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International Labour Organization •Sustainable Enterprise Programme
Resilience of the Cooperative Business Model
in Times of Crisis
Johnston Birchall1and Lou Hammond Ketilson2
1
to the Global Economic Crisis
Responses
1 Johnston Birchall is Professor of Social Policy at Stirling University, Scotland
2 Lou Hammond Ketilson is Director, Centre for Cooperative Studies, University of
Saskatchewan, Canada. She would like to acknowledge the help of her research
assistant, Dwayne Pattison
Table of contents
Summary........................................................................3
Introduction ....................................................................4
1. Cooperatives thrive in times of crisis ..............................6
1.1 Employee-owned co-operatives...............................8
1.2. Cooperatives succeed only in crisis or also in crisis? .......9
2. Why are cooperatives good in a crisis?...........................11
2.1 The cooperative model of enterprise.......................11
2.2 Cooperative performance in crisis ..........................14
3. How are cooperative banks and credit unions faring
in the current crisis? ................................................16
3.1 Increase in assets and deposits ..............................18
3.2 Significance of cooperative banks and savings and
credit cooperatives for financial inclusion .................27
3.3 The significance of cooperatives for employment
creation and decent work ....................................31
3.4 Policy responses ...............................................34
3.5 How can the ILO assist its constituency to promote
cooperatives to address the crisis and recovery?..........38
2
Summary
The financial and ensuing economic crisis has had negative impacts on the
majority of enterprises; however, cooperative enterprises around the world
are showing resilience to the crisis. Financial cooperatives remain
financially sound; consumer cooperatives are reporting increased turnover;
worker cooperatives are seeing growth as people choose the cooperative
form of enterprise to respond to new economic realities.
Why is this form of enterprise proving so resilient?
This report will provide historical evidence and current empirical evidence
that proves that the cooperative model of enterprise survives crisis, but
more importantly that it is a sustainable form of enterprise able to
withstand crisis, maintaining the livelihoods of the communities in which
they operate. It will further suggest ways in which the ILO can strengthen
its activity in the promotion of cooperatives as a means to address the
current crisis and avert future crisis.
3
Introduction
The recent massive public bail-out of private, investor-owned banks has
underlined the virtues of a customer-owned cooperative banking system
that is more risk-averse and less driven by the need to make profits for
investors and bonuses for managers. Savings and credit cooperatives also
known as credit unions or SACCOs, building societies and cooperative banks
all over the world are reporting that they are still financially sound, and
that customers are flocking to bank with them because they are highly
trusted. The point is an important one, because the cooperative banking
sector is extraordinarily large; the World Council of Credit Unions has 49,000
credit unions in membership, with 177 million individual members in
96 countries. The International Raiffeisen Union estimates that 900,000
cooperatives with around 500 million members in over 100 countries are
working according to the cooperative banking principles worked out in
Germany by Friedrich Raiffeisen. In Europe alone, there are 4200 local
cooperative banks, around 60,000 branches and a market share of 20%. The
banks serve 45 million members and 159 million customers.3Some of the
largest banks in the world are cooperatives: Rabobank, for instance, has 50%
of Dutch citizens in membership, is the largest agricultural bank in the
world, and is rated the world’s third safest bank. 4Theessenceof
cooperative banking is quite simple. It is that members, who include both
savers and borrowers, use the cooperative to recycle money from those who
have it to those who need it, without anybody outside taking a profit and
with interest rates set so that the system works in everyone’s interest.
4
3 DeVries, B (2009) European Cooperative Banks in financial and economic turmoil, Paper
for the UN Expert Group Meeting on Cooperatives, April, New York
4 By Global Finance Magazine. It is also the only privately-owned bank with the highest
possible credit ratings (see OCDC, 2007)
This report begins by providing historical evidence that cooperatives are
good in a crisis. This sets up a plausible generalisation that they will
continue to be good in the current crisis.
The report then tests out this generalisation by providing theoretical
arguments and empirical evidence for and against it. It is in two parts.
In the first part, it investigates the claim that cooperative banks and savings
and credit cooperatives are better able to withstand the banking crisis and
economic recession than the investor-owned banks. It presents arguments
for the advantages and disadvantages of ‘member-owned’ banks and tests
these against the evidence. It finds that, so far, cooperatives are in an
unusually strong
position; they have
not been damaged
much by the banking
crisis, and are
growing strongly as
customers switch
their business away
from the discredited
investor-owned banks
and other enterprises
to what they see as a
more risk-averse and
trustworthy sector.
Inthesecondpart,
the report then
considers two important policy aims - financial inclusion and employment
creation - presenting evidence for the importance of cooperatives in
achieving them during a time of economic recession.
Finally, the report considers the policy implications of these findings for
governments and banking regulators and what the ILO can do with regard
the promotion of cooperatives.
5
Resilience of the cooperative business model in times of crises
1. Cooperatives thrive in times
of crisis
During an agricultural depression in 1860s Germany, a social reformer,
Friedrich Raiffeisen, provided emergency food aid to hungry farmers and their
families, but then realised that what they really needed was credit to help
them to modernise their methods and gain access to markets for their
produce. He designed a new type of savings and credit cooperative which was
enthusiastically taken up by the farmers; the idea of the rural cooperative
bank spread throughout mainland Europe, and led to promotion of supply and
marketing cooperatives. Together, they helped develop the modern farm
economy. At the same time, another social reformer, Schultze-Delitsch,
invented a similar type of cooperative bank for townspeople, providing credits
to enable artisans and small business people to survive in the rapid economic
changes and frequent depressions that accompanied the industrial revolution.
Similarly, in the United States, during the Great Depression in the 1930s, a
cooperative bank was set up with government support under the New Deal, to
provide vital farm credits. At this time, the Federal Credit Union Act was
passed ‘to ensure credit unions made credit available to “people of small
means”’, and it is interesting to note that The Act was ‘meant to stabilize an
imbalanced global financial system’. 5
Also in the United States during the Great Depression, agricultural
cooperatives began to be formed in large numbers. Cooperative farm supply
purchasing grew from US$76 million in 1924 to US$250 million in 1934, and
spread to all parts of the USA. It was around this time that Land O’Lakes
6
5 Meyer, M. (2008). Does Capitalism Need Cooperation? Cooperative Business Journal
November/December p4
emerged as a
significant regional
dairy cooperative. Also
there was a rapid
growth in petroleum
cooperatives supplying
farmers; by 1935 there
were around 2000 of
them supplying
products worth US$40
million. There was
government support in
the form of credit, but
farmers were
encouraged to take control of their own cooperative banks. By 1935 there
were 10,500 farmer cooperatives with a membership of 3.66 million farmers.6
Similarly, in Sweden after the price collapse of 1930, instead of cooperatives
giving way to state marketing boards, cooperative federations took control in
farm credit, dairy, forestry, eggs, meat and fruit, presided over by a strong
National Union of Swedish Farmers.
In a more recent depression in farm prices in the US and Canada, a new type
of cooperative was devised that aligns farmer share-ownership to delivery
rights, thus enabling farmers to go into food processing. There are around 200
of these ‘new generation’ cooperatives, and they have raised the incomes of
farmers dramatically and revitalised the local economies of North Dakota,
Minnesota and neighbouring states. 7More recently, the BSE (or mad cow)
crisis in Canada was the major impetus behind cattle producers in Alberta,
Canada forming several producer cooperatives in the province. 8
During the 1840s in Britain, at a time of desperate economic hardship, retail
consumer cooperatives began to be formed among textile workers as the
7
Resilience of the cooperative business model in times of crises
6 USDA Rural Development (1935) cooperatives help farmers survive the great depression,
accessed April 2009 at www.rurdev.usda.gov
7 Merrett, C and Walzer, N (eds, 2001) A Cooperative Approach to Local Economic
Development, Quorum Books
8 Canadian Cooperative Association (2005, Dec) Coops in Alberta Fact Sheet. Retrieved
from: http://www.coopscanada.coop/pdf/Sector/FactSheet/Alberta%20coops.pdf
only alternative to emigration or starvation. They weathered many crises,
including two world wars and the great depression, coming out stronger
every time until by the 1950s they had 12% of the retail trade and had given
rise to similar cooperative sectors throughout Europe. 9Their ability to
withstand shocks and to provide a distribution network guaranteeing food
supplies led to their use in reconstruction in Germany and Japan after the
Second World War. More recently, when the Soviet Union collapsed consumer
cooperatives around Moscow not only survived the economic crisis but
restructured and began to grow again. 10
Other forms of consumer cooperative have proved their worth.
During the 1930s depression electricity and telecommunication cooperatives
helped transform the rural economy of the US. During the 1960s the city of
New York began foreclosing on thousands of landlord-owned properties for
non-payment of taxes, and landlords responded by abandoning their tenement
blocks. Out of this crisis was born a cooperative housing movement that
successfully housed 27,000 families. Today, cooperative ownership is the most
common form of apartment ownership in New York City.11
1.1 Employee-owned co-operatives
During the 1970s and early 1980s in Western Europe, a fundamental
restructuring of industry took place that led to mass unemployment. The
response of many employees was a wave of takeovers through
employee-owned cooperatives that managed to minimize the loss of jobs
from industrial change. Similarly in Argentina in 2001, after a serious
financial meltdown had led to thousands of bankruptcies, workers took over
upwards of 200 firms and, with government support, ran them themselves
(known as ‘empresas recuperadas’). 12 The severe recession experienced in
Finland in the early 1990s after the Soviet Union collapsed led in part to
unemployment reaching more than 20%. The response was a ‘new wave’ of
8
ILO - Sustainable Enterprise Programme
Responses to the Global Economic Crisis
9 Birchall, J (1994) Coop: the People’s Business, Manchester University Press
10 Birchall (2003) Rediscovering the Cooperative Advantage, Geneva: ILO p55-57
11 Coldwell Banker. Understanding Cooperatives and Condominiums
12 Howarth, M (2007) Worker cooperatives and the phenomenon of empresas recuperadas
in Argentina, Manchester: Cooperative College
worker cooperatives promoted and supported by the Ministry of Labour and
the Finnish Cooperative Movement which led to over 1200 labour
cooperatives designed to get unemployed people back into work. 13
1.2 Cooperatives succeed only in crisis
or also in crisis?
Does this mean
cooperatives only
succeed at a time of
economic crisis? Are
they a business type
that people turn to
when it is needed, only
to return to the
dominant
investor-owned model
whenthecrisisisover?
There is no evidence
for this. In fact, it is
the strength built up
by cooperatives during
the good times that helps tide them over a recession. The International
Co-operative Alliance (ICA) calculated in 2004 – four years before the
banking crisis – that the top 300 cooperatives in the world had around the
same output as the GDP of Canada. 14 A study of cooperatives in 11
countries in Africa estimates that around seven percent of Africans are
cooperative members and that even in countries where cooperatives unions
have collapsed, such as Uganda and Rwanda, the numbers have continued to
grow; there were only 554 cooperatives registered in Uganda in 1995, but
nearly 7,500 today. Savings and credit cooperatives are growing
everywhere. 15
9
Resilience of the cooperative business model in times of crises
13 Birchall, J (2003) op cit p48-51
14 See www.ica.coop for the Global 300 project
15 Develtere, P, Pollet, I and Wanyama, F (2008) Cooperating out of Poverty: the
renaissance of the African cooperative movement, Geneva: ILO
It is true that in some countries such as the US and United Kingdom
demutualisation had, over the previous decade, been a strong destroyer of
cooperatives. The arguments were that cooperatives and mutuals were an
outmoded business type that could not provide incentives to attract the
best managers, and could not raise enough capital to compete in global
markets. These arguments have come back to haunt the demutualised
companies, many of which (for example Bradford and Bingley and Northern
Rock in the UK) have become bankrupt, their management discredited, and
their shares worthless. There is now a countertrend. Just as in the 1930s
many life insurance companies mutualised in order to gain the trust of their
customers, in the current crisis there are calls for remutualisation of the UK
building societies that became banks, and for the eventual mutualisation of
private banks such as Lloyds Banking Group and RBS that are now mainly
owned by the government.
Of course, as with any other type of business, if a cooperative is being badly
managed or has serious weaknesses in its business strategy, a recession will
find this out and it may fail.
The cooperative model provides comparative advantages, but no magic
formula for success. However, it is interesting to see just how strongly
cooperative banks, savings and credit cooperatives and credit unions are
performing during the current banking crisis, and how little help they have
needed from governments, in contrast to their investor-owned competitors
who have had to be bailed out with staggeringly large amounts of public
funding. Where cooperatives and mutuals do get into trouble, they can rely
on federal bodies that provide guarantee funds or ensure they merge with
others so the assets are not lost and their members are protected.
What is remarkable is that worldwide hardly any cooperative banks or credit
unions have had to ask for government help. Why should the cooperative
model have proved so strong?
10
ILO - Sustainable Enterprise Programme
Responses to the Global Economic Crisis
2. Why are cooperatives
good in a crisis?
2.1 The cooperative model of enterprise
Cooperatives are member-owned businesses. The simplest way to
understand them is that they aggregate the market power of people who on
their own could achieve little or nothing, and in so doing they provide ways
out of poverty and powerlessness.
The internationally recognized definition of cooperatives included in both
United Nations Guidelines aimed at creating a supportive environment for
the development of
cooperatives (2001)
and ILO R.193 (2002)
and as established
by the
representative body
for cooperatives, the
International
Co-operative
Alliance (ICA), is:
An autonomous
association of
persons united
voluntarily to meet
their common
11
economic, social and cultural needs and aspirations, through a jointly
owned and democratically controlled enterprise.16
Cooperatives are also guided by seven cooperative principles: voluntary and
open membership; democratic member control; member economic
participation; autonomy and independence; education, training and
information; cooperation among cooperatives; and concern for community.
The first four of these are core principles without which a cooperative
would lose its identity; they guarantee the conditions under which members
own, control and benefit from the business. The education principle is a
commitment to make membership effective and so is a precondition for
democratic control, while cooperation among cooperatives is really a
business strategy without which cooperatives remain economically
vulnerable. The last principle, concern for community, recognises that,
unlike investors, cooperative members tend also to be members of a
particular community. Often, one of the business aims for the cooperative is
that it will meet the needs of this wider community. This does not mean
that cooperatives are ‘social’ rather than economic, and can just be used as
a tool of development. It is important to distinguish between the primary
aims of the cooperative, which are to meet the members’ economic needs,
by-products such as improved nutrition and increased capabilities, and
aggregate effects in
the wider society such
as lower mortality
rates or higher
employment levels.
Paradoxically, in
order to achieve these
wider goals
governments need to
respect the autonomy
of cooperatives.
The diversity of types
of cooperative can be
confusing, and so here
is a simple way of
12
ILO - Sustainable Enterprise Programme
Responses to the Global Economic Crisis
16 See International Cooperative Alliance website, www.ica.coop
classifying them.
Apart from the
investors of capital,
there are three main
stakeholders in a
business: its
consumers, the
producers who supply
inputs to or take the
outputs from the
business, and its
employees. In a
cooperative, usually
one of these
stakeholders is put at the centre of the business. This gives us three classes:
consumer cooperatives, producer cooperatives and worker cooperatives.
There is one interesting complication. Financial cooperatives – cooperative
banks, insurance societies and credit unions – often have in membership
people who are consumers of their products and – in their own right –
producers. So farmers and small businesses can be members alongside
private individuals. As long as the interests of each group do not conflict,
thecooperativeworkswell.
There are two kinds of comparative advantage to cooperatives: general ones
derived from the nature of cooperatives as member-owned businesses, and
particular ones derived from specific types of cooperative.
The general advantages are derived from membership. Cooperatives are
uniquely member-owned, member-controlled and exist to provide benefits to
members as opposed to profit and this has an impact on business decisions.
When the purposes of the business are aligned with those of members who
are both investors and consumers of the cooperative, the results are loyalty,
commitment, shared knowledge, member participation, underpinned by
strong economic incentives. 17 These are the kinds of values any business
organisation would want but that investor-owned business can only achieve by
mimicking the idea of membership. The general disadvantages are the
13
Resilience of the cooperative business model in times of crises
17 Shah, T (1996) Catalysing Cooperation: design of self-governing organisations, New
Delhi: Sage
obverse of the advantages; when the purposes of the business are not aligned
with those of the members, apathy or cynicism result, members lose interest
and cease to participate. This leads to management pursuing their own
interests, and to complacency and a reinforcement of oligarchic tendencies
among the board.
The particular
advantages of
consumer cooperatives
are that they provide
people with
consumption goods at
the lowest possible
price and with a
guarantee of good
value, and so make
their income go
further. Producer
cooperatives enable
self-employed people
and family businesses
to gain the strength in
numbers they need to survive in the market. Worker cooperatives provide
people with an income, but also are a way of gaining control over the
conditions under which they labour, providing ‘decent work’ . However, these
advantages cannot always be realised; we have to take into account the
extent to which cooperatives have the capacity to realise them and the
intensity of competition they are facing. From an evolutionary point of view,
they are in competition with other types of organisation doing the same job,
and these other types also have their advantages and disadvantages.
2.2 Cooperative performance in crisis
There are two crises; the banking crisis and the resulting recession.
Financial cooperatives can help lessen the impact of the banking crisis.
They do this by continuing to trade without the need for government
bail-outs, and demonstrating that a more risk-averse sector exists that is
14
ILO - Sustainable Enterprise Programme
Responses to the Global Economic Crisis
focused on the needs of customer-members. They show that there is an
alternative to the current policy of greater public regulation of private banks,
while in many countries also providing banking and insurance to low income
people who would otherwise be unbanked.
Cooperatives can lessen the impact of the recession by the mere fact that
they survive and continue to carry out business. There is evidence that
cooperatives in all sectors survive better than their competitors; the rate of
survival of new start ups is better, and the longevity of cooperatives is
impressive. They can use member capital rather than bank borrowing to
expand the business, and they provide services to more risk-averse
consumers. More specifically, worker cooperatives can concentrate on
employment creation through labour cooperatives, employee buyouts and
rescues, consumer cooperatives on lowering the cost of food and other
essentials, and producer cooperatives on making members’ businesses more
productive.18
It is generally agreed
that the recession will
hit developing countries
hard.Itcanbe
countered by continued
strengthening of the
savings and
credit/credit
union/SACCO sector and
development of farmer
cooperatives and new
cooperative unions or
federations to develop
their business. Also
important are the
strengthening of links between cooperatives North and South, through
technical assistance, product development and fair trade. There are also
great opportunities to continue the development of mutually owned utilities
such as electricity and water.
15
Resilience of the cooperative business model in times of crises
18 See Birchall, J (2009) Discussion paper at the Expert group meeting on ‘Cooperatives in
a World in Crisis’, 28-30 April 2009, New York
3. How are cooperative banks
and credit unions faring in the
current crisis?
When former US Federal Reserve Chairman Alan Greenspan went before
Congress in October 2008, he told American lawmakers that the economic
meltdown had revealed a “flaw in the model” that he had not expected –
that banks operating in self-interest would not self-regulate to protect their
shareholders and institutions. 19
The type of ownership and methods of capitalization are two of the key
factors that have created the disparity in the financial positions of credit
unions and banks, to the advantage of savings and credit cooperatives or
credit unions. Because these are member owned they tend to be more risk
averse compared to other financial institutions. 20 savings and credit
cooperatives are not driven by profits or shareholder interests so they do
not feel compelled to force people into inappropriate loans. 21 Thus,
savings and credit cooperatives have stayed away from offering the riskier
sub-prime loans. They have a different kind of governance structure, in
16
19 McCabe, D (2009) Economics Shrugged, in University Affairs, April
20 Coombes, A. (2008, April 27). Given Turmoil at Banks, Time May Be Right to Try a Credit
Union. MarketWatch. Retrieved from:
http://www.foxbusiness.com/story/markets/industries/finance/given-turmoil-banks-ti
me-right-try-credit-union/
21 McDougall, P. (2008, September 12) Credit Unions Take On Big Banks. TheStreet.com.
Retrieved from:
http://www.thestreet.com/story/10437101/1/credit-unions-take-on-big-banks.html
which local credit unions and cooperative
banks scrutinise the decisions of the
central institutions. In this way, they are
more aware of the fact that the loan they
offer to their members is another
member’s money. The direct link of
savings and loans, which may not be as
apparent in some banks, acts as a moral
constraint.
Cooperative banks and savings and credit
cooperatives are not reliant upon the
capital markets for funding, but are
funded through member deposits. 22 They
are strong in retail banking, which is
characterised by stable returns and
comparatively good access to savings and
deposits. They are not able to go to the
markets to obtain easy money from
investors, and so they tend to retain their
profits and take fewer risks. 23 This is one
reason why they also have higher capital
reserve criteria. Another example of their aversion to risk is their additional
deposit guarantee schemes that serve as extra security.
Ferri (circa 2006) offers three reasons why cooperatives may be beneficial
during a credit crunch. In comparison to banks, savings and credit
cooperatives or credit unions: (a) tend not to freeze credit (b) have lower
increases in interest rates and (c) are generally more stable due to different
capitalization and lending practices.
Reports from the credit union system in both Canada and the US seem to
support these three propositions. 24
17
Resilience of the cooperative business model in times of crises
22 John Radebaugh from the North Carolina Credit Unions League (NCCCUL) Credit Unions
in Good Shape, 2008
23 deVries, op cit p2
24 Ferri, G. (n.d.). Why Cooperative Banks Are Particularly Important at a Time of Credit
Crunch. Retrieved April 17, 2008 from:
Reports indicate that during the economic turmoil, savings and credit
cooperatives, credit unions and cooperative banks have experienced an
increase in almost every facet of their business including: increase in assets
and deposits; increased volume of lending; increase in membership; a better
rate of interest; and greater stability (measured by capital adequacy ratios,
and loan default rates). They have had very few losses on investments and
so far very few have needed government help.
3.1 Increase in assets and deposits
In Canada, 516 credit unions and caisses populaires outside of Quebec saw a
six-month increase in assets in the second quarter of 2008.25 Similar reports
from the provincial savings and credit cooperatives or credit union
associations, called Centrals, highlight the stability of the system. In
Manitoba for example, the 48 credit unions saw assets, loans and deposits
increase by 10 percent or more in 2008.26 For credit unions in Saskatchewan,
net income and total assets in 2008 were the highest ever.27 It was also a
record year for credit unions in British Columbia where 2008 earnings
increased by 10 percent to reach an all-time high for the province. 28
With an increase in member numbers, deposits and assets of these financial
institutions is also on the rise. Credit Union National Association in the US
expects deposits in credit unions to increase by 10 percent in 2009.29
18
ILO - Sustainable Enterprise Programme
Responses to the Global Economic Crisis
http://www.eurocoopbanks.coop/GetDocument.aspx?id=56d29cf3-4c7d-44a4-8a60-d0e4
601fba6c
25 Credit Union Central of Canada (2009) Largest 100 Credit Unions / Caisses Populaires
System Results Fourth Quarter 2008
26 Kirbyson, G. (2009, March 25). A Good Year for Manitoba’s Credit Unions. Winnipeg Free
Press. Retrieved from:
http://www.winnipegfreepress.com/business/a-good-year-for-manitobas-credit-unions-
41816297.html
27 Johnstone, B. (2009, April 8). Sask. credit unions post record income. Leader-Post.
Retrieved from: http://www.leaderpost.com/story_print.html?id=1479192&sponsor=
28 Anderson, F. (2009, April 21). B.C. credit unions enjoy record earnings for 2008.
Vancouver Sun. Retrieved from:
http://www.vancouversun.com/Business/credit+unions+enjoy+record+earnings+2008/15
17578/story.html
29 Knappe, C. (2008, December 7). Credit unions grow as financial storms batter banks.
The Grand Rapids Press. Retrieved from:
Credit unions in Manitoba saw their deposits increase by 11.5 percent to
Canadian $13.4 billion in 2008. 30
The picture is similar in Europe. In 2008, Rabobank (Netherlands) saw its
share of loans increase to 42% of the market, and its local member banks
recorded a sharp influx of savings of 20%. In the UK, the very low interest
rate set by the Bank of England has discouraged savings, but the building
societies’ share of the retail savings market increased from 20.2% at the end
of February 2008 to 21.4% at the end of February 2009. More deposits mean
greater liquidity for savings and credit cooperatives, credit unions and
cooperative banks, and so more money is available for lending.
Volume of lending
While a credit freeze by the large banks has been one of the characteristics
of the financial crisis, this has not been the case for the majority of
financial cooperatives in the United States and Canada. In the US, loans by
credit unions increased from US$539 billion in 2007 to US$575 billion in
2008. By comparison, 8,300 U.S. banks saw loans outstanding decrease
US$31 billion last year, to US$7.876 trillion from US$7.907 trillion in 2007. 31
Here is another way of putting the same point: credit union loan volume
increase 6.7% in 2008 while lending from US Federal Deposit Insured
Corporation (FDIC), or banks dropped by 40 basis percentage points.32
Davide Phillips, president and Chief Executive Officer (CEO) of Credit Union
Central of Canada affirmed to a parliamentary committee that credit unions
had not restricted their lending to businesses despite the economic
turmoil.33 Garth Manness, CEO of Credit Unions Central of Manitoba,
explains “Most financial institutions were short of lending capital and had
19
Resilience of the cooperative business model in times of crises
http://www.mlive.com/grpress/business/index.ssf/2008/12/grand_rapids_credit_union
s_gro.html
30 Kirbyson, 2009 op cit
31 Marte, J. (2009, March 15). Safe Havens: Credit Unions Earn Some Interest. Wall Street
Journal. Retrieved from: http://online.wsj.com/article/SB123708535764231521.html
32 Kashner, E. (2009, March 16). “Credit Unions vs Banks: A Competition of Value.”
Creditunions.com March, 16. Retrieved from:
http://www.creditunions.com/article.aspx?articleid=3000
33 Canadian Cooperative Association (2009) Credit Unions Maintain Business Lending
Parliamentary Committee Told Cooperative News Briefs: 10 (8)..
trouble financing
lending. Our credit
unions had the liquidity
to be able to meet
lending demand”. 34
Small businesses are a
driving force in the
economy and in
employment creation.
It is crucially important
that lending to this
sector continues. In
Canada, many credit
unions have increased
the number of loans to
small businesses; in British Columbia by 10 %. 35
Credit unions in the United States have reported a substantial increase in the
number of mortgages and car loans. First mortgage lending rose 40 percent in
first half of 2008 while the overall market was down
17 percent.36 Following reports that the large auto leasing companies in the US
such as GMAC Financial Services and Chrysler Financial Services have restricted
their lending activities, more car and boat dealers are reliant on credit unions for
their business.37 Others have turned to the credit union simply because their bank
would no longer work with them. Credit unions are also attracting customers who
may not have considered credit unions in previous years. Cliff Rosenthal, chief
executive of the National Federation of Community Development Credit Unions in
the US says that more people are turning to credit unions for mortgages. Bill
Hempel, chief economist of Credit Union National Association said that business
lending was up 36 percent in the first half of 2008.38
20
ILO - Sustainable Enterprise Programme
Responses to the Global Economic Crisis
34 Kirbyson, 2009 op cit
35 Anderson, 2009 op cit
36 Carey, N. (2008, November 17). As US banks retreat, credit unions step up loans.
Reuters. Retrieved from:
http://www.reuters.com/article/ousiv/idUSTRE4AF22120081116
37 Witkowski, R. (2009, April 17). Credit unions making loans where banks fear to tread.
Jacksonville Business Journal. Retrieved from:
http://jacksonville.bizjournals.com/jacksonville/stories/2009/04/20/story3.html
38 Meyer, 2008 op cit
It is a similar picture in other parts of the world. Taiwan Cooperative Bank is the
second largest bank in Taiwan; it is now granting mortgages with an initial
minimum of 1.5% for six months, and is competing aggressively with the Bank of
Taiwan. In Europe, Rabobank has seen its market share in loans increase to 42%,
and in mortgage lending to 29% in 2008 while Groupe Desjardins in Canada
remained a dominant player in Québec with a 39.3% market share in residential
mortgage credit, 46.9% in farm credit and 43.9% in personal savings 39.
Increase in membership levels
Loan accessibility, competitive rates, and institutional stability have translated
into an increase in membership in savings and credit cooperatives. Taking the
US as a whole, membership in credit unions rose to almost 90 million in 2008,
from 85 million in 2004. Raiffeisen Switzerland reported that 2008 outstripped
all expansion in its 108-year history with 150,000 new members (7.3% increase
to over 1.5 million members) and inflows of some 12 billion Swiss francs of new
money in the retail business, taking total client monies above 100 billion Swiss
francs.40
In previous banking crises, such as the Asian crisis of the 1990s, there was a
‘flight to quality’ among savers. The growing membership of banking
cooperatives suggests that this is also occurring in the present crisis. Consumers
are looking for safer and more ethical alternatives to the banks and are turning
to cooperative financial institutions.41 Drops in stock prices have also driven
investors to withdraw from the stock market and put their money into
cooperative savings and credit or credit union savings accounts.42
21
Resilience of the cooperative business model in times of crises
39 Desjardins Group. Desjardins Group Announces Surplus Earnings Before Member
Dividends of $78 Million for 2008 retrieved from
http://www.desjardins.com/en/a_propos/salle_presse/la_une/communiques/resultats-
financiers-2008.pdf
40 Raiffeisen Switzerland. Annual Report 2008 retrieved 14 May 2009 from
http://www.raiffeisen.ch/raiffeisen/INTERNET/home.nsf/0/E6B7C897EAA5468DC12575
8B005C59B4/$FILE/low_verband_2008_en.pdf
41 Hyden, G. (1988). “Approaches to Cooperative Development: Blueprint versus
Greenhouse” in Attwood D.W. & Baviskar B.S., (eds.), Who Shares? Cooperatives
andRural Development, Oxford University Press, Delhi.
42 World Council of Credit Unions (2008, Oct 1) U.S. Credit Unions Poised to Prosper During
Economic Downturn, CUNA’s Rick Tells WOCCU Webinar Audience, WOCCU News
Release.
Better interest rates, compared to competitors
As banks continue to suffer huge losses they have increased interest rates
and lowered credit limits on consumer credit cards to make up some of
these debts.43 Savings and credit cooperatives have no need to do this, and
a comparison of interest rates at credit unions and banks conducted by the
banking industry in the United States showed that credit unions consistently
had better rates than the banks did. 44 In other words, credit unions are
meeting the current demands of the market for good rates, low risk and
personal service while banks are increasing fees to make up for losses.45
Also, the net interest margins (the difference between deposit and loan
interest rates) are lower in credit unions.46
The disparity of rates is not just a North American phenomenon. High
interest rates and bank spreads was one of the main impetuses behind small
business owners and low income families forming savings and credit
cooperatives in Brazil; here, banks’ personal interest rates are at about 8
percent compared to the cooperatives’ rate of 4 to 5 percent.47
Stability, measured by capital adequacy ratios, and loan
default rates
If the saving and credit cooperative system is posting impressive numbers in
one of the worst financial environments in history it suggests an underlying
stability of these institutions. Capital adequacy ratios are one way of
measuring the stability of financial institutions. In its Financial Stability
Review the Reserve Bank of Australia stated that credit unions and building
22
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43 Blackwell, L. (2009, April 21). Banks Passing on Credit Card Debt to Consumers.
WTVY.com. Retrieved from:
http://www.wtvynews4.com/news/headlines/43387632.html
44 O’Connell, B. (2009). Do Credit Unions Offer a Better Deal? bankingmyway.com.
Retrieved online April 20, 2009 at:
http://www.bankingmyway.com/article/04/17/do-credit-unions-offer-better-deal
45 McDougall, 2008 op cit
46 Kashner, 2009 op cit
47 Braga, M., V. Fully Bressan, E. Colosimo, and Bressan. (2006). Investigating the
Solvency of Brazilian Credit Unions Using a Proportional Hazard Model. Annals of Public
and Cooperative Economics. 77 (1): 83-106.
societies had higher ratios than the banks and non-performing home loans
were lower as well.48
Similarly, US credit unions remain well capitalized. Loan delinquency rates
are increasing but are still less than half the rate for banks.49 For example,
credit unions in California have a capital-to-asset ratio of 10.5 percent that
well exceeds the 7 percent ratio needed to be classified in the highest
category of “well capitalized”.50 Financial cooperatives in South America
are also seen as
secure institutions
even during the
economic crisis. For
2008, the rating
outlook for the
Federación Uruguaya
de Cooperativas de
Ahorro y Crédito
(FUCAC) was stable.
It has recorded
profits for the past
five years and has an
equity/assets ratio of
49.4 percent.51
Losses made, and the need for government support
The World Council of Credit Unions reports “not a single credit union,
anywhere in the world, has received government recapitalization as a result
23
Resilience of the cooperative business model in times of crises
48 Why Credit Unions are a Good Bet in Bad Times. (2009, March 28). Business Day – Sydney
Morning Herald. Retrieved from: http://business.smh.com.au/business/
why-credit-unions-are-a-good-bet-in-bad-times-20090327-9e5c.html
49 Marte, 2009 op cit
50 Freeman, M. (2009, April 17). Economic heat encroaching, credit unions seek U.S. help.
The San Diego Union-Tribune. Retrieved from:
http://www3.signonsandiego.com/stories/2009/apr/17/1n17credit0068-credit-unions-st
arting-feel-economi/?business&zIndex=83787
51 Fitch Affirms Uruguay’s FUCAC’s IDRs at ‘B’; Outlook Stable. (2009, April 27). Business
Wire. Retrieved from:
http://www.pr-inside.com/fitch-affirms-uruguay-s-fucac-s-idrs-r1211176.htm
of the financial crisis and they remain well capitalized”. In Brazil the savings
and credit cooperatives have not been significantly impacted by the crisis.
They have high liquidity and have stable short- and medium term
financing.52 However, in the US an inter-cooperative guarantee fund has
needed state aid to compensate for losses incurred on the money market.
In Europe, the cooperative banks have satisfactory solvency ratios and are
not forced to resort to the recapitalisation plans introduced by
governments, though in a few instances (in Austria and France) they have
done so ‘with the intention of sustaining a rate of growth in their lending
tailored to a severely degraded and risky environment’.53
Losses have been made at the level of central cooperative banks and credit
unions. In Canada most provinces have a Central which is owned by the
credit unions and operates as a type of central banks to the system.
Centrals provide financial and technological products and services, as well
as managing liquidity and investment for the individual credit unions. The
corporate credit unions in the US play a similar role, and their investment
activity exposed them to the same markets that have devastated the
banking system. SaskCentral, one of the provincial Centrals in Canada,
posted a loss of over C$45 million as it had a 51% million write-down on
investments in asset backed commercial paper.54 Desjardins in Quebec also
experienced significant losses, however guaranteed repayment of the initial
capital its customers invested in the ailing hedge funds that it offered to it
5.8 million customers.
In the US, the two corporate credit unions, US Central Credit Union and
Federal Credit Union were seized by US regulators at the beginning of 2009;
the two institutions were involved in the kind of mortgage backed securities
that got banks into trouble. 55 The US Central Corporate Credit Union is to
get US$1 billion in government aid, but it is interesting to note that the
losses are not due to a failure in corporate governance; at the time the
24
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52 WOCCU 2009: 1
53 DeVries (2009), op cit p4
54 Johnstone, op cit 2009
55 Kane, M. (2009, March 26). Credit Union Collapse Signals Depth of Financial Crisis. The
Washington Independent. Retrieved from:
http://washingtonindependent.com/35928/credit-union-collapse-signals-depth-of-finan
cial-crisis
investments were rated as low risk products. The US credit unions have a
three tier system; there are 8,400 primary societies, 27 corporates and the
Centrals. The corporate credit unions invested US$64 billion from their
members in mortgage-backed securities, and as these have declined in value
by US$18 billion they are being forced to acknowledge the decline.
In other parts of the world, cooperative banks have also posted losses, but
again only at the level of highest level of their structures and its
subsidiaries, not at the level of the local banks. The write-offs have so far
been bearable in relative terms. In Germany, the cooperative central bank,
DZ, announced a loss of Euro1 billion for 2008 as a consequence of high risk
investments. DZ is a joint stock company owned by cooperative banks, and
they will have to share the loss. Similarly, in Japan the Norinchukin Bank has
lost US$6.5 billion on investments and securitized products, making it the
biggest loser in Asia from the crisis. The bank had continued to buy toxic
assets while other banks disclosed losses, because the assets were bought
cheap, and its managers under-estimated the severity of the crisis. It is
owned by 32 million farmers and fishers through their producer
cooperatives, and they will have to find 1.9 trillion yen of financial support
which they believe will be possible. While the bank is still able to guarantee
a return on its members’ assets, it is unable to pay a dividend in 2009, and
this will put pressure on a not very profitable farming sector.
These are exceptions. The global picture is of a sector which has not yet
been seriously affected by the crisis. It has high liquidity and a healthy loan
growth. However, as the recession deepens and lengthens, it is likely to
have to deal with increased loan delinquency, and eventually a falling off in
deposits as members’ incomes begin to decline. Also, perversely,
cooperatives have to compete with bankrupt investor-owned banks that
have been recapitalised by governments which are offering very high
deposit rates and forcing others to follow; this is unfair competition.56
In developing countries, credit unions will continue to be crucial to their
members’ wellbeing, and their savings-led approach to development should
lead them to survive while conventional banks collapse.57 Indeed in some
25
Resilience of the cooperative business model in times of crises
56 deVries (2009)
57 See Crear, P (2009) Cooperative Banks, Credit Unions and the Financial Crisis, Paper for
the UN Expert Group Meeting on Cooperatives, April, New York
countries including the Bahamas58 Philippines59 and Kenya, government
officials are lauding the performance of savings and credit cooperatives and
encouraging their citizens to bank with them.
What savings and credit cooperatives
and cooperative banks are doing to cope
with the crisis
In response to the crisis, there is an immediate refocusing of the business,
and we can predict that the sector will sell off subsidiaries that are not part
of the core business. It will increase its capital base to make it more
risk-averse including through mergers, and will make efforts to achieve cost
reductions. One interesting effect of the recession is that cooperatives
everywhere are rediscovering their core values as member-owned
businesses, and are making these part of their business strategy. In Europe,
there is a growing commitment to social responsibility including the
financing of
environmentally
friendly projects. In
general, there is a
growing confidence
in the cooperative
business model and a
sense that it is going
to be a key player in
the restoring of
confidence in the
banking system.
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58 McKenzie, T. Cooperative Regulators Dash CLICO Reports. The Bahamas Journal
Retrieved from
http://www.jonesbahamas.com/news/45/ARTICLE/19394/2009-03-12.html
59 Negros Chronicle. GARY TEVES: Cooperatives Less hit by Global crisis. Retrieved from
http://www.negroschronicle.com/?p=4540
3.2 Significance of cooperative banks and
savings and credit cooperatives for financial
inclusion
Thepoorarethemost
vulnerable to
economic instability.
The global economic
crisis may force more
than 50 million
additional people into
poverty and thwart
any major progress in
achieving the United
Nations Millennium
Development Goals of
2015.60
Savings and credit
cooperatives are
particularly good at reaching the poor. A membership survey in Colombia,
Kenya and Rwanda found that half of members live below the national
poverty lines, nearly half are first time users of financial services, one third
live in rural areas, and nearly a third have a micro-entrepreneur in their
household. 37% of respondents are women, and one in four have a primary
school education or less. At the same time, because they also include higher
income members they are able to provide a range of affordable financial
services to members while keeping costs low. They are also able to help
create a middle class in societies, thus contributing to political and
economic stability. 61 Particularly noteworthy is the remittance system,
whereby savings and credit cooperatives provide low cost money transfers
from people working in developed countries and sending part of their wages
27
Resilience of the cooperative business model in times of crises
60 Schifferes, S. (2008, February 12). Crisis ‘to trap 53m in poverty’. BBC News. Retrieved
from: http://www.stwr.org/poverty-inequality/global-financial-crisis-pushing-
millions-into-extreme-poverty.html#bbc
61 Crear (2009) op cit
home. Since this began in 2001, over US$2 billion has been transferred.62
For many people in developing countries in Latin America remittances
from family members abroad are an essential part of the household
income. Estimates put the total value of all remittances from the US to
Mexico, Central America, and the Caribbean at around US $15 billion.
Lower services fees on remittance transactions can therefore have a
significant impact on low income families. Credit unions and cooperatives
charge the lowest fees compared to banks and remittance service
companies.63
A lesson that can be taken from the subprime mortgage debacle is that too
much emphasis was placed on access to credit and marketing strategies to
get people comfortable about having personal debt. In looking at poverty
reduction strategies, Jones states that one of the fundamental shifts in
the philosophy of savings and credit cooperatives and their role in poverty
reduction was an emphasis on savings rather than loans.64 Previously,
savings and credit cooperatives assumed that offering low-cost loans to
the poor was the key to getting them out of poverty as it was believed
that lack of access to credit and a reliance on subprime lenders kept the
poor impoverished. Increasingly savings and credit cooperatives are
coming to understand that savings and the accumulation of assets should
be the priority as this is what ultimately will pull people out of poverty.
Marginalized groups—people in the inner-cities, ethnic populations and
rural citizens have already witnessed a pulling out of banking institutions
in their communities and the current crisis will only exacerbate the
problem. The credit freeze will disproportionately hurt those who are
considered a credit risk leading to even greater financial exclusion and
marginalization. Jones also argues that there is a direct correlation
between financial exclusion and poverty. Financial exclusion is both a
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ILO - Sustainable Enterprise Programme
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62 See also Birchall J (2004) Cooperatives and the Millennium Development Goals, Geneva:
ILO for a case study of remittances
63 Orozco, M. (2002). Attracting remittances: Market, money and reduced costs.
Multilateral Investment Fund of the Inter-American Development Bank. Washington D.C.
Retrieved from:
http://www.rree.gob.sv/sitio/img.nsf/vista/documentos/$file/market%20money%20and
%20costs.pdf
64 Jones, P. (2008). From tackling poverty to achieving financial inclusion—The changing
role of British credit unions in low income communities. The Journal of Socio-Economics
37: 2141-2154.
result of poverty and a cause of greater poverty. Thus, finding ways to
create, and foster financial inclusion is an essential part in alleviating
poverty. Simply having a bank account can lead to greater financial
security.
Here are three examples that
show the potential of savings
and credit cooperatives
among poor people. Sistema
de Cooperativa de Crédito
(SICREDI) in Brazil is a
network of 130 financial
cooperatives with
approximately one million
members, half of which are in
the rural areas. SICREDI has
been a picture of growth and
profitability in recent years.
It nearly doubled its
membership between 2001
and 2005. Deposits and loans
also increased during this
period and the consolidated
profits for 2005 were just over US$64 million.
The conclusion is that financial cooperatives can deliver quality products
and services to the rural communities while still being profitable.65
Ecuador went through an economic crisis during the 1980’s and 1990’s which
forced many banks to file for bankruptcy.66 By 1999, nearly half of the
38 banks in the country had failed. Similar to the current global crisis,
access to credit was limited, and trust in the banking system dropped
significantly.
29
Resilience of the cooperative business model in times of crises
65 Nair, A. and R. Kloeppinger-Todd. (2007). Reaching Rural Areas with Financial Services:
Lesson from Financial Cooperatives in Brazil, Burkina Faso, Kenya and Sri Lanka.
Agriculture and Rural Development Discussion Paper 35. The World Bank.
66 Klaehn, J. (2006). Credit Unions Reach Out to Poor Women. CUFocus. Autumn. pp.
28-29. Irish League of Credit Unions. Retrieved from:
http://www.creditunion.ie/files/20061109031401_CUFocus_Autumn.pdf
However, the credit
unions in the country
remained relatively
stable, which the
credit unions
attributed to the
financial controls and
supervision they had
established before
the crisis occurred.
The credit union
system and village
banks are providing
financial services in
small rural communities that have little or no access to other financial
institutions.
VanCity, the largest credit union in Canada, was established in the 1940’s
because the major banks refused to lend to the poorer areas in the city of
Vancouver. Still today with assets in the billions of dollars, the credit union
remains committed to ensuring that the marginalized groups of people have
access to financial services. VanCity’s established an Accessibility
Programme to meet these commitments which includes making sure that
services are accessible as possible, introducing microfinance schemes and
working with other community groups to connect with hard-to-reach people
such as new immigrants.67
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ILO - Sustainable Enterprise Programme
Responses to the Global Economic Crisis
67 Canadian Cooperative Association. (2003). Building Assets in Low Income Communities:
Policy research on the cooperative model. A Building Community Assets Research
Report.
3.3 The significance of cooperatives for
employment creation and decent work
The sound health of the cooperative banks and credit unions is good news
for employment creation as they are crucial for enabling SMEs to expand. In
Europe, for instance, 29% of cooperative bank lending is to SMEs and the
main focus is on local, domestic markets.68
What about the contribution of other types of cooperatives? The evidence so
far in the current recession is that there has been an increase in the
numbers of cooperatives being formed, and they tend to last longer than
other types of business. In Germany, the cooperative business model is
‘seen to provide stability and security in tough times’, and is expanding into
new fields within the SME sector. There are 8,000 cooperatives with around
20 million members. 250 cooperatives were created in 2008, double the
numbers started in 2007. Also, cooperatives last longer; while in 2005 1% of
businesses were declared insolvent, the figure for cooperatives was less
than 0.1%.69 On the other hand, in Spain, where there are over 18,000
worker cooperatives employing 300,000 people, there was a slight fall in the
number of new cooperatives in 2008 of 1.7%. However, the fall in start-ups
for conventional companies was 7%.70
A major study by the Québec government showed that cooperative
businesses tend to last longer than other businesses in the private sector.
“More than 6 out of 10 cooperatives survive more than five years, as
compared to almost 4 businesses out of 10 for the private sector in Québec
and in Canada in general. More than 4 out of 10 cooperatives survive more
than 10 years, compared to 2 businesses out of 10 for the private sector.”71
One of the reasons for this longevity could be that cooperatives are not
purely motivated by achieving the maximum rate of profit. Rather
cooperatives also have goals of serving their community and meeting the
needs of their members.
31
Resilience of the cooperative business model in times of crises
68 deVries (2009) op cit
69 Marquardt, S and Sinico, S (2009) More German firms turn to cooperatives in tough
economic times, found at www.dw-world.de
70 Worker cooperatives face the economic crisis, found at www.cicopa.coop
71 A study conducted by the Ministry of Industry and Commerce, Government of Québec,
2008 Contributors: Lise Bond, Michel Clément, Michel Cournoyer, Gaétan Dupont
Where can we expect the growth points in cooperative development to be,
during the recession?
Just as in previous recessions, we can expect an increase in worker
takeovers of ailing companies. For instance, Cantende-Harmonia is Brazil’s
largest
worker-managed
business in the
country. The
company is an
agricultural
cooperative involved
in sugar production
and providing
employment to
4,300 families. The
workers took over
the ailing company
in 1993 in order to
protect the workers’
jobs. The Labour
Ministry of Brazil estimates that there are approximately 200 cases of
workers taking control of a private business.72
We can also expect an increase in the number of women’s cooperatives
being formed to increase their incomes. For instance, in state of California
in the US, the Women’s Action to Gain Economic Security (WAGES) has
focused on funding worker cooperatives to help low income women increase
their earning potential. The cooperatives, which are mainly eco-friendly
housecleaning enterprises, have raised the household incomes of members
by 40 percent and it is estimated that the worker-owners are earning 50 to
100 percent more than they working for other housecleaning businesses.73
In addition to higher wages members also receive health insurance and
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72 Osawa, M. (2008). “Development-Brazil: Solidarity Economy Combats Exclusion.” IPS
News. January 11. Retrieved online April 28, 2008 at:
http://ipsnews.net/news.asp?idnews=40760
73 Todd, A. (2007). Housecleaning coop members see income, benefits rise sharply. Rural
Cooperatives. March/April. Retrieved from:
http://findarticles.com/p/articles/mi_m0KFU/is_2_74/ai_n19022190/
other benefits and the opportunity to learn skills needed to run a successful
business. In a failed toy store in Hingham Square, Boston in the United
States, four women have opened a cooperative which they hope will serve
as an incubator for other mothers with business ideas.74
We can also expect an increase in the number of communities turning to
cooperatives to safeguard their local economies. For example, in Canada’s
remote northern communities, where cooperatives form the backbone of
the local economy, 2008 was a banner year for Arctic Cooperatives Limited,
and the 31 Inuit and Dene owned and controlled cooperatives located in
Nunavut and the North West Territories in Canada’s Arctic. ACL and its
member cooperatives experienced the best year in its 50 year history.
Revenue from all business units of the 31 community owned cooperatives
was C$164 million, an increase of 12% from 2007. The cooperatives are an
important economic engine in the Arctic. Local coops paid C$22 million in
wages, returned C$8.1 million in patronage dividends and invested more the
C$4 million in new and expanded infrastructure, including retail stores,
hotels, warehouses and other fixed assets.75
What can governments do to help the employment creation process through
cooperatives?
The Finnish experience of labour cooperatives is potentially of great interest
in this respect. As previously noted, Finland suffered badly from a deep
recession caused in part by the breakup of the Soviet Union; a large part of
its export market was lost. Then, when Finland joined the EU in 1995 there
was the impact of deregulation of markets. Unemployment, which had been
around 3% in the late 1980s, rose to over 20%. The numbers of
employee-owned cooperatives soared to around 1400, of which 1,230 were
labour coops. They are a fascinating combination of job seekers clubs,
employment agencies and training agencies. Unemployed people become
members. The cooperative then finds them temporary work, renting out
their labour by the day or hour like a private employment agency. They
operate mainly in construction and office work, but also in computer
services, accounting, cleaning, social services, and maintenance work. In
33
Resilience of the cooperative business model in times of crises
74 www.boston.com/news/local/articles/2009/02/26/
theyre_going_to_work_on_their_own_terms/)
75 Arctic Cooperatives Limited/Arctic Cooperatives Development Fund 2008 Annual Report,
page 7.
2001 they provided work for 3,300 full time and 4,400 part time members.
Support for them is part of public policy. 76
Sweden has a network of 25 cooperative development agencies that has
been promoting worker cooperatives since 1985. Together they support the
startup of between 200
and 400 new coops
each year. There are
around 500
cooperatives in
membership of their
Association, most of
which are worker
cooperatives.
However, they do not
limit themselves to
worker cooperatives
but promote other
types such as
consumer, producer or
multi-stakeholder
cooperatives. 77
Taken together, the Finnish and Swedish experiences can show the potential
of employment creation through cooperatives.
3.4 Policy responses
Governments that wish to promote cooperatives of all types and around the
world already have guidance in the form of ILO Recommendation 193 on the
Promotion of Cooperatives.
Passed in 2002, this recognises that governments should provide a
supportive framework for cooperative development, but insists that
cooperatives are autonomous associations of persons that have their own
values and principles. This means that promotion should not involve direct
support to the business but capacity building that enables members to make
34
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Responses to the Global Economic Crisis
76 Birchall (2003) op cit pp48-51
77 Slup.se website explains
the cooperative succeed for them. Grants, loans or other sources of funding
may sometimes be needed, but a primary goal of governments, NGO’s and
other development agencies should be organizational self-sufficiency at the
earliest possible stages of the cooperative’s development; cooperatives
must be established with the intent of being viable businesses.
In developing countries in particular,
there must be no return to the
discredited policies of the past, when
cooperatives were turned into parastatals
controlled by governments and
politicians, and treated as ‘tools’ of
economic development.78 It is important
to note that the early development of
cooperatives in the United States and
Canada were predominantly local
initiatives of people who had a common
need.79 Similarly,thecooperativebanks
of continental Europe were created by
local people, who then created their own
central banks to supply them with joint
services. In both cases, promoters such as
Raiffeisen in Germany, Desjardins in
Canada and Gebhard in Finland
concentrated on spreading the idea,
educating people to run their
cooperatives, and making sure that
enabling legislation and a fair regulatory
system were put in place. Thus a central role for government is also to
ensure that cooperatives are included in school curricula at every level to
enable to young people to look to the cooperative option for
entrepreneurial activities.
In general, governments should identify a focal point for cooperatives with
the government and provide focused assistance to the cooperative sector.
They should recognize the importance of cooperative top-level or apex
35
Resilience of the cooperative business model in times of crises
78 Birchall (2003) op cit
79 Hyden, G. (1988) op cit
organizations and
federations in the
development of the
cooperative sector
and provide
technical and
financial assistance
to these
organizations.
Cooperative
federations may be
more attuned to
the needs of their
members than
other groups and can
effectively provide their cooperative members with specifically designed
support. They can offer some stability for smaller cooperatives during tough
economic times, and may be better at coordinating outside funding and
delivering to first tier coops that require assistance, rather than
development agencies targeting local cooperatives in an uncoordinated
manner.
In particular, governments should develop policies that recognise the
particular nature of cooperatives. They should not be over-regulated, and
their essentially risk-averse nature should be understood.
With regard to savings and credit cooperatives and cooperative banks in
particular, these need direct access to payment, clearing and settlement
systems, in particular to card networks. In a recent study, savings and credit
cooperatives in 41 out of 60 countries did not have this kind of access. In
order to be successful and to reach those who are financially excluded, they
must have the same opportunities as their competitors to offer a broad
range of financial products and services.80 They also need direct access to
their central bank’s liquidity window. In developing countries, restrictions
on lending to small businesses need to be lifted so they can lend to this
sector. Access to deposit insurance systems needs to be on a par with that
of commercial banks. They need to be able to access and issue alternative
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80 Jones, 2008 op cit
forms of capital in markets where they can prove they can manage such
capital.81
With regard to legislation for savings and credit cooperatives, what is
needed is a legislative framework that recognises the unique nature of
savings and credit cooperatives and provides specific legislation for them.82
In some countries, they are regulated by general cooperative laws but these
are not appropriate. In Sri Lanka, for instance, the SANASA movement is
held back by being regulated by cooperative commissioners at local level
who do not know much about the financial sector.83
In other countries they are regulated by micro-finance laws that are
designedmoreforNGOsandprivatebanks.
Finally, there are also public international regulations that sometime
unintentionally also limit the development and growth of all types of
cooperatives including international accounting standards and international
financial regulations such as the Basel Accords.
How should governments treat savings and credit cooperatives and
cooperative banks during the crisis? First, any future financial rescue
packages implemented at global or national levels should be unbiased
against cooperative financial institutions relative to the commercial banking
sector. Second, cooperative financial institutions should be recognized in
any pronouncements emanating from governments and international
agencies as secure, locally-owned financial institutions that have presented
safe and sound financial alternatives during the current crisis. Lastly, future
regulations or legislation that may result from this crisis should clearly
recognize that cooperative financial institutions have not been the source of
these problems, have been significantly less affected by the economic
fallout and should not be punished by inclusion in a series of new rules
designed to correct a problem they have not caused. 84
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Resilience of the cooperative business model in times of crises
81 Crear (2009) op cit
82 Crear (2009) op cit
83 See Birchall, J and Simmons, R (2008) Cooperatives and Poverty Reduction: final report
to the ESRC, available at www.esrc.ac.uk
84 WOCCU Asks G-20 Finance Ministers to Recognize Credit Unions Safety, Stability – letter
from the CEO, Pete Crear (www.woccu.org/press/releases?id=1543)
3.5 How can the ILO assist its constituency to
promote cooperatives to address the crisis
and recovery?
The ILO has a unique mandate and responsibility within the United Nations
systems to promote cooperatives. It has an excellent opportunity to
respond to the economic crisis through its Cooperatives programme
(EMP/COOP) to deliver effective services in the implementation of ILO
R.193. This includes policy advice and technical expertise in such areas as
legislation as well as the implementation of technical cooperation
programmes to support cooperatives. Through the unique Memorandum of
Understanding between the ILO and the International Co-operative Alliance,
the ILO has access to the cooperative movement, its expertise, practical
knowledge and a large network of already successful cooperative
businesses, and there are a considerable range of opportunities to assist
partnerships between the cooperative movement and ILO constituencies.
However, strengthening the cooperative element in existing ILO
programmes can also lead to innovative approaches to addressing decent
work through the organization including, but not limited to, addressing
sustainable enterprise, poverty alleviation, social protection, the informal
economy, child labour, gender, corporate social responsibility and a range
of other issues that are critical to promoting the Decent Work Agenda.
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ILO - Sustainable Enterprise Programme
Responses to the Global Economic Crisis
Finally, the ILO and its Cooperatives programme will likely become more
important within the UN system as a focal point for cooperative expertise as
the international community, and in particular ILO constituents, seek
assistance in promoting cooperatives in all sectors and around the world.
The World Bank, in its World Development Report 2008 which focused on
agriculture, has already noted the effectiveness of the cooperative model of
enterprise as one form of producer organization and thus the importance of
the promotion of cooperative development in the context of rural
development. It notes too that “financial cooperatives and their networks
are re-emerging as promising institutions in rural finance in many countries”
which supports evidence from the International Monetary Fund on the
success of financial cooperatives. Further confirmation of the trend to seek
solutions to global recovery through cooperatives is also already visible in
the initiative of the United Nations to declare a UN International Year of
Cooperatives in which the ILO’s Cooperatives programme would hold the
secretariat of the Year. The decision will be taken at the UN General
Assembly at its 64th session this year, while on 4 July 2009, the
international community will celebrate UN International Day of Cooperatives
which focuses on the theme, “Driving global recovery through
cooperatives”.
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Resilience of the cooperative business model in times of crises
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