolidation of co-operative banks has occurred. He participated in forming present three associating banks. He participated in European Association of Co-operative Banks in Brussels. He cares with dignity and responsibility on interest of the whole co-operative banking sector both domestically and abroad. From October 2002 he is the President of International Co-operative Banking Association. He is recognized domestically and internationally as authority of co-operative banking. EUGENIUSZ LASZKIEWICZ MISSION OF COOPERATIVE BANKS IN THE WORLD EXPERIENCES AND PROSPECTS The first credit unions were created in Europe in the middle of the 19th century in order to protect the poorest from usury and exploitation. In those times when human rights were yet not observed and profit maximization was the only value, cooperative initiatives were glorious acts of solidarity and mutual aid. In the following years, the tide of European emigration transferred the idea of cooperation to various parts of our globe-South America and Asia. 8 In the 20th century the cooperative movement, including cooperative banking, further developed. Cooperative banks appeared as rank-and-file initiatives in Italy, Switzerland, India and Brazil, or as initiatives put forward by the state authorities in the US, Japan or Greece. They aimed at protecting farmers and small entrepreneurs from usury and taking up activities for the welfare of their members. Cooperative banks offered their members credits and services at low cost and allocated a part of their profit to educational activity in their local communities. In order to protect their business more effectively, cooperative organisations began to associate into supranational structures- both regional and global. In 1895, in London, International Cooperative Association was founded. It associated national and international associations of all trades and sectors: agriculture, banking, saving and crediting, power industry, industry, insurance, fishery, housing, tourism and consumption. The need to found a supranational structure was shortly noticed by cooperative bankers, who established International Cooperative Banking Association. This organization acted as a forum for exchanging mutual experiences of cooperative bankers worldwide. The association became a platform that initiated care of the sector’s business, especially its clients and shareholders. The newly established organisations had to face a range of challenges in the 20th century. The ongoing process of globalisation turned out to be one the most serious challenges in every walk of life, including finance and banking. Procedures and norms of banking operations were standardised as a consequence of consolidating processes. These changes have turned out to be profitable for large commercial banks. However, they pose a serious challenge for cooperative banks, as they appear time-consuming and involve considerable financial outlays. The changes do not reflect the specific nature of cooperative banks, which have to meet requirements identical with the ones imposed on commercial banks. The cooperative movement, whose mission and main goal involve mutual help and supporting initiatives in the economically weakest communities, has to respond to a serious challenge: how to preserve its current profile of activity in the face of the ongoing process of globalisation. Globalisation is not a fully favourable or friendly phenomenon. However, it has to be admitted that globalisation, which involves free flow of goods and services, has led to numerous international investments in the less developed countries that have provided workplaces to their citizens and accelerated the process of raising the standard of living. Globalisation has also contributed to the increased exchange of information and has been a step forward towards 9 better intercultural understanding between nations. On the other hand, this process has also led to a range of unfavourable phenomena. The governments of many countries have been forced to change their economic and social policies. Liberalisation of markets, as well as the open door policy, has enabled large international corporations to create their own, supranational policy, which is unfavourable to particular countries. In the developing countries of Asia and the Pacific region, poor social groups are still marginalized. Income stratification is also growing. Contrary to expectations, the number of workplaces for women in the region of Asia has not increased. The notion of globalisation is often associated with unhealthy competition, rivalry, unemployment and corruption. In the banking sector globalisation signifies further consolidation and standardisation of banking operational forms and courses. The process of consolidation may have serious consequences for cooperative banks or even threaten their existence, as they provide services to local markets or customers with less abundant capital resources. The process favours large entities at the cost of smaller ones. The fulfilment of the mission of cooperative banks may be also impeded due to the fact that decision-makers ignore the needs of the cooperative banking sector. The Basel Agreement 10 and the International Standards of Accounting were aimed at streamlining and standardising the banking system in the world. However, the forecasted solutions pose a serious threat to cooperative banks, as high requirements imposed on the banks do not comply with the specific nature of cooperative banks. The necessity to comply with the new requirements, imposed on cooperative banks, may involve merging of small, local banks into larger structures, which may drift cooperative banks and their customers apart and loosen their close contact. It has been necessary to carry out intensive activities to inform the decision-makers about the specific nature of cooperative banks in the world, so that the implemented changes would comply with their specific nature. The development of the Interpretative Note to IAS 32 Financial Instruments, which is conducive to cooperative banks, may be put forward as an example of the sector’s efficiency in solving common problems. The problem referring to IAS 32 Financial Instruments and its consequences for cooperative organisations became evident at the beginning of 2003. It mainly referred to the treatment of the members’ shares. According to the draft of IAS 32 Financial Instruments, the membership shares were to be transferred from the position of the own funds to liabilities. This state of affairs would undoubtedly shake the economic balance of the cooperative banking sector, and would simultaneously lead to the drop of prices in the face of the prudential norms. Such a strict and groundless approach raised a storm of protest from cooperative organisations, including the International and European Cooperative Banking Association, represented by the National Cooperative Banks Association. Initially, IAS Board seemed insensitive to the submitted postulates and IAS Financial Instruments were worked on behind the closed door, excluding the sector organisations. In October 2003 the representatives of the International and European Cooperative Banking Association and the European Commission finally met to discuss threats resulting from the draft of IAS 32 Financial Instruments. The commissioners expressed their approval for the provision of the technical solution of IAS 32 Financial Instruments by the representatives of cooperative banks. The specially appointed working groups developed ideas, which were subsequently presented to the European Commission and IAS Board. As a result, IAS Board realised the core of the problem, which had appeared due to insufficient knowledge of the project initiators about the nature of the cooperative banking. Representatives of cooperative banks were invited to the sessions organised by the International Accounting Standards Committee Foundation (IFRIC). Direct consultations resulted in a unanimous approval of the Interpretative Note by IFRIC referring to the cooperative membership shares, which satisfied cooperative banks. The note stipulates the conditions that allow for the acceptance of the membership shares of cooperative banks as equity. Membership shares were recognised as the capital, provided that an entity possesses the unconditional right to reject discontinuation. Moreover, membership shares were acknowledged as the capital within the limits of law of a given country, and other legal regulations or an internal code of a given entity. The achieved success has confirmed the assumption that the power of cooperative movement lies in unity and cooperation. Only common, international initiatives may properly strengthen and protect the sector from the negative consequences of globalisation. The activities to be taken should base on the values and rules of the cooperative movement, including mutual aid and care of its client: the owner. The operation of the European cooperative banks may be put forward as a paragon of effective fulfilment of the idea and mission of cooperative banking. Cooperative banks have a firm position on the European banking market. They are present in all 25 member countries of the European Union. As a result of long-standing work, cooperative banks may take 11 pride in the capital of 38 million shareholders and 100 million clients. Currently, at the beginning of the 21st century, the European cooperative banks recognize their customers’ needs and contribute to long-standing and responsible development of the European economy. They join the EU programmes aimed at bridging economic discrepancies between particular European regions. A range of counselling centres and financial agencies, which offer free assistance with filling out the EU grant application forms and search of additional financing sources, operate vigorously at numerous banking institutions. The aims of the cooperative mission of cooperative banking strive towards complete adjustment to the EU regional development programmes. In many countries they are present even in the smallest administrative units, including the areas which face serious unemployment or are less economically developed. Very often they are the only entities that offer banking services in such regions. Following their mission, they provide services to the market niches, which do not attract commercial banks. They also educate local communities about economics and business, and stimulate enterprise development. The activities run by the European cooperative banks have turned out to be effective. This example shows the importance of cooperation for creating a new, better future. The results of similar cooperation within the initiatives taken globally give hope for solving numerous problems. Cooperation for public welfare, the notion which characterizes the idea of cooperative movement the world over, appears conducive not only to the cooperative members’ well-being. It contributes to the economic growth in the local communities, where they operate. However, in order to provide adequate conditions for operation, some operational frameworks are necessary. Therefore, one of the most fundamental elements of the ICBA and its constitutive organisations strategy involve strong lobbying among decision-makers, aimed at legislation which complies with the specific nature of the cooperative banking sector and its special and exceptional role in local communities. One of the most acute problems the world has to face is the division into the rich north and the poor south. The fact that only every fifth inhabitant of the Earth lives in welfare, leads to a range of global problems, including terrorism. Therefore, the cooperative movement should strive for the reduction of the existing differences through influencing the policies of individual countries and activity of the international structures. 12 Supporting enterprise development and economic education of the local communities are the statutory aims of cooperative banks. ICBA, which acts as their representative, spares no pains to popularise the idea of cooperative banking and prompt establishment of new banks in the poorer parts of the world. The idea of cooperative banks was evolving during the development of predatory capitalism, as a rank-and-file initiative of the poorer social classes and was alternative to the strict rules of the market economy, as it offered a chance for well-being. The history of cooperative banking development and the current position of cooperative banking have demonstrated that the activities taken up at that time were entirely right. It is worth sharing these experiences to facilitate development of the poorer and less economically developed regions. The experiences and results achieved by cooperative banks so far show that the high position held by them is not accidental. Regardless the ongoing, inevitable global changes, the cooperative movement has been growing. Cooperative members have proved, and are still proving, that they play a very important role in the economic reality worldwide. 13 Director BANCO CREDICOOP Uruguayan, Been born in Paysandú city on 24th of March 1942 Married with Alba Vidiella - Two daughters and one granddaughter It held the following positions in cooperative companies: 1. President of COFAC - Cooperative of 2o degree (1984 - 1986) 2. President of the National Cooperative of Saving and Credit - COFAC (1987-1993) 3. President of the Uruguayan Confederation of Cooperative Organizations (1988 -1996) 4. Director de INTEGRACION AFAP SA. (Administrator of Provisional Funds 1996-1998). 5. Vice-president Mundial of ACI (1998-2002) 6. President of the Cooperative Alliance the International of the Americas. (1998- 2002). 7. Member of the Executive Committee of the Association the International of Cooperative banks. AOIBC. (1993 -1998). Present responsibilities: • Institutional Adviser of COFAC from year 1993, • President of the Camera of Cooperatives of Financial Intermediation CACIF from its foundation. (1994). • Honorary President of the Uruguayan Confederation of Cooperative Organizations: CUDECOOP. • Vice-president of the Association of Cooperative banks - AIBC from 1993 to the date. • President of the Regional Committee of Financial Cooperatives of Latin America. MIGUEL CARDOZO 14 THE URUGUAYAN CO-OPERATIVE BANKS WAY TO OBTAIN CAPITAL COFAC’S EXPERIENCE Capitalization has always been one of the most frequently debated topics in co-operative forums. Capital has always represented a challenge for co-operatives, the focus of attention for many of our institutions around the world and, in general, a issue successfully addressed. However, you all might know about opposite experiences, cooperatives that have been unable to obtain the required capitalization by using standard procedures, i.e.: 1. member contributions or, 2. surpluses In addition, more strict levels of capitalization have aggravated a problem already difficult to solve. At the same time, I think this two factors make the problem worse and worrying: a) Regulations, enforced by central bank bodies, that do not recognize co-operatives as distinct entities b) Aforementioned regulations being enforced in regional and/or local economies exposed during many decades to policies highly dependent on developed countries, to unfair trade practices and to resource transfers, through foreign debt and patents, making cooperative business management a more complex task in the growing dynamism and complexity of the economic globalization framework The Capital in Co-operatives of the Region The ICA statement adopted in Manchester in September 23, 1995, defines the capital of the co-operatives not only based on its nature, source or functions but laying special emphasis on member’s economic participation: “Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership”. It is clearly pointed out that members must contribute to the capital of their co-operative; however, no minimum contribution is settled, and that seems reasonable since it is a universal principle. Even though this is not the complete definition this matter requires, it is a great step forward from the previous definition that only mentioned “limited interest” to the capital and established members’ surplus return proportionally to the operations they made. However, the capital plays a key role in the development of any economic activity and when it comes to co-operatives it is their main source of funds, representing, as well, a guarantee for third parties that work with them. 15 Moreover, the socio-economic profiles of the great majority of members, with low or middle income, prevent individual contributions from being an efficient way to raise capital. Hence, our businesses are limited to raise capital from the slow accumulation of member contributions and to save reserves from the portion of surpluses that they managed to rescue from generalized co-operative return. This represents a vital obstacle, extremely aggravated by the enforcement of prudential regulations established by the Basel Accord as defined for big banks, without taking into consideration the particular characteristics of the co-operative movement. COFAC has to meet central bank regulations that require a capital representing 10% of the risk assets. Member contributions and surpluses accumulated in the course of the years have been the traditional ways to obtain capital. Currently, the minimum required member contribution is 1,200 pesos (equivalent to US$ 40). Members can also contribute by reciprocity through credit operations: in consumer loans up to 10% of the loan and in business loans from 2% to 5% of the loan. Another way to achieve capitalization is through co-operative shares with fixed interest and share redemption in 7 to 10 years; in 2003, COFAC has placed 4 million dollars of its co-operative shares. In addition, subordinated loans are used to meet the equity/risk-assets ratio: to date, COFAC has 9 million dollars placed in subordinated loans. Voluntary social parts: This is a new instrument. COFAC is currently reforming its articles of association in order to be able to use this mechanism. Voluntary social parts are permanent social parts with fixed income and no redemption date. Four million dollars will be issued and a parallel market will be established in order to place these social parts among members. Finally, let us dream: The sixth principle of the ICA Manchester Statement on “Co-operation among Co-operatives” points out: “Co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional and international structures”. In this context, wouldn’t it be reasonable to claim a more active role of the ICBA in managing the aid provided by the economically stronger co-operatives to the economically weaker ones allowing them to grow and to better serve their members and communities? Let us follow the example of the ICMIF* that has established a Project Support Fund and a Development Committee: I propose that the ICBA Executive Committee studies this matter. Thank you very much. 16 General Director BANQUE CENTRALE POPULAIRE HASSAN EL BASRI Mr. El Basri holds a Doctorate in Political Science from Mohamed V University, Rabat, and a Postgraduate Degree in Management from High Institute of Commerce and Business Management, Casablanca (ISCAE). He held various positions of responsibility in Ministry of Finance from 1983 to 2001. The same year, he joined Crédit Populaire du Maroc as Presidential Advisor in Banque Centrale Populaire. Subsequently, he was Executive Vice-President in charge of Reform and Relationships with Member-Owners. Since 2002, he is Executive Vice-President in charge of the Resources and Production. HOW COOPERATIVE MOROCCAN BANKS STRENGTHEN THEIR EQUITIES Presentation of Crédit Populaire du Maroc The Crédit Populaire du Maroc is a grouping of banks made up of: • Banque Centrale Populaire, a limited company listed on the stock market; • Banques Populaires Régionales, companies formed as a cooperative with variable capital, currently 11 of them. This structure of Crédit Populaire du Maroc is the result of a law enforced in 2000 which has reformed the Institution through two main lines: • The transformation of Banque Centrale Populaire from its cooperative form to a limited 17 company with fixed capital. This transformation was a prerequisite for the introduction of this bank on the stock exchange. It is worth noting that this introduction has been achieved in July 2004, and has been a real success; • The maintaining of the regional popular banks’ cooperative form while it is sought, on the one hand, to revitalize their management’s mode endowing them with a board of directors and a supervisory board, and on the other hand to strengthen their financial basis, recommending a set of mechanisms intended to strengthen the social part. The Crédit Populaire du Maroc holds today a leading position in Morocco, with a market share amounting to 30% of deposits and 24% of loans. The Institution is also first in the national rankings in terms of banking network with 470 branches. CPM is also characterized by a strong capitalization, the most important one in the banking sector with an equities ratio - cooke ratio of about 22%. It is worth noting that these equities are characterized by the predominant part of reserves in relation to capital, as the following table shows: Item Amount (in M DHS) % Capital 882 17 Reserves 3.541 66 Subordinate liabilities 530 7 Result 387 10 TOTAL 5.340 100 How do regional popular banks manage to mobilize the funds they need and to strengthen their equities? This is the question we are going to try to answer, while examining the aspects concerning the capital and those concerning equities. I – THE CONSTITUTION OF THE CAPITAL. Due to their form as cooperative, the capital of regional popular banks is exclusively composed of social shares which are subscribed by the customers who, in this way, become partners. Customers generally subscribe to social parts when they are offered a service, in particular loans according to a scale fixed by the banks. Thanks to their dynamism and their proximity towards the customers, Moroccan cooperative banks have been able to rally a vast portfolio of customers – partners, which are today about 440.000. However, we think that these banks have not been able to exploit the potentials of these partners, basically because the social share is not so attractive. This lack of interest for the social share can be explained by several reasons: • The general rule according to which the social share is subscribed and reimbursed at its par value, does not make of it an attractive placement; 18 • The subscription of social shares is not considered as a profitable placement by the partner. On the contrary, the subscription in social shares is perceived as a constraint, an obligation. In some cases, the social share is part of “ file fees”, which increases the banking service’s cost , compared with that of the competitors, from the point of view of the partner; • The one person / one voice voting rule does not encourage great investments in social shares, knowing that a cooperative bank’s control could be avoided by setting a subscription ceiling; • The social share’s “no negotiability” insofar as this can only be bought back by the bank, after repayment of the loans which generated the subscription. We consider that the lifting of these obstacles would contribute to make the social share more attractive, and consequently the partners’ contribution to the capital of cooperative banks. The objective is to make of the act of subscription, a voluntary placement act justified by the advantages it grants: profitability, negotiability, active participation to the bank’s social life, as the bank itself would take advantage of this situation since they can call for the partner’s contribution when in need of equities. In this sense, our banks have introduced some modifications at the level of the rules governing social shares, in particular: • The creation of new categories of social shares; • The appreciation of the social share; • The right to vote and the partners’ participation in the management of the company 1- THE NEW CATEGORIES OF SOCIAL SHARES In general, the subscriptions in social shares were limited to those imperatively subscribed when the partner is offered a service from their bank, in particular loans. Besides, the level of these subscriptions is set by internal rules in the bank, which, added to the above mentioned constraints, does not allow to use all the potential of the partner’s subscription. While maintaining this category of social shares, the new statutes of regional popular banks have made provision for two new categories: • Ordinary social shares with optional subscription; • Privileged social shares. Ordinary social shares with optional subscription are different from those with compulsory subscription, in the sense that their subscription is not linked to the loans, and can therefore be paid back to the partner at any time. Besides, they give the same rights as the parts with compulsory subscription. 19 As for privileged social parts, they are a real investment tool for the partner, and present various differences in relation to ordinary social shares: • They give no right to vote to the general assembly, neither to the candidacy for the supervisory boards; • They give right to a priority return on investment, compared to ordinary social shares. This return on investment can be postponed to another financial year if the current year shows a deficit; • Last, they can be sold among the partners, while social ordinary shares can only be bought back by the bank. We think that the features of the privileged social shares are of interest for investors especially if they are combined with the other innovations, such as the appreciation of the social part, and the setting of a high subscription ceiling (see infra). Their transferability among partners is likely to give the social share another dimension which could lead to the emergence of a “social shares’ market”. In addition, the new statutes of regional popular banks have also made provision for the creation of bonds convertible or not in social shares. This product, which yield is guaranteed while being lower than the social share’s return on investment, could be considered as an initial product offer for new subscriptions in the capital of BPRs, through the recruitment of new partners. 2 – THE APPRECIATION OF THE SOCIAL SHARE A major obstacle to the revitalization of the social share resides in the fact that it is not valorised and can only be paid back to the partner, to the best of the cases, at its face value. This situation was unusual especially that the face value is only assured when the inventory of the current fiscal year reaches this value. However, when that inventory shows a value above the nominal value, the repayment is only made at this par value. In other words, the bank could pass the losses on the partners, but cannot make them benefit from the benefits it shows. The new statutes of regional popular banks in Morocco have practically reversed this rule, while foreseeing, on the one hand, that the social share’s value will be valorised when the bank shows benefits, and on the other hand, that the social share’s repayment value cannot, in any case, be lower than the face value. The formula set for the appreciation of the social part is as follows: • The creation of a reserves account called “valorisation reserve” 20 • The allocation to this account of 10 % of the profits of every fiscal year • The new value of the social share is calculated adding the amount of the valorisation reserve to the capital, divided by the number of social shares. This value is applicable at the subscription as well as at the repayment. Considering that the importance of the results can have a considerable impact on the social share’s value, various rules have been planned: • The value of the annual variation cannot be superior to 20% of the face value; • The value of the social share resulting from the successive annual variations cannot exceed twice the face value. This limit can be reduced by the possibility, for the general assembly, to modify the social share’s face value. Thanks to this valorisation, the social share should become more attractive for the securing of the loyal existing partners and the recruitment of new ones, because we think it presents a double advantage: • The value acquired by the social share is added to the return on investment that the member receives annually; • The face value of the social part is guaranteed, unlike other tools, in particular, the normal share. 3 - CEILINGS OF SUBSCRIPTION, RIGHTS TO VOTE AND INVOLVEMENT IN THE GOVERNING OF THE COMPANY The above mentioned innovations could only have their full effect if they go along with other complementary measures concerning, in particular, the ceiling of subscription, the rights to vote and the partner’s involvement in the governing of the company. Concerning the subscription ceiling, it has always been limited to a given number of social shares which subscription is compulsory according to the volume of the loans granted. To allow the partners to subscribe to the compulsory social parts, the optional parts and the privileged parts, the rule set in Morocco was to set this ceiling of subscription to 5 % of the capital of the bank. Concerning the rights to vote, the one person / one voice rule has been abandoned, and the rights to vote have been set proportionally to each member’s part in the bank, on the understanding that the ceiling of the rights to vote is limited by the ceiling of subscription, which is of 5%. As for the members’ participation to the governing of the company, the regional popular banks have been transformed in banks with a Board of Directors and a supervisory Board. This formula enables to separate the functions of management assumed by 21 the professionals who are the members of the Board of Directors, from those of control assumed by the members through the supervisory Board. In this new organization, the customers partners are called to participate more actively first in the life of their bank, through the general assembly in which they participate, then in the Supervisory Board in which they can be elected and, finally, at the level of the Management Committee, the highest authority of the Group since this is composed of five Supervisory Board Presidents. 4 - OTHER POSSIBILITIES TO INCREASE THE CAPITAL Two other possibilities are planned to strengthen the capital of the Moroccan cooperative banks in the event this would be insufficient, according to the rules and regulations: • The increase of the capital by incorporation of the reserves; • The participation of Banque Centrale Populaire to the capital of a regional bank. The increase of the capital by incorporation of the reserves would result in a free distribution of social shares to the partners, which include the same advantages as the normally subscribed shares This practice came up against the cooperative principle according which partners have no right on the reserves which remain granted to the institution. Without contravening this principle, the law governing our Group allowed the distribution of reserves when it aims at the increase of the bank’s capital. It generally comes with a subscription of new social shares, while being limited to 25% of the reserves. As for the participation of the Central Bank to the capital of the regional banks, this remains an alternative when the other possibilities do not make it possible for a bank to have the minimum authorized capital. This participation is often temporary since the central Bank withdraws from the capital of the regional bank as soon as this one reaches this authorized minimum. II – THE OTHER CONSTITUENT COMPONENTS OF THE EQUITIES 1- Reserves The above mentioned importance of the reserves in the regional cooperative banks’ equities (2/3 of the equities) is understandable by the importance of the profits all along the fiscal years and the profits’ distribution policy resulting from the cooperative form of these banks. Indeed, this policy is generally limited to the concession to the partners, of an annual interest of the social part which, in spite of being high, leaves the bank a great part of the profits affected in reserves We consider that this situation is going to last and that the reserves will go on constituting a major part of the regional cooperative banks’ equities. 22 2 – The subordinate liabilities Regional cooperative banks are granted subordinate debts through the Support Fund of Crédit Populaire du Maroc. It is worth mentioning that this Support Fund, which is provided for by the law in order to reinforce the cohesion and the solidarity of the Group, is funded by a compulsory contribution of all the organisms forming the Crédit Populaire du Maroc - the Banque Centrale Populaire and the 11 regional banks - at the rate of 2% of their annual turnover, and by a complementary contribution, in case the first proves to be insufficient, taken from the net result of these organisms. This Support Fund is meant to allocate, either subsidies to banks showing a deficit, or restructuring loans for those with a weak financial basis. The repayment of these loans is often bound to the return to a better financial situation, which entitles them to be considered as subordinate debts and, consequently, as equities, but second degree equities, provided that their amount doesn’t overpass the amount of first degree equities. Three of our 11 banks have used these loans, particularly those that have been exposed to a high default risk which has caused a real deterioration of the quality of their assets. 3 – The regroupings The regrouping of regional cooperative banks has also been used as a means to strengthen our banks’ equ- ities. This regrouping often takes the form of merger absorption between two banks presenting some connection elements - geographical proximity, complementarities at the level of the activity. Indeed, the objectives of the regroupings are multiple, in particular economies of scale, but they lead to a substantial strengthening of the new entity’s equities, by the addition of the equities of the two entities having been merged. This experience has been led repeatedly by our Group since our banks have decreased from 21 regional banks in 1997 to 11 banks today. III – CONCLUSION Today, one of the major assets of Moroccan cooperative banks within the Moroccan banking system is the solidity of their equities. In their annual rating, Standard & Poor’s, considers that «the capitalization of the Group very high and remains the most important in the Moroccan banking sector „. It is worth noting that this capitalization has been possible thanks to the internal mechanisms of the Group which didn’t need to go to the capital markets. We consider this a major asset for our banks, which should allow them to maintain their cooperative shape and to avoid, thus, the risks of “demutualization”. 23 Vice President RABOBANK GROUP Mr. Kuijpers holds a degree in economic sciences of Tilburg University. He joined Rabobank in 1981 as an economist in the Economic Research Department. Subsequently, he was Head of Savings Department within the Local Bank Section; Head of Money Market and Forex Department of the Financial Markets Division; Managing Director of Rabobank Ireland Ltd; Global Business Manager Health Care within Rabobank International; Director of Strategy for Rabobank Nederland and Director of Products within the Corporate Clients Division. Since February 2004 Mr. Kuijpers is advisor to the Executive Board of Rabobank Nederland. ARNOLD KUIJPERS RABOBANK, CAPITAL STRUCTURE AND DEVELOPMENT Rabobanks emerged in the late 19th century in Dutch rural areas in order to relief the deprived circumstance farmers lived in. Today, Rabobank Group represents a major financial institution in Europe with 8 million customers, of which 1.5 million are a member of one of the 325 local cooperative banks. It employs 57,000 staff and total assets amount to more than € 400 billion. It has an international presence with 222 offices, mainly based on a food- & agri franchise. The financial solidity has been awarded with the highest (AAA) rating. In the Dutch retail banking, Rabobank is market leader in virtually every field: market share saving deposits 38 %; home mortgage loans 26 %; small and medium sized enterprises 39 % and the primary 24 agricultural sector 85%. Through Rabobank, cooperative banking is strongly rooted in the Netherlands, also relative to the other European countries where cooperative banks represent about 20 % of total retail markets. Member’s liability Unlike almost all of the other cooperative banks in Europe, Rabobanks have been established without the creation of shareholders capital. Members are not shareholders at the same time and their voting power is only based on membership subscription. The reason for this is that the legal basis for establishing cooperatives in the Netherlands was the law on associations and not corporate law. Corporate law limits the liability to subscribed share capital; association law does not have such a restriction. In order to secure the financial solidity of the bank, its borrowers were required to become a member, meaning that they were jointly and severally liable for all the bank’s debt. In this way the borrowers, in their capacity of members, provided sufficient comfort to savings depositors for the bank being appropriately funded over time. For most part of the existence of Rabobank, (unlimited) liability by the members of the local banks and reserves accumulated by retained profits have been the only sources of capital for Rabobank. Those reserves are being considered to be ‘capital in a dead hand’, no one is entitled to it. When a local bank would decide to liquidate, the capital will not be distributed among its members. There- fore it provides for them no incentive to demutualise. Retained profits Over time retained profits accumulated (no dividends) to an amount of € 11 billion by the end of 2003. Gradually, those reserves substituted the significance of members’ liability for the purpose of capitalisation. For this reason, the liability for each member was limited to NLG 5000 (€ 2250) in 1980 and it was abolished in 1998. Members are no longer financially liable in case their bank would go bankrupt. Accumulated reserves are abundant to meet the solvency requirements of the supervisory authorities. Therefore it was considered that it should no longer constitute a hindrance to some of its potential customers to become a borrower (and member) of the bank. Eventually also the obligation to become a member, when money was borrowed, has been abolished. Capital allocation The significance of Rabobank Nederland, being the central bank of the group, raised over time. Apart from being a service provider to the local banks, the Dutch Central Bank delegated supervisory authority in respect of the local banks in 1952. Furthermore Rabobank Nederland started to perform banking business itself (treasury, corporate banking, international banking). For this purpose it needed capital, much more than the amount of subscribed share capital by the local banks. It was decided at the 25 time that 40 % of group profit should be allocated to Rabobank Nederland. This required a redistribution of profits from local banks to Rabobank Nederland. The instrument for steering the profitability between Rabobank Nederland and the collectivity of local banks was the interest rate on the deposits held by local banks with Rabobank Nederland as a consequence of the liquidity requirements of the Dutch Central Bank. Eventually, when the commercial activities of Rabobank Nederland generated sufficient profits, this ‘re-allocation’ of capital was ended. Rabobank Nederland’s own capital enabled it to make important investments and acquisitions in order to widen the product range local banks could offer. Insurance (Interpolis), leasing (DLL) and asset management (Robeco), for example, are now delivered by subsidiaries wholly owned and governed by Rabobank Nederland. In some European cooperative systems where the central institution was not capitalised sufficiently for such acquisitions, local banks and their regional organisations became shareholder of the subsidiaries as well, which complicates their governance. Cross guarantee system In 1979 a cross guarantee system among the local banks and Rabobank Nederland (and some of its subsidiaries) was introduced. In an amended law on the supervision of credit institutions (1978) this was stated as a prerequisite for Rabobank Nederland and the local banks to be regarded as one entity for su- pervisory purposes, e.g. for solvency and liquidity requirements. It became also a requirement for having the supervisory authority on local banks delegated to Rabobank Nederland. The delegation of supervision to Rabobank Nederland and the existence of a cross guarantee system contributed a lot to the relatively high level of coherence of Rabobank Group compared to other cooperative systems. As a consequence Rabobank Group can act relative effective and efficient in today’s dynamic markets. Having a cross guarantee system in place the total capital of the all the constituent parts of Rabobank is considered as group capital. Because of this Rabobank Nederland has obtained an extraordinary high (AAA) credit rating, reducing the funding costs. This also applies to the costs of borrowings of a subordinated nature providing Rabobank with the opportunity to raise capital at relatively low costs. Membership certificates Acquisitions (depreciation of goodwill) and fast growing business (solvency requirements) increased over the last 15 years the need for capital more than could be provided by retained profits. In light of this Rabobank Nederland explored new ways of raising capital; trust preferred securities and membership certificates. The trust preferred security is a hybrid capital market instrument offered to the professional investment market. Basically, it is subordinated perpetual paper that generates an interest-related income for 26 the holder with some dependency on the profitability of Rabobank Group. The holders have no voting rights; they consider this mainly as a bond, that can be redeemed by Rabobank but it has no obligation to do so. Because of the relatively high remuneration and the low risk due to the financial solidity of Rabobank, this paper is regarded as very attractive to investors. In order to favour the members of local banks, a capital instrument was derived from the trust preferred security especially for them. This paper is called ‘membership certificates’. Compared to trust preferred securities, the membership certificate is structured in such a way that it represents a higher quality of capital for Rabobank. The membership certificates provide the members with a unique (relatively high reward and low risk) investment opportunity and, at the same time, Rabobank Nederland with tier one capital. Up to now membership certificates have been placed for an amount of about € 4 billion. Public equity markets An instrument for capitalisation not used by Rabobank, but by two other cooperative banking systems in Europe is raising share capital via the public equity markets (IPO). Both the central banks of Okobank and Crédit Agricole are listed at their domestic stock exchange. The introduction of external shareholders into a cooperative system creates tensions in respect of control. As long as capital is provided by members only, the voting power as member of a coope- rative bank and the voting power as capital provider coincide within the same group. When ownership is shared with external capital providers, also voting power will have to be shared. Rabobank would only consider such a dramatic move when this would be crucial for its further development and significance. For instance, in case a huge consolidation in the European banking industry would require Rabobank to acquire or merge with a substantial financial institution. Raising capital by the issuance of public shares would be limited to less than 50 % of its ‘market capitalisation’ to safeguard the majority of voting power with the present shareholders, the local banks. This would be required to secure the cooperative status of Rabobank for the long term. The amount that can be raised by an initial public offering would not be determined by the current volume of capital but mainly by its profitability. Composition of capital Currently the capital of Rabobank Group, € 17 billion, is composed of: Retained profits € 11 billion Membership certificates (tier one capital) € 4 billion Trust preferred securities € 2 billion Member liability abolished Subordinated loans (tier two capital) very small amount The amount of capital translates into a comfortable (tier 1) BIS ratio of 10,9 %. A more sophisticated assessment of 27 required capital is now being introduced by taking the perceived risks of the various credit exposures into account (RAROC) in conjunction with the effort of making Rabobank compliant with the advanced internal rating based approach of Basel II. It is to be expected that this will reduce the required capital for Rabobank in which case the BIS ratio (level of capitalisation) will increase. Development of capitalisation The development of capitalisation during the last 75 years in figures (€ million): 1928 2003 annual increase for the required capital. Therefore the issuance of membership certificates was needed to support to fast growing business of Rabobank during the last years. Profitability as an objective In general the basis for capitalisation is profits and this also determines the level of achievable growth by banks in the long run. This also applies to cooperative banks, they cannot escape this economic reality, but for them it usually poses an additional issue. Cooperative institutions are not established for creating profits, but to serve its members and customers. Its natural orientation, emphasising favourable customer conditions, is not fully aligned to generating sufficient profit to secure long term viability and significance. To achieve this, nevertheless, requires good governance, management and discipline in all parts of the organisation and trustworthy and efficient relationships among the constituent parts. Conclusion As it comes to structuring and raising capital by a cooperative banking group, Rabobank’s experience reveals that: • there are many ways for cooperative banks to raise capital • the applicability of each way is dependant on the stage of development of the group • the implications of each way go far beyond the financial scope only • however, a sufficient level of profit is a requirement in any way Profit (after tax and loan losses) 1 1,403 Capital 10 17,270 Assets 233 403,305 P/C P/A C/A 10 % 10 % Average (1928-2003) 10 % 8.1 % 8.7 % 0.4 % 0.35 % 0.4 % 4.3 % 4.3 % Capital relative to assets was, by coincidence, the same in 1928 and 2003. When the assets of last year are risk weighted (BIS I) this translates into a C/A ratio of 10,9 %. During the last 75 years both the volume of assets and of capital increased on an average with 10 % annually. A pricing policy that supported growth (increasing market share) in a competitive environment implied that the increase of profits could not be maintained on a level that would fully suffice 28 President and General Director CRÉDIT COOPÉRTIF GROUP Jean-Claude Detilleux is chairman and chief executive officer of Crédit Coopératif Group since 1992. After a BA in literature and a post-graduate degree in public law, he graduated from the Paris Political Science Institute in 1963 and joined ENA, from which he graduated in 1968. Civil administrator in the Treasury Department of the Ministry of Economic Affairs and Finance from 1969 to 1973, he joined the French Permanent Representation at the European Communities in Brussels from 1973 to 1976 as a financial attaché. In 1976, he returned to the French Treasury Department where he became a chief office manager. Jean-Claude Detilleux joined Crédit Coopératif Group in 1980 as a chief executive officer, and became chairman of the board in 1992. Jean-Claude Detilleux is also, among other mandates, member of the board of Banque Fédérale des Banques Populaires, chairman of Groupement National de la Coopération (GNC), member of the board of the International Cooperative Alliance (ICA) and member of the European Commission Professionnal Chamber of the Enterprise Policy Group JEAN – CLAUDE DETILLEUX 29 Presentation of the Development fund for social economy in Central and Eastern Europe (COOPEST) Introduction: The creation of a development fund for social economy enterprises in Central and Eastern Europe is a project resulting from the first social economy Conference in Central and Eastern Europe, which had been held in Prague in October 2002. This project was supported by the actors of social economy in Western Europe, in order to imagine solutions and tools allowing the development of social economy in Eastern Europe, seen as a fundamental Pan-European question: the costs not to develop social economy in the new accessing countries being infinitely heavier, in the long run, for all the citizens of the future EU. This project had then received a broad approval of the participants and the support of the European Commission. The first aim of the development fund COOPEST would be to improve medium and long term financing of social economy companies in Central and Eastern Europe by reinforcing their own funds and providing them with guarantees. This Fund is based on local and national partnerships and adapts as much with the legal context than with the needs to satisfy in each country. Now that the movements of social economy are preparing for a second international Conference in Central and Eastern Europe, which will be held in Cracow in October 2004, it is time to give a progress report on this ambitious project and to present its evolution during the last two years. Presentation of the financial partners Following the Prague Conference, a working group was created to conceive the COOPEST development fund. Credit Coopératif took a great implication in this working group, with Credit Mutuel, which accompanies this project since his origin, Group ESFIN-IDES, a company of venture capital of the social economy linked to Crédit Coopératif and Crédit Mutuel. In addition to these three French financial actors, the Italian development fund Coopfond took part of the initial round table, as well as CECOP, an institution representative of labour co-operatives on the European level and the principal organizer of the Cracow Conference, SOFICATRA, a European company of venture capital which has been coordinating the pilot projects carried out in the context of this fund. More recently, the European Federation of Ethical and Alternative Banks (FEBEA) joined this project, as well as the EACB and the CCACE which granted their support to this project. In addition to the financial contributions of the partners, it is envisaged to address the European Union financial or- 30 ganizations and the European structural Funds, in order to increase the financial means of the fund and to create a leverage effect which would make it possible to extend its action. The discussions held during the last two years made it possible to determine the main characteristics of the fund and to specify its modes of intervention. Modes of intervention of the Funds Schematically, eligible companies (SME, co-operatives, mutual insurance companies, associations and foundations) would be able to receive two types of financing: 1 Contributions in equity or quasiequity, in the form of long term subordinate loans 2 Interventions in guarantee or counter-guarantee, which would allow them to be financed by the local banks In addition to these financial interventions, the project also comprises a „technical aid and formation to social economy” part. Of course, the modes of intervention of COOPEST will largely depend on the legal statute of the final user and on national legislations. The financial interventions should be limited to the network heads, with global envelopes which will be redistributed locally. Thus, the Fund will not finance the companies individually but will grant envelopes to local financial intermediaries, with preset rules of intervention. With these guiding principles, we currently work on 5 pilot projects in Poland, Hungary, Slovakia and Latvia: 1. Poland In Poland, social economy companies have a credit access problem, the loans which are granted to them by the banks being conditioned by the mobilization of important guarantees (which can reach up to 150% of the loan’s amount). For most social economy companies, this condition is difficult to satisfy and strongly limits the possibilities of banking financing. To improve this situation, the Polish co-operative banks decided to create a guarantee fund which will allow the Polish co-operatives and associations to obtain the guarantees which are actually missing in most cases. I will not much develop on this project, which will be presented to you more in detail in the current of the afternoon. However, I can tell you that we are considering giving a counter-guarantee to this guarantee fund set up by the Polish cooperative banks, and that the European Investment Fund could join us and participate in this project. I would also like to underline that Credit Coopératif have a good knowledge of this kind of mechanism, since it created in the years 1970-1980 in France many guarantee funds, to the benefit of the associative sector and labour co-operatives, which were confronted with the same kind of problem. 31 This is why we join KZBS today to develop this project, via the Bank of Socio-Economic Initiatives (BISE) of which we are shareholder and which knows well the market and the Polish banking legislation. 2. Hungary In Hungary, three types of intervention are considered within the framework of the pilot project, under the supervision of the Hungarian federation of savings co-operatives OTSz: - the creation of “employment cooperatives”, aimed at improving the access to employment to the benefit of an underprivileged public, essentially gypsies. The activity would be focused on the grubbing and maintenance of a system of roads and channels to the benefit of local communities - the creation of supplying co-operatives in the artisanal and semi-industrial sectors, which would constitute central purchasing offices, for the account of independent producers - Helping the development and reorganization of existing co-operatives, particularly in the agricultural sector. These 3 topics correspond to strategic axes identified by the European Commission and the Hungarian public authorities for the affectation of the European Structural Funds. The local financial operator who will lead the project in Hungary is the Takarek Bank, the central bank of the Hungarian co-operative movement, who will play the part of a central operator and will be responsible for the financial management of the allocated envelope, will control the use of the funds and report to the financial partners of the project. 3. Slovakia In Slovakia, two pilot projects are being studied: - the first one is proposed by the Slovak Union of Labor Co-operatives, a CECOP member. The project consists in the creation of a mechanism of long term loans for the member cooperatives. Contacts were taken with the federation and the project is under development. - the second Slovak pilot project would be rely on the INTEGRA Foundation, which finances, through a financial co-operative, micro projects or „social” SME. These financing can take, depending on the project, the form of microcredits, traditional financings, contributions in equity or guarantees. The projects financed by the Integra Foundation are primarily turned towards the creation of enterprises by unemployed people or towards initiatives with a social or cultural vocation: training scheme in the creation of micro-enterprises by women, creation of companies devoted to the integration of young people into the job market, creation of a skating rink in underprivileged suburbs of Bratislava, creation of a school of languages open to a modest public. The Slovak Union of labour co-operatives and the Integra Foundation will participate to of Cracow Conference 32 and will present more in detail their respective projects. 4. Latvia In Latvia, the pilot project would consist in the reinforcement of the young network of Credit Unions. This project is strongly supported by the federation of the German co-operatives (DGRV). There are 30 Latvian Credit Unions today, federated since October 1997 in the association of Latvian Crédit Unions (LKKSS). This movement is still rather young and develops mainly in the rural areas, where the commercial banks are less and less present. Nevertheless, in spite of a promising potential of development, the Latvian Credit Unions must face a certain number of difficulties, including the insufficiency of financial resources to face an increasing demand for credit, the mistrust of the potential savers towards to this very recent network and the great poverty of the rural areas where the savings capacities are inevitably limited. Consequently, the Latvian Credit Unions would need external sources of financing to face an increasing demand for long-term credits, while at the same time their long financial resources are very limited. This need could be partially satisfied by the COOPEST fund. Conclusion As you can see, the pilot projects that I briefly introduced to you are very diverse, as well in their object as in the expressed needs, which strongly vary according to countries. This is why we imagined a flexible and adaptive system, with modes of intervention taking into account the diversity of the needs. These 4-5 projects will be presented more in detail by the local network heads at the Cracow Conference, where a workshop will be entirely devoted to this fund. We hope we shall gather there many investors and convince them to participate in this project, because as you can see it by yourself, there are a lot of projects and the financial needs are very important, too much important to be exclusively financed by the historical promoters of this fund, Crédit Coopératif and Crédit Mutuel. In two years, we have much advanced in the assessment of the needs and of the means that we should set up to face them. Now it is time to collect the funds necessary to answer these needs. I believe that social economy companies of Western Europe have a leading role to play in this field, and I believe that they are quite conscious of it. Indeed, in the enlarged Europe, we must remain strong, linked and close to resist the repeated attacks against our enterprises: the actuality shows it well with the procedure recently launched against the Italian people’s banks. This is why, in my opinion, the COOPEST project is essential. I thank you for your attention. 33 Member of The Board HUNGARIAN SAVINGS CO-OPERATIVES (OTIVA) Ms. Tóth has been working for OTIVA (National Fund for the Institutional Protection of the Savings Co-operatives) since 1995 as managing director. She has been confirmed in her position on October 22nd last. She got her diplom at the Universitiy of Economic Sciences in Budapest. She has also received a diplom as chartered auditor. KALMANNE TOTH THE INSTITUTIONAL PROTECTION FUND OF THE HUNGARIAN SAVINGS CO-OPERATIVES (OTIVA) The first credit cooperatives in Hungary were established in the middle of the 19. century and they had played an important role in the life of the rural population until the end of the Second World War. Their liquidation - which took place in 1947 - had only partially been „successfull”, since nine years later, in the year of 1956, they have come to new life and made their appearance even in the smallest settlements of the country. Their repeated revival has well proved that the regional financial institutions, being in direct neighborhood to the rural population, cannot be ignored because these are they who can offer financial products and services to the local inhabitants. The activity of the savings co-operatives was however limited to deposit collection, to intermediate housing loans and to grant consumer credits (purchasing consumer goods). 34 The milestone in the life of the Hungarian savings co-operatives was the year 1990, when the preconditions for the activities have essentially changed. That was also the year, when we created the National Federation of Savings Co-operatives and from that year on the savings co-operatives were granted much larger licenses on the market and started a closer cooperation among themselves. In October 1993, more than 90% of the cooperatives, 233 savings co-operatives, have concluded a so-called „Integration Agreement”. This Agreement fixed the general goals of the cooperatives in the frame of a closer collaboration ensuring reasonable mutual advantages and further development, by: a. increasing their market share, activity efficiency and rentability, b. striving for a determining role in the financial services offered to the population and to small and medium-size entrepreneurs, c. exploiting the advantages of the common business policy they will take more part in financing bigger enterprises, d. offering adequate international banking links to their customers, e. creating a common institutional protection fund and an audit body, f. offering standardized financial services to their members and customers through unified marketing and market appearance. Following the signature of the Integration Agreement, OTIVA was set up in November 1993, which the Hungarian State has also joined to. The OTIVA is a voluntary Institutional Protection Fund as determined in the Law on Financial Institutions. Its tasks are: the control of member cooperatives; the development of the integration as well as the prevention and/or the management of crisis situations. The necessity of the banking consolidation has also strengthened the integration efforts. The State, because of the cooperative character, did not want to become a direct owner of a savings co-operative, therefore a third party was needed to give financial assistance to the cooperatives. The adhesion of the State has taken place in the form of a syndicated contract, accordingly the Hungarian State has a right of veto concerning the use of OTIVA’s assets, respectively, the representative of the State is the Chairperson of the Fund. Thanks to the activity of OTIVA, the prudent running of the Hungarian savings cooperatives is guaranteed in the frame of the Hungarian banking system. The Institutional Protection Fund, the Integration’s controlling organisation as well as the crisis prevention and management units are working in one structure within OTIVA. The controls to be made on the spot mean the employment of 12 highly qualified controllers. These local controls take place on the basis of an annual control 35 plan built upon a professional control programme. All the member cooperatives are controlled biannually, furthermore target-oriented and post-controls are made as well. In order to make the prevention more efficient, a separate team is dealing with monitoring control and analysis. This department accomplishes a close coordination work with the control-on-the-spot department as well as with the crisis management one. The crisis management is made on the basis of a regulation containing very strict condition system for the procedure and for the financial support. This regulation is approved by the supreme body of the Integration, namely by the General Assembly. The Hungarian State has undertaken a predominant role in the creation of OTIVA, as a financial fund, but member savings cooperatives have to contribute to the growth of this Fund by paying annually one thousandth of their total assets. The Integration Agreement had also a role to play in establishing a central bank for the savings cooperatives, the Takarékbank. A central cooperative bank is needed everywhere in the world, so was the case in Hungary, too. This central (apex) bank undertakes, among others, the account leading of the savings cooperatives, the execution of the money transfers through the national account system (giro), the liquidity management of the whole integration group, as well as product development. Originally saving cooperatives had 100% of shares of the Takarékbank, but as a result of bank consolidation, the Hungarian State became the majority owner of the bank in 1994. There was a privatisation tender in 1997 and one of the conditions of this tender was that Takarékbank should remain the central bank of the savings cooperatives’integration and option right should be ensured to them to buy back the majority of the shares of the bank. This international tender was won by the German DG Bank - which is the apex bank for the German Volksbank and Raiffeisenbank group. With a minimum participation the Hungaria Insurance Co. became also a co-owner of the Takarékbank. At the end of the last year – according their options right - the saving cooperatives gained a majority share in their central bank. The savings cooperatives are able to offer wide-range products and services to the customers. The Allianz Hungaria Insurance Company covers all insurance products which can be offered. The „Fundamenta Housing Presavings Caisse” is a member of the savings cooperative group and leads the market, too. During the last five years Hungarian savings cooperatives have achieved an 36 outstanding development is their assets, in own capital and net profit as well. This process became obvious to our business partners as well. The small rural financial institutions, working earlier quasi with non-profit character, have become a group, networking practically the whole country and offering large-scale financial services, save guarding at the same time their autonomy. They became truly the „Rural Bank” on the basis of their dynamic growth. Today there are 158 integrated savings cooperatives with roughly 1.600 outlets, which is more than 50% of all the banking outlets, covering all the country’s territory. There are more than 1000 settlements where the savings cooperatives are the only institutions offering financial services. Total assets of the savings cooperatives were as per December 31, 2003, 770 billion HUF (This means more than 3 billion EURO) . The savings coop group is the 6th largest banking group in Hungary, regarding total assets. The growth of this group’s total assets, own capital and net result has shown up a larger dynamic as the average of the banking sector. The savings cooperatives are playing important role in deposit collection from the population. As for the credit side, they grant loans mainly to micro-, small and medium-size enterprises, to agricultural ventures and to regional development projects. Their market share is about 5% actually, but it is larger in the field of consumer small and medium size entrepreneur credits. According to the stipulations of the legal regulation, all cooperative financial institution has to dispose a minimum of capital of 1 million Euro by December 31, 2007. The strategic goal of the integration group is to double its market share in five years. In view to meet the legal requirements as well as the realisation of the above mentioned strategic goals, the Hungarian savings cooperatives go on the way of developing their information technology as well. 37 MICHAŁ MAZUR President NATIONAL CREDIT GUARANTEE FUND OF CO-OPERATIVE BANKS Since 1994, the president of the management board of Beskid Capital Chamber and Loan Guarantee Fund Ltd. Based in Bielsko-Biała - the only financial intermediary institution in the cooperative banking sector in Poland. Mr. Mazur graduated from the Cracow University of Technology in Cracow and the University of Insurance and Banking in Warsaw. In 1999, he completed a post-graduate course at the Warsaw School of Economics - banking faculty. He holds a professional degree of the chartered bank employee granted by the Polish Bank Association and the insurance agent license of Insurance and Pension Funds Supervisory Commission (KNUiFE). Previously, Mr. Mazur had been employed in managerial positions and later was self-employed and involved in the construction and bridges construction industry. Since 1989, has been involved in cooperative banking; in the period of 1990 to 1994 he was a member and the president of the management board of Bank Spółdzielczy in Bielsko-Biała. Since September 2003, the president of the management board of Krajowy Fundusz Poręczeń Kredytowych Bankowości Spółdzielczej Sp. z o.o. (National Credit Guarantee Fund of Co-operative Banks Ltd.) in Warsaw. Hobbies: tennis, sports and leisure. 38 PRESENTATION OF NATIONAL CREDIT GUARANTEE FUND OF CO-OPERATIVE BANKS In many countries of the European Union and in the United States, small and medium-sized enterprises constitute an engine of the economic growth. After the year 1989, more than 2 million of such businesses have been established in Poland. They derived mainly from craft, production, industry, trade & services, processing and agriculture sectors. Continuing restructuring of mining and steel industry, as well as reorganization of numerous types of services for individuals, naturally leads to self-employment practices being the next element developing the SME sector, which started to grow after 1989. The ways of supporting the SME segment adopted in Poland, such as subsidies, tax reliefs or subsidised loans, have never worn any signs of a long-term economic policy enhanced year on year with the purpose to create the basis for the establishment of new enterprises and not disturbing the rules of free competition among the already existing ones. The best and proven form of supporting the enterprises is to enable their access to cash. In all the developing countries, small and medium-sized enterprises come across problems with accessing the funds allocated in the banks. The key reasons behind such problems are the following: • Lack of the so called track-record with the bank, which allows the bank to assess whether a given entrepreneur is able to repay the debt he has incurred. • High costs of processing loan applications are triggered by the necessity on the side of both the entrepreneur and the bank to prepare vast documentation that needs to be reviewed and analysed, • If the entrepreneur runs full accounting, the bank needs experts, and when the entrepreneur runs the simplified accounting, which is most often the case, the bank ‘s assessment of customer’s actual financial standing is more difficult, • The biggest obstacle is the lack of sufficient collateral (both in terms of its quality and quantity) required by the bank to grant a loan. It seems very likely that the existing problems could be reduced by 75 to 85 % by establishment of guarantee funds. Guarantee funds in Poland Since 1995, in Poland, there has been one National Guarantee Fund operating under the auspices of National Economy Bank (Bank Gospodarstwa Krajowego). It received the capital of PLN 45m form the state budget. Today, as a result of the co-operation agreements signed with around 30 banks, its offering is available in around 4000 bank outlets situated all over the coun- 39 try. This has resulted in the provision of guarantees amounting to ca. PLN 800m. As at 30 June 2004, there were 59 local and regional guarantee funds registered in Poland. Their total own funds amounted to PLN 162.56m. The equity of the smallest fund is PLN 102k, and the equity of the biggest one amounts to PLN 16m. Together they have granted ca. 4000 guarantees and they have noted very insignificant losses related to the loss of guarantees. The aforementioned funds lost the amount of PLN3.8m which represents the ratio of 2.38 %. This is significantly lower than the average bad loan ratio in the banking sector. Banking sector, local authorities and businesses, which avail of the guarantee funds services, very often are the organizational initiators and financial partners assisting in their creation. In 2002, during the General Meeting of the National Association of Cooperative Banks, the cooperative and associating banks adopted a resolution on establishing their own guarantee fund. In January 2003, the National Association of Cooperative Banks (KZBS) and the Beskid Capital Chamber (BIK) - financial company founded in Bielsko–Biała in 1994 by 8 cooperative banks, established a commercial law company, which constituted legal basis for the cooperative banking sector guarantee fund. The company received a name of the National Credit Fund Guarantee of Cooperative Banking in Warsaw. The same year in September, the first group of cooperative banks joined the fund. In Q4 of 2004 another group of banks from the cooperative sector will join the Fund. When taking the decision on the establishment and joining the guarantee fund, the cooperative banks were motivated by the following objective: “Own structure, completely controlled, nation-level financial institution to handle guarantees”. The objectives of the National Fund of Credit Guarantees in Cooperative Banking Romote the bank as a financial centre for the local community and businesses Due to the level of equity held by Cooperative banks and their structures in a form of associating banks they provided and still provide services for the segment of local businesses, deriving from the local craftsmen, trade, service processing industry and agriculture. If we do not want the hard work of these businesses to lower Banks’ income, by increasing the risk, mainly the credit risk, the development of lending processes must be paralleled by providing guarantees and assisted by advisory services, training, promotion and advertisement. In this respect the operations of own Guarantee Fund will help the banks from the cooperative sector to implement the following: 40 • keep the existing and source new customers, • enhance the existing banking facilities and introduce new ones without increasing the risk, • reduce costs of credit operations by setting up cheap collateral in a form of capital guarantee to replace expensive personal property collateral or personal collateral, which becomes more and more difficult to obtain, • consolidate local business environments, very often supported by the local cooperative bank in which their owners usually hold shares, • enable the businesses to access the numerous financial, para-banking, IT, consultancy and insurance services, • cooperate with local governments which are directly interested in creating new jobs by way of establishing new businesses; in the future, local governments will obtain some part of the income tax pertaining to the new businesses and jobs, as well as the production real estate tax, and other payments that will contribute to local budgets. Development of the Cooperative Banking Guarantee Fund The implementation of the objectives will make a difference only if the Cooperative Banking Guarantee Fund develops in the following manner: 1/ shareholder’s equity of the Fund obtained as a result of: • sourcing the highest possible number of shareholders represented by cooperative banks themselves or by the associating banks. Banks have a crucial role to play here: when joining a Fund as shareholders they deliver the capital which is necessary for the guarantees, at the same time they automatically become the providers of the guarantees which come from their customers; very low unit financial contribution of a given bank, proportional to the equity of a given bank, in the scale of the entire cooperative banking sector translates into significant own funds of the Fund which can be used as guarantee funds, • attracting other shareholders representing entrepreneurs who provide services or are willing to provide services to the cooperative banking sector; joining the Fund enables the companies to offer their services and products to the entrepreneurs serviced by the banks, • acquiring grants, donations, subsidies from governmental institutions, as well as national and the EU aid programmes 2/ Guarantee capital of the Fund The Fund Capital is calculated by means of the capital multiplier, which defines the ratio of the maximum value of guarantees granted by the Fund to its equity. In the initial phase of the Fund’s activity the quantity of the multiplier was fixed at 3 which indicates, that every PLN1m of equity equals PLN3m of credit guarantees. (50-100 of the credits backed up by a guarantee). 3/ Guarantee- related operations of the Fund 41 According to a survey of the activity of funds operating in Poland, 54% of secured bank loans have been raised in order to increase an entrepreneur’s working capital to cover running expenses that provide financial liquidity. Another group of secured bank loans (25%) involved loans for purchase of equipment. The analysis of economic sectors from which the secured bank loans have been originated, Provides very interesting information presented below. 4-5% of investors represent agriculture, 5% construction industry and 19% industry. There is a noticeable dominance of entrepreneurs representing trade (39%) and services (34%). Therefore, the activity of the sector’s own Fund is possible in the field of services provided to the market niches, such as agriculture, craft, local entrepreneurs - producers. The current and future customers of cooperative banks must be pre-serviced and attended by a bank and their own Fund by means of financial resources from national and the EU funds. Organisational structure v operating costs of the Fund. The final organisational structure of the Fund, which includes operational costs, may be developed through three stages of organisational activities, namely: I stage- the division of Poland into two Regions, which encompass northern and southern voivodships. Cooperative banks in Ciechanów and Gliwice operate as Departments of Fund Current Management, employees of KZBS and BIK act as Approving Committees. The Fund Board signs guarantee agreements. II stage – basing the organisational structure of the Fund on shareholders of cooperative and associating banks, and using their structure, human resources, administrative resources and premises. It is worth noting that ca. 600 cooperative banks which form the chain of 3040 banking units in the area of almost every commune and district, 3 associating banks with their chain of 116 units located in the capitals of all voivodships, and the largest cities form an easily available and cheap organisational structure of the Fund. The role of the Fund Board would be limited to signing guarantee agreements and recovering lost guarantees. The most widespread Fund’s models presented in stage I and II, are the models of individual Fund which consists in examining every single guarantee by the Fund’s organisational structures. This model is transitory towards the Portfolio Fund. III stage – implementation of the portfolio Fund model, as the best solution in which guarantee applications 42 of individual entrepreneurs do not reach the Fund’s structure. The role of the structures at banks’ level would be redundant, and the role of the Fund Board would be limited to controlling whether the banks observe the established procedures and formal & vindicatory operations. This may be achieved, provided that all cooperative and associating banks join the Fund. Such activation would enable transition from stage I directly to stage III which could be followed by the development of the Fund organisational structure operating at a very low cost. Revenues of the Fund There are, practically, only two basic sources of financing the Fund: a/ interest on deposits from accumulated guarantee capitals, which has not been paid out as lost. b/ fees for guarantees granted to entrepreneurs by the Fund. Generally, the Fund self-financing is very difficult to achieve. Therefore, the fixed costs must be curbed at the lowest possible level (which is guaranteed by stage III). An activity promoting mainly the services offered by cooperative and associating banks, which are related to an individual guarantee, would be a desired form of increasing the Fund revenues, as the Fund cannot be perceived as a high-risk relief institution, reached by the customers themselves. Promotion and advertising commissioned by the banks, as well as regular, thus cheap and regionally available counselling and training services allowing for a particular bank’s specificity, would be very important activities performed by the Fund. Such enterprises would not be directed only at the market niche where a bank may acquire a new customer. They may also have a positive impact on the cooperative bank’s image, whose main objective and strength is not a commercial activity but being of service to local communities that, owing to this, may become the rightful owners of the bank in the cooperative sense, to the extent greater than ever. New challenges and assignments posed on the cooperative and associating banks in relation to Poland’s accession to the European Union, comply with the theme of the International Conference “Polish Cooperative Banks as Supporters of Local Enterprise”, organised in Zegrze, in April 2003. Owing to active participation of cooperative banks in the Fund, their business may be common with the core business and activity of the National Fund of Credit Guarantees in Cooperative Banking. President of the Board Michał Mazur 43 ICBA ADDRESSES President Mr Eugeniusz Laszkiewicz President National Union of Cooperative Banks 6/22 Boya Żeleńskiego Street Telephone (48.22) 375 30 30 Fax (48.22) 875 30 40 Vice Presidents and Regional Chairman Europe Mr Etienne Pflimlin President Confederation Nationale du Credit Mutuel 88-90 rue Cardinet 75017 Paris, France Telephone (33.1) 44.01.10.01 Fax (33.1) 44.01.11.63 East, Central & South Africa Mr Gideon Muriuki Managing Director Co-operative Bank of Kenya Ltd. P.O. Box 48231 Nairobi, Kenya Telephone (254) 20.320.76.000 Fax (254) 20.249.474 North Africa and Middle East Mr Noureddine Omary President General Director Banque Centrale Populaire 101, Boulevard Mohamed Zerktouni B.P. 10 622 21100 Casablanca, Marocco Telephone (212 22) 46 91 64 Fax (212 22) 20 19 32 Latin America Mr Miguel Cardozo Asesor Institucional Cooperativa Nacional de Ahorro y Credito (COFAC) Casa Central, Sarandi 402 C.P.11000 Montevideo, Uruguay Telephone (598) 29.16.01.00 Fax (598) 29.160.031 North America Mr Alban D’Amours President et chef de la Direction du Movement des caisses Desjardins Federation des Caisses Desjardins du Quebec 100, avenue des Commandeurs Levis (Quebec), Canada G6V 7N5 Telephone (1.418) 835.24.04 Fax (1.418) 833.47.69 Asia and the Pacific Mr P.A. Kiriwandeniya President SANASA Development Bank No. 106, Dharmapala Mawatha Colombo 07, Sri Lanka Telephone (94) 11 237 50 89 Fax (94) 11 237 50 89 44