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East: Credit Unions Overcome Suspicion To Bring Services To Transition Nations

  • Don Hill

A modest innovation that is neither a bank nor a small-loan company is worming its way into the trust systems of some of the wariest and most suspicious markets on earth -- those of the formerly communist countries. These are people who in the last 10 years repeatedly have been burned and scarred by bank failures, collapsed pyramid schemes, and official corruption. But RFE/RL reports that these same people now are lining up to entrust their tiny savings to credit unions operated by their neighbors and themselves.

Prague, 24 June 2002 (RFE/RL) -- Georgeta Rus was a "youth officer" -- a government worker in charge of youth programs -- in postcommunist Romania in 1996. Then she responded to an employment notice in Bucharest published by the U.S.-based World Council of Credit Unions (WCCU).

The WCCU needed a Romanian employee to help with a program to develop small, member-owned financial institutions in Romania. The group selected her from among dozens of candidates, saying her lack of financial institution experience was a mark in her favor. As she puts it, "I didn't have anything to unlearn."

Rus since has become a convert to the credit-union faith. She's taken specialized courses in credit-union management. She's earned a master of business administration degree from a U.S. university. And the WCCU has named her its Romania country director, charged with nationwide development of credit unions -- or CARs, as Romanians call them, using the acronym from the country's former mutual assistance societies.

The idea that the WCCU wanted to plant in Romania was simplicity itself -- tidy little organizations that accept small savings accounts and pay interest on them that exceeds the rate of inflation. They would also make small loans charging enough interest on the loans to cover overhead. It was a simple idea, but hard to sell, Rus recalls, "because the first reaction was, 'American recipes will not work for Romanian reality.'"

Successful credit unions in the United States and elsewhere had founded the WCCU in the 1970s to share the good news about this approach to bringing financial services to small savers and borrowers. Typically, credit unions are financial institutions owned and operated by their members. The members ordinarily share some affinity -- or "trust bond," in credit-union parlance -- such as working for the same company, or residing in the same town.

The council's vice president for development, Lucy Ito, sounds evangelical about the idea in a recent telephone interview: "Credit unions are a way to export democracy and free-market principles to countries that have not had that much experience with them."

She adds: "In many countries, especially developing countries today, people do not all have access to basic savings accounts that are safe. There are some micro-credit programs that are available, and that is great to meet credit needs of folks, but with credit unions we see that in a household a family needs both savings services and lending services on occasion."

In the last 10 years, the WCCU and other organizations have set up credit-union development programs in Albania, Bulgaria, Macedonia, Uzbekistan, and Poland, as well as in Romania and in countries in other parts of the world. In credit unions in the former communist countries now, the savings accounts and loan portfolios -- all in small individual amounts -- add up to billions of dollars.

The WCCU's first foray into Romania in the early 1990s was discouraging. The inflation rate exceeded 150 percent a year, making both saving and lending improvident. But the credit-union concept was not entirely foreign. Romania had a century-long tradition of mutual assistance societies. Under communism, workers' unions for government-run companies collected forced savings from employees and made the proceeds available at subsidized interest rates for loans for purchases like cars and furniture.

As companies collapsed or downsized after the fall of communism, and government subsidies no longer propped the CAR assistance societies up, a number of them appealed to the credit-union council to teach them how to survive using market principles.

Former youth worker Rus recalls her early days with the WCCU in Bucharest: "This was the first obstacle we had to overcome, to explain that the [new] Romanian reality is different from the one the CARs built their success on year after year after year. And as times change, our needs change and our members' needs change. Therefore the CARs' leaders' mentality had to change."

A WCCU team tried at first to win legislation authorizing credit unions. When the Romanian parliament balked, the team adapted itself to the CAR model. In 1997 when the program began, inflation still was high -- at about 30 percent -- so they determined to make very short-term loans, often only for a matter of weeks. They overcame the suspicions of Romanian savers by capitalizing on the trust people had developed in the old CARs.

The result is that today in Romania, the credit-union-like organizations have more than 105,000 members, who have saved the equivalent of $5.2 million, that have made possible $11.6 million in outstanding loans.

The WCCU applauds but is not directly involved in a similar program in Albania. Land O'Lakes, Inc, based in Minnesota, came to Albania just after the fall of communism. Its original purpose was to share its experience as the world's most successful dairy products cooperative -- a farmer-owned marketing association.

In 1996, the Land O'Lakes team joined with the Irish League of Credit Unions to develop village-based credit unions in Albania. Deborah Wagner, Land O'Lakes country director for Albania, recalls: "We had been working with groups of village women since 1993 in terms of dairy development. So we already had groups of women who were used to working together and we thought that this would be a good basis to start the credit-union movement."

Wagner says their proudest achievement is that they formed their first credit union in December 1997, when the country was still roiling with riots and rage over the collapse that year of a nationwide pyramid fraud that had bilked thousands of Albanians of their savings.

Wagner gives much of the credit to Land O'Lakes' Albanian employee Eldina Gjakrosa, who had worked with the original network of village women in dairy development. "The success of the first credit union in Albania was due largely to the efforts of Elda and others who had spent several years establishing a trusting relationship with rural women."

With the combined efforts of the Irish League and Land O'Lakes, Albania now has 35 functioning credit unions, with more on the way.

The Czech Republic reinstituted traditional community savings banks -- credit unions in all but name -- soon after the fall of communism, but the government failed to adopt sufficient regulatory mechanisms. A network of 100 credit unions sprang up but by the year 2000 many were in trouble, drained of funds by bad loans and in some cases by failed investments in subsidiary businesses.

Czech regulators took over direction of 19 credit unions and passed legislation to compensate members who lost their savings. The WCCU has visited Prague and recommended legislative reforms. And Czech credit unions have formed an association and have joined the WCCU.

Country-by-country data on credit-union development can be found at the following websites:

Bulgaria -- http://www.woccu.org/development/md_country.php?cid=3

Macedonia -- http://www.woccu.org/development/md_country.php?cid=8

Romania -- http://www.woccu.org/development/md_country.php?cid=14

Uzbekistan http://www.woccu.org/press/press_rel/pressr.php?pressr_id=293

Poland -- http://www.woccu.org/education/poland/docs/SKOK.doc

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