#BTEditorial: Embarrassment of riches headache for credit unions

There have been some interesting developments emerging from the global pandemic that may have been overlooked by the average man in the street, but which may have an impact on him, nonetheless.

In the face of lockdowns, business disruptions, thousands of employees in the public and private sectors working from home, and general uncertainty in the economy, many people have decided to top-up their savings.

Barbadians have been through rough times before.

We know how to “tighten our belts”. When the global financial crisis created contagion from one corner of the world to the next, Barbadians hunkered down.
The economy slowed to a drag, and the former administration responded with increased taxes on an already burdened population.

Today, we are experiencing even more troubling times simply because there are no safe harbours to shelter. Government has tried to respond to the needs of the most vulnerable among us, but it is coming at a hefty price tag and at a time when state revenues are under severe pressure.

But the average Barbadian is averse to state assistance. They find the process demeaning, rather than a temporary entitlement for which modern societies make provision.

On this occasion, though, faced with significant unemployment and business closures, most have responded wisely by safeguarding against any future crisis events.

An examination of the 2020 Financial Stability Report (FSR), jointly produced by the Central Bank of Barbados and the Financial Services Commission (FSC), showed that not only were Barbadians putting aside a tidy sum for that rainy day in financial institutions, but it seemed their favoured places to save were credit unions.

According to the FSR “The exposure to commercial banks was reduced from the previous year, as all financial institutions held smaller balances except credit unions.

The credit union sector became the subgroup most exposed to the commercial banks, as they increased their deposits, while the finance and trust companies significantly reduced their deposit holdings compared to 2019.”

FSC statistics show that at the end of the second quarter of 2021, this island’s credit unions held $2.87 billion in assets and the amount has been climbing every quarter since the beginning of 2020.

Of the assets which are creeping ever closer to $3 billion, the movement held an estimated $537.90 million in cash, $1.80 billion in loans to members, $430. 42 million in investments, $96.58 million in fixed assets and $69.16 million provisioned.

Commercial banks still dominate the financial space, however, when it comes to deposits. But what is noteworthy is that the deposits of credit unions represent the savings of ordinary citizens.

It is clear that Barbadians are confident in the credit unions as safe institutions, and that commercial banks are simply not working for them in the way they desire.

The hue and cry over rising bank fees and the fact that in an environment of very low or zero interest on deposits, a growing number of Barbadians conclude that it is increasingly too expensive for them to keep their money in commercial banks.

But this growing attractiveness for credit unions and the movement’s obvious embarrassment of riches is posing a major headache for their management teams. These indigenous financial institutions are now forced to ask a very serious question. “What do we do with all the excess cash that we have?”

The obvious response would be to turn to the traditional answer of loans to members. But given the uncertainty in the market, Barbadians are wisely holding back on new debt and major spending.

Job security during this pandemic is a real concern for workers whether in the private or public sector.

To compound the situation, the appetite for investment in Government paper has been eroded following the administration’s debt restructuring exercise.

What has resulted is a still tepid response by local institutions and individuals with excess cash to invest in Government paper, despite their history of strong returns and the absence of default.

Another matter that is adding to the stress of credit union managers is that with their growing treasure chest of cash deposits, has also come increased scrutiny from the regulators.

The attention and resources that must be diverted to ensure compliance with anti-money laundering and counter financing of terrorism (AML/CFT) is an unavoidable bug bear.

And with Barbados being placed on various adverse AML/CFT lists, the hammer is coming down on credit unions to get their houses in order or face fines and other sanctions by the FSC.

The pendulum is now swinging, and we suspect that commercial banks are quite happy to offload many of their small, average Joe customers to the credit unions.

The move reduces their reserve requirements to be held with the Central Bank and cuts the cost to keep these customers on their books.