Europe/Eurasia - USAID Mission to Poland

BUILDING A SUSTAINABLE NETWORK OF FINANCIAL SERVICES TO SERVE LOW-INCOME MASSES

The World Council of Credit Unions, Inc. (WOCCU) Research Monograph Series presents the findings of credit union research and studies carried out through WOCCU credit union development activities. The issues and interpretations expressed in this document are those of the authors and should not be attributed to World Council of Credit Unions, Inc. or to its member organizations.

Information Center
World Council of Credit Unions, Inc.
P.O. Box 2982
Madison, WI 53701-2982
USA

PEARLS WOCCU’s Financial Monitoring System (Protection, Effective Financial Structure, Asset Quality, Rates of Return and Costs, Liquidity, and Signs of Growth)

"As soon as we regained independence in 1989, and became a self-reliant country again, we wanted to create a financial system which would be our own."

At Polish request, the World Council of Credit Unions (WOCCU) provided technical assistance funded by the U.S. Agency for International Development (USAID) to help create a credit union system after the fall of Communism in Poland. Considering that prior to 1992, there were no operating credit unions in Poland, it seemed aggressively optimistic to assume that a large base of self-sufficient, primary level credit unions could be built throughout Poland within seven years. It was outrageously bold to state that the WOCCU project would also create many of the secondary level financial services that are present in most developed credit union movements around the world, and then declare that it would all be self-sustaining by the end of the project. Unbelievable as it seems, that is exactly what has happened.

In 1992, the project established a national association (NACSCU) and created a Central Finance Facility (CFF), a Stabilization Fund, and an Insurance Company. This technical assistance project did not focus on strengthening a number of primary level credit unions at the base, but instead had a top-down approach that has not had a replicable success anywhere else that WOCCU has worked. NACSCU has directed and implemented most of the project initiatives. As of December 31, 1998, the following indicators were recorded:

The total cost of the entire seven years of USAID project assistance to Poland was 3.9 million USD. For every US Dollar that was spent on this project, over 40 USD of new assets was generated. Assets of 158 million USD render the Polish credit union system the fourth largest financial network in Poland.

The Polish credit union system is a huge provider of retail financial services to low-income Poles. The system served 268,700 members at the end of 1998. The average loan size is only 12% of average GNP per capita ($3590) and the average deposit size is a mere 15% of average GNP per capita. The average loan and deposit sizes are well below USAID’s benchmark of $1000 for poverty lending in Eastern Europe.

A survey of 604 credit union members in 21 credit unions in March 1998 discussed in the text reveals in a qualitative sense the depth of outreach of Polish credit unions. For more than 50% of the members surveyed, the credit union is the only source of formal finance available to them.

The main body of the document highlights various financial indicators to illustrate the financial performance of the largest 36 credit unions. The return on average assets in 1998 was 3.04%. Delinquency stands laudable at less than 1%; however, institutional capital is lower than WOCCU international performance standards recommend.

Besides credit union-level achievements, the development of NACSCU as a financially sustainable second tier national association, is a remarkable project accomplishment. NACSCU’s overall success and financial independence are largely due to its ability to attain: legal significance, commercial significance (as evidenced by income-generating services including central finance facility, stabilization fund, training seminars, SKOKOM computer software, equipment services, supervisory/audit services, insurance products), political significance, and supervisory significance.

As is the case in most successful projects, there are a variety of factors which, when combined together, produce a synergy that yields an output greater than the sum of the individual pieces. In the case of Poland, this synergy is readily apparent. The success factors in the development of the Polish Credit Union Movement include:

These factors of success are particular to Poland and make the probability of a similar success in a similar amount of time in another transitioning economy country in the region very small. The explosive success in building and then strengthening a credit union system that now functions completely on its own in Poland is not likely to be replicable in the region. Not only is the legal framework, the support from Solidarity and company management, and the movement’s leadership unique; but also, donor funding patterns have changed to the effect that technical assistance projects, no matter how small the funding, rarely last for seven years despite this brilliant example of leveraging.

There is an international credit union system; nevertheless, every national member of the global system has its own unique strengths and challenges.

"In my opinion, we were established at the right moment, at the right time to attract people to make them save and to make use of our credit services. If we hadn’t been established, I don’t know what would have happened to these people. To many members of our credit union, we are just an indispensable element of their environment. They wouldn’t be able to find any other financial service provider. They need the credit union."

In August 1989, leaders of the newly empowered Solidarity Party visited the United States. Grzegorz Bierecki, an employee of Lech Walesa at that time and the Manager of the Polish Credit Union League (NACSCU) since its inception, learned about the operating principles of credit unions and presented Walesa and other ranking Solidarity officials with the concept of building credit unions in Poland. At the request of Solidarity, officials from the World Council of Credit Unions (WOCCU) visited Poland in November 1989 to conduct exploratory interviews regarding "free market" credit union development in Poland.

With seed capital provided by donations from the U.S. credit union movement, the Foundation for Polish Credit Unions (FPCU) was founded in 1990 to help promote education about credit unions and establish a legal framework for their development in post-communist Poland. The FPCU succeeded in getting an article passed in the Trade Union Act in 1991 that allowed credit unions to establish themselves in workplaces such as coal mines, shipyards, and factories.

In 1990, a group of U.S. credit union experts visited Poland and evaluated the feasibility of creating a credit union system within Poland. After a favorable review, a proposal was drafted, approved by USAID, and the first USAID sponsored project started in September 1992. Several people were hired to promote the organization of credit unions within the business workplace in Poland.

The overwhelming local interest in the development of credit unions resulted in the design of a much larger new project entitled, "Building the Polish Savings and Credit Union System." This project began in May 1993 and was refocused in 1995 with an added "Phase II" for another two years. In October 1997, USAID extended this project for eighteen additional months until March 31, 1999, because of the impressive results that had been achieved in the Polish credit union system. In this last extension, the focus of the project changed again from building the credit union system to strengthening the credit union system.

Considering that no credit unions had operated in Poland since before World War II, it seemed aggressively optimistic to assume that a credit union network could start from nothing in the early 1990s and build a large base of self-sufficient, primary level credit unions throughout Poland within seven years. It was outrageously bold to expect that the project would also create many of the secondary level financial services present in virtually all of the developed credit union movements around the world, and then declare that it would all be self-sustaining by the end of the project. Unbelievable as it seems, that is exactly what has happened. The total amount of USAID funds spent from 1992-1999 was only $3.9 million. For every $1 spent on the project, over $40 of new assets were generated.

The following table shows the initial project goals and the status in U.S. Dollars (1 USD = 3.5 PLZ) as of December 31, 1998:

"We offer a wide range of products to our members, ranging from loans to fixed term deposits. The most popular product is the short term loan. A loan granted for a period not exceeding one month…Also, fixed term deposits are very popular and we offer the highest interest rates in the city."

Credit unions in Poland offer a sophisticated variety of products and services ranging from short-term instant loans, medium term credits, long-term housing loans, share deposits, withdrawable voluntary savings deposits, systematic savings programs, fixed term deposits, automated teller machines (ATM), electronic payment of monthly bills, credit cards, to life insurance. Credit union interest rates are more attractive than those of commercial and state banks. Credit unions typically pay several percentage points higher on savings deposits and one or two points less on credit.

"If our credit union lacks funds, then we can borrow from the Central Finance Facility at a low interest rate. If the credit union has excess liquidity, then we can invest the funds in that same facility. Perhaps this is the most important element of the National Association, because as a result, our members can feel comfortable that the credit union is a reliable institution."

Mr. Ziecek, President of Katowice Steel Mill Credit Union and NACSCU Board Member

The National Association of Co-operative Savings and Credit Unions (NACSCU) is the apex organization through which virtually all credit unions are allowed to do business in Poland. The development of NACSCU as a financially sustainable second tier, national association, has been one of the most remarkable accomplishments in the first seven years of the Polish credit union system. There are many national associations throughout the world that even after thirty years of existence are still not financially self-sustainable.

With the approval of the Credit Union Act of 1995, NACSCU assumed a preeminent role as the true axis of the entire Polish credit union network. Legally, NACSCU has been charged with the responsibility of establishing prudential standards and norms for credit unions, and then enforcing those norms through a comprehensive audit and supervisory role. This legal structure, in essence, guaranteed that NACSCU would always play a significant role in the development and supervisory control of the credit unions. At the center of its supervisory responsibilities are the prudential standards of safety and soundness that NACSCU imposes on all of the Polish credit unions. To effectively monitor the compliance of these standards, NACSCU requires strict monthly reporting requirements of all credit unions. The growing database of credit union financial data and statistics has become a powerful, centralized source of information for NACSCU, on the status of the Polish credit union system.

The key to the financial success of NACSCU has been the commercially-oriented products and services which it has offered to credit unions to help them provide better services to their membership base. The sale of these products and services has created sufficient revenues to cover the operating expenses and attain financial sustainability. The services listed below are offered either through NACSCU, or a subsidiary or affiliated organization through which NACSCU receives a financial benefit:

The CFF was created in order to provide liquidity protection to credit unions in the event of unanticipated member savings withdrawals. The current fund balance of 17,263,165 USD has grown as a result of the legal requirement that all credit unions maintain at least 5% of all savings deposits and external loans and 100% of their capital reserves (shares and institutional capital) in the CFF. The role of the CFF is to manage the liquidity of the S.K.O.K. network. It is the only credit union entity that can borrow from banks, so base-level credit unions can only borrow from the CFF for their financing needs. It pays a competitive return (currently 12%, the same as the PKO Bank) to credit unions for the obligatory liquidity reserves that they must maintain in the CFF.

This return is significantly better than that of the competition. Currently, the National Bank of Poland requires banks to deposit 11% of their risk-weighted assets as obligatory liquidity reserves, and pays 0% interest on those funds. Aside from the obligatory liquidity requirements, the CFF also offers a volunteer savings program which pays 2 -1% higher than savings accounts in a bank.

The CFF has two investment options with its liquidity. It may either invest in government bonds which currently yield 14%, or it may loan funds to member credit unions in need of external financing. The loan interest rate varies between 16-20%, depending upon the term of the loan. The CFF has tried to "smooth out@ the highly volatile interest rates in the financial marketplace by not reacting immediately to rate changes. By lagging the market, the CFF provides greater stability to the credit unions still struggling with proper interest rate pricing.

The Stabilization Fund was set up to assist credit unions that have experienced financial difficulties in the volatile economic conditions of the financial marketplace. Credit unions must deposit 1.22% of their total assets in the Stabilization Fund, at 0% interest, in order to help weak credit unions strengthen their financial position and protect their member savings deposits. NACSCU lends this money out to weak credit unions at preferential rates of interest (currently between 5-8%). As of December 1998, the balance of the Stabilization Fund was 2,045,000 USD. Of this amount, 250,000 USD is loaned out to financially-troubled credit unions while the balance is invested in government bonds.

This credit union-owned insurance company provides credit unions and their membership with a variety of important insurance products, such as property and casualty insurance, credit disability insurance, fidelity bonding insurance, and savings deposit insurance up to 8,000 Euro per account holder.

All credit unions that belong to NACSCU must use the SKOKOM credit union software, developed by this company. Increasingly, this software has become a centerpiece for offering new financial products (e.g., ATM cards, credit cards) as well as for the supervisory activities conducted by NACSCU, as mandated by the new credit union law. H&S also handles the purchase of a variety of office supplies, equipment and furniture for the credit unions, such as desks and chairs, copy machines, computers, ATMs, paper shredders, safes, marketing materials and forms.

The Credit Union College and the regional training centers, equipped with very capable people, have done an excellent job in training credit union personnel in all matters related to credit union principles, philosophy, operations, financial management, and member services. Training is an on-going activity, which is conducted in regional training centers throughout the country. Fees are charged for these seminars.

This is a tax-exempt foundation that owns the building of NACSCU and the SKOKOM software program. In addition, it has invested in TUW-SKOK Insurance, a Brokerage Service Business, and computer hardware. It uses donor contributions to help develop and strengthen various activities within the Polish Credit Union Movement.

According to Marguerite Robinson, in Strategic Issues in Microfinance, pp.55-56:

The primary beneficiaries of financial services offered by credit unions in Poland are low-income wage workers. The majority of credit unions in Poland are employee-based owing to legal constraints that existed until early 1996. It was not until the Credit Union Act entered into force on February 5, 1996 that credit unions could be established on the basis of associational or organizational common bonds outside of the workplace. Credit unions appeared in all areas of Poland in its coal mines, shipyards, and factories. Since 1996, several community credit unions have been established. Their appeal to low-income Polish people is spreading rapidly as evidenced by growth rates in membership and average sizes of loans and deposits.

"On June 12, 1996 we opened the first Polish Parish Credit Union. First, the credit union was housed in tiny quarters. We anticipated that the location would be adequate because we didn’t expect to have more than 200 members. There was a burst, rather an explosion of membership in the credit union. From the initial membership of about 100 people in the first month, in three months we arrived at a membership of 200… When the parishioners learned that the interest rate charged on loans was less than the rate of other financial institutions, they started joining quickly. Soon we became the first parish credit union. Now in June 1998, we have 2,600 members."

Father Bernard Zielinski, Priest and Founder of St. Anthony’s Parish Credit Union

USAID has classified microfinance in Eastern and Central Europe as loans and savings deposits amounts of less than or equal to $1000. Average savings deposits and loans well under $600 place credit unions in the position of the largest microfinance provider in Poland. According to data from the Bank Guaranty Fund, assets of $158 million render the Polish credit union system the fourth largest financial network in Poland. From a remarkable penetration rate of 1.7% in 1997, in first quarter 1999, the credit union system had achieved a penetration rate of 5% in the consumer lending market. This level of market penetration is extremely impressive, given that the Polish credit unions started operations in 1992 and that "market penetration by microfinance programs seldom exceeds 5 percent; indeed, few countries have reached 1 percent" (Christen et al., 1994, p.11).

Legally, credit unions in Poland are not authorized to make "business loans", if the loan is to support a business activity that is the member’s primary source of income. Polish credit union managers and NACSCU officials believe that many of the micro amounts of funds saved and borrowed at credit unions support microbusinesses which secondarily supplement admittedly low industrial blue collar wages. Rural finance experts Dale Adams and J.D. Von Pischke have made mention of the fungibility of money for the past two decades: "Fungibility of money makes it difficult to identify the ultimate use of a loan. The loan only provides more liquidity to the borrower, and it is hard to say what activity it actually stimulates" (Yaron, 1992, p. 32).

In March 1998, the WOCCU project funded a survey conducted by NACSCU of 605 credit union members in twenty-one credit unions throughout the country to profile the membership of the credit union network. The respondents were 54% male, 46% female, and 64% of the total belonged to the 30-49 years old age category. The members were asked to self-report their income and to describe what kind of lifestyle their income could afford their families (80% of respondents were married, and 64% of these married members had children).

Only a mere 16% possessed formal education beyond high school and 39% had less than a high school degree (6% did not attend school beyond primary level). More than a third of respondents (36%) mentioned that their annual income was in the range of $909-$1818. Another 27% reported their annual income in the range of $1819-$2727. These salaries are quite modest given that the average GNP per capita for Poland as reported by The World Bank in early 1999 was $3590. To further illustrate the poverty of the credit union members, 23% of the respondents declared "having enough money to buy themselves and their family members only food and clothing, but being barely able to pay the monthly bills." Another 34% stated that their income is "enough to buy themselves and their family’s food, clothes, and to pay the monthly bills, but is insufficient for buying anything more."

These indicators point to a credit union membership composed of, in significant portions, people in the lower economic ranks of the Polish economy. In as much as predominately employee-based credit unions can be diversified, the Polish credit unions have members from all salary levels, including "white collar workers". The different economic strata desire different products and services from the credit unions and push the financial intermediaries to offer a wider range of services. Among the variety of services that members identified as "services of special use": 35%, predominately those members in the lowest income range mentioned the short term loans; 29% mentioned loans, including all of those interviewed in the lowest income range; 27% mentioned electronic payment of monthly bills, mainly white collar workers and no members from the lowest income range. Fixed term deposits were identified by 58% of those interviewed (from all income levels) as a service of interest.

One way of assessing the depth of outreach of the credit unions is to discern whether or not the members have any other formal financial service alternatives. The survey found that 52% of the 605 respondents relied solely on the credit union (these respondents included laborers, retired pensioners, and people in the lowest income range). The other 48% that had access to bank services (although not necessarily access to credit) in addition to the credit union included mainly those in managerial positions, and other white-collar workers.

The value of having access to formal financial services at the credit union is highly valued; 61% of the respondents agreed most strongly with the statement "it is unthinkable that the cooperative savings and credit union might not exist." A meager 8% agreed most strongly with the statement "I can live without the cooperative savings and credit union."

"Recently a bank opened a branch near the coal mine and it was perceived as a competitor to our services, but this is actually not the case. The bank wanted to meet with us and we did. During this meeting, the manager of the branch frankly admitted that they would be unable to compete with us in terms of the range of services and the speed of delivering services because they are not in a position to provide the type of retail banking services that we do."

Polish Credit Unions Consolidated Financial Information, December 31, 1998 in U.S. Dollars (1 USD = 3.5 Plz)
ITEM	AMOUNT
Total Assets:	$158,073,027
Total Loans:	$112,949,678
Total CFF-CU Loans:	$8,677,785
Total Gross Income:	$33,168,378
Total Financial Costs:	$20,829,690
Total Operating Costs:	$7,978,117
Total Net Income:	$4,360,571
Loan Delinquency:	0.74%

Some elements identified in Otero and Rhyne’s The New World of Microenterprise Finance (1994), as indicators of institutional viability include: financial self-sufficiency of service, an institution’s profitability or ability to break even, its portfolio quality, its liquidity, its capital adequacy, and an assessment of institutional strength given the context of its operating environment. WOCCU has established international prudential standards for credit union operations. Below are excerpts from PEARLS (full report in annex), a series of financial indicators for credit union monitoring and management, revealing the consolidated performance of Poland’s 36 largest credit unions.

If one considers member share capital as part of risk capital, then the Polish credit unions have sufficient institutional capital to meet Basle Accord standards; however, WOCCU does not include member equity capital in its PEARLS calculations. One of the reasons for a low level of institutional capital is that recently the growth rate of total assets has been very high (63% in 1997 and 48% in 1998) while the growth rate for institutional capital has been only 18% and 48%, respectively.

As of December 1998, the consolidated delinquency rate for all 36 credit unions was only 0.78% (using the standard portfolio at risk calculation). There are several reasons for low delinquency rates. First, in the case of employed members in employee-based bond credit unions, payroll deductions have greatly facilitated the collection of periodic loan payments. It is more interesting to observe the payment of loan obligations of factory workers who have been laid-off, or dismissed. Consistently, the average Polish worker-member has met his or her obligations faithfully, even in the face of great difficulty. According to Mr. Bierecki, President of NACSCU, this has happened because of the strong religious ties of most people to the Catholic Church. It is considered a sin to not repay a loan. People who do not repay are labeled as thieves, and this label carries a very strong social stigma in the community. It must be pointed out that even though delinquency is very low, the current rate of 0.78% is almost double what it was as of December 1997 (0.48%).

The return on average assets for 1998 was 3.04% slightly lower than the ROA for 1997 that was 5.86%. Inflation for the year of 1998 was 8.9%.

In addition to the consolidated financial information for the credit unions, it is noteworthy to ponder the very significant progress that the National Association has made on its own road to financial self-sufficiency. In many traditional credit union movements around the world, the National Associations are notoriously weak in the area of financial sustainability and are dependent upon subsidies for their continued survival. Poland provides a striking contrast. NACSCU received financial assistance from USAID up until September 1997, when it finally arrived at full operational self-sufficiency. Since that time, NACSCU has continued to increase its revenues. The following table illustrates NACSCU=s self-sustaining capacity for 1997 and 1998:

For those who doubt the impact of technical assistance projects to develop credit unions and the ability of credit unions to effectively serve low-income people, the aforementioned financial data and statistics speak for themselves. For academicians who debate the imponderable equation of additionality (i.e., the incremental benefit attributed to a project, after subtracting out the inertia of on-going activities that would have happened anyway without project assistance), such mental gymnastics are not applicable to this project, since nothing existed before USAID/WOCCU decided to help promote credit union development in Poland.

As one contemplates the rapid evolution of the base-level credit unions and other components of the network, a question begs an answer. How did the Polish credit union system grow so fast and accomplish so much in such a relatively short period of time? Traditional credit union development projects have taken many more years to mature, and some, even after over 30 years, have not achieved what Poland has in less than seven years. As is the case in most successful projects, there are a variety of factors which, when combined together, produce a synergy that yields an output greater than the sum of the individual inputs. In the case of Poland, this synergy is readily apparent:

Before 1989, over 80% of all Polish exports were sent to the Communist Bloc countries. After the fall of Communism, the Polish government started to re-orient its exports to Western European countries. This strategy was highly successful and as of 1998, only 7% of all Polish exports were sent to the old Communist Bloc countries. Sound fiscal policy also dramatically reduced inflation from over 800% in 1990 to a mere 8.9% in 1998. In conjunction with these events, the average monthly salary of Polish workers rose from 50 USD in 1990 to 350 USD in first quarter, 1999. These successful macro-economic reforms created an ideal financial environment in which the credit unions could flourish.

"Without Solidarity and its assistance, credit unions wouldn’t have emerged in Poland at all, or perhaps not in the size or form in which they now exist."

"We experienced a high level of assistance from the Solidarity movement…they launched a huge promotion campaign to their members. This was one of the factors that contributed to the success of our credit union."

Andrzej Nowak, Board Chair at Julian Coal Mine Credit Union in Southeastern Poland

From the very beginning, the Solidarity Trade Union, which gave birth to the Solidarity Political Party, was highly supportive of credit union development. The Solidarity Trade Union openly encouraged its members to either create new credit unions or join existing ones. This free "advertising" created a very favorable image of credit unions among the rank and file members of Solidarity, and provided a great boost to the development efforts. Many people were "pre-disposed" to join a credit union because of the unwavering support of Solidarity.

"The potential leaders of innovative finance schemes are not simply 'born' but develop and take inspiration (and sometimes lessons) from other leaders. The achievements [of leaders]... increase the likelihood of similarly dynamic characters emerging, and developing new approaches and organizations for financial services."

The two key architects of the Polish Credit Union Movement are the Chairman of the Board, Adam Jedlinski and the President, Grzegorz Bierecki. Mr. Jedlinski is a successful businessman, lawyer, and professor, who is independently wealthy. As is the case in many credit union movements, he has donated his time as a volunteer financial/legal advisor, without charging for his professional services. An example of his significant volunteer service was his commentary on the Credit Union Act, which he drafted free of charge, for all credit union personnel to understand and correctly interpret. He has joked on many occasions, that the Polish credit unions could not afford his fees, if he were to charge them his commercial rates. Mr. Jedlinski has been on the Board since NACSCU's inception in 1992 and will continue in his current role as Chairman until 2002. The long-term, ten year continuity of his high-quality, volunteer service continues to play an integral part in the development and implementation of a coherent, national credit union development strategy.

Grzegorz Bierecki, 36, has likewise played a decisive political and operational role in the establishment of Polish credit unions. At the tender age of 15, Mr. Bierecki became a political activist, and aligned himself with the Solidarity Movement. At the time when Bierecki first learned about American credit unions on a visit to Kansas to promote investment in the newly democratic Poland, Lech Walesa was his boss. Mr. Bierecki’s political connections have been utilized to establish some very favorable legislation for credit unions in Poland. This reality reinforces what has previously been documented by Alfonso et. al., that "Political clout is one of the main assets of an apex organization" (Otero & Rhyne, 1994, p.264).

Aside from being politically astute, Mr. Bierecki has surrounded himself with competent, young professional employees who have helped implement the operational aspects of the grand vision, as defined by Mr. Jedlinski. The strategy to hire young professionals, anxious to "make their mark" has paid rich dividends.

With the able leadership of Mr. Bierecki, in the short span of seven years, the Polish Credit Union Movement has achieved what many other credit union movements have been unable to accomplish over a much longer period time. The number of "watershed" legislative rulings for credit unions is amazing. Consider the following legal victories:

"Before credit unions were established in Poland, we had here so called Worker Savings and Loan Associations. This Association was an organization to which members would have to make contributions. Members paid dues (automatically deducted from their payroll), but no interest was paid on these monthly contributions, nor was any interest charged on loans granted to employees. People could potentially have made money with their contributions, their deposits, but actually they lost a lot of money owing to high rates of inflation. With no interest paid on their contributions, people would just absorb losses. The system just wasn’t a good one, you had to wait a long time for a small loan to be granted to you, one month in the best scenario…

…At the general meeting of the Worker Savings and Loan Association on February 4, 1992, we decided to convert our association into a credit union; however, we had to wait a long time for the legal conversion process. The credit union was not opened until July 1993 owing to Executive provisions to the act of parliament. Without those provisions it was impossible to convert from a Workers Savings and Loan Association into a credit union."

Zygfryd Schoenhoff, Board Chair of Wybrzeze Credit Union at the Gda�sk Shipyard, (previously managed Gdansk Shipyard WSLA for thirty years)

This legislation supplanted Amendment 39 to the Trade Union Act of 1991 (the original legislation that provided for the existence of savings and credit cooperatives in the workplace). The 1991 Act did not allow for Worker Savings and Loan Associations established under communist rule to convert into credit unions. The Executive Order ruled that WSLAs could convert into credit unions, but that the two organizations could not both exist at any one work place. Until the Executive Order passed, workplaces originally envisioned as "strongholds" for credit union development such as the Gda�sk shipyard had been prevented from starting credit unions because WSLAs existed there.

"Before the Credit Union Act entered into force on February 5, 1996, only employee based credit unions could be established…the Credit Union Act allows for the creation of credit unions, not only for employee-based credit unions, but also for organizational common bond credit unions."

A separate, stand-alone Credit Union Act was passed in December 1995. The Act established a legal framework for the operation and expansion of credit unions in Poland and, at the same time, empowered NACSCU with the sole responsibility of supervision and regulation of the credit union sector. The Act also established some operational standards and allowed NACSCU to set other standards, as it deemed necessary.

All credit unions, as of 1999, are tax exempt from income taxes for at least a five-year period. This favorable law will allow the credit unions to build much needed institutional capital reserves from their net earnings.

In 1997, the banking law was changed to allow credit unions to offer ATM and credit cards to their membership. This significant piece of legislation will allow the credit unions to continue to provide their membership with high quality financial products and services.

Instead of depositing their liquidity reserves in the National Bank of Poland at 0% return, credit unions are legally required to deposit their liquidity reserves with the Central Finance Facility of NACSCU where they receive a competitive yield (currently 12%) on their liquidity reserves.

Credit unions are non-profit organizations whose owners are not wealthy. Normally, it takes time to build capital reserves. Given this fact, credit unions have been exempt from the new minimum capital requirements imposed on banks. This legislation is so significant that approximately 200 small cooperative banks (up to 10 million PLZ) have indicated their desire to convert to credit unions to be able to continue to operate.

In addition to the aforementioned items that have already been approved, there are two more items of significance that are pending final approval:

Currently, credit unions must use the banking sector to process checks, deposits, wires, etc. In June 1999, it is anticipated that the CFF of NACSCU will be able to open a direct account with NBP and then act as a direct automatic clearing-house (ACH) for monies transferred within the credit union system. This will be a major step forward in making credit unions completely independent of banks in Poland.

Credit unions are currently prohibited from making business loans to their membership unless the business is a secondary source of income. It is anticipated that during 1999 credit unions will be able to offer primary business loans to member entrepreneurs, thus opening the way for the credit union movement to diversify its loan portfolio and provide a broader range of loan products.

Finally, it is important to note that there was one disappointment among the many legislative victories that credit unions have won. Article 6 of the Credit Union Act specifies that persons desiring to become members of a credit union must have a "common bond" between them. This bonding requirement conceivably limits community-based credit unions from opening their doors to the public in general. Thus, it might be difficult to establish community credit unions in Poland in the future and scale of outreach may be curtailed. According to Mr. Bierecki, however, there appears to be a "way around" the regulation. There are two ways in which community credit unions can continue to grow:

"The establishment of our credit union was facilitated by the fact that the management of the coal mine had a very favorable attitude towards it. Representatives of the coal mine were present at our founding meeting and they provided us with our first premises: a small location which we had to adapt to our needs. They also delegated 3 coal mine employees to work for the credit union at the expense of the company. This provided a basis for the credit union to operate... however, starting in the autumn of 1995, we wanted the credit union to become self-sustaining and we began negotiating with the company about cost-sharing. We wanted to become completely independent since we were quite aware that in order to succeed in the market, we would need to be self-supporting."

According to Mr. Bierecki, there was a considerable debate at the beginning of the project as to whether to start organizing credit unions with existing businesses, or to start in rural areas in a community setting. One of the most important correct decisions ever made was to start organizing credit unions in the workplace. Owing to stipulations in the Executive Order of the Council of Ministers that entered into effect in January, 1993, a variety of immediate economic benefits were provided to credit unions by the work establishment:

While some of these benefits have disappeared as the credit unions have grown and have become able to assume the full burden of their operating expenses, many credit unions, even today, still enjoy subsidized rent and utilities as a continuing demonstration of employer commitment. Had the rural-based credit union development strategy been employed, the results would not have been anywhere near as dramatic, nor as sustainable. In light of the limited funding available for this type of project, the employer-based development strategy, likewise, paid rich dividends.

"I think that there are a few key factors that have made credit unions so successful in Poland…Above all else, there is a very strong bond, very strong ties exist between the members and the credit union staff. People have the feeling that they come to >their= place, the institution which belongs to them, which is owned by them, and which depends on their will, and that gives the members a lot of satisfaction."

Important factors to consider for the project’s success were the strong economic and social underpinnings in Poland. In a very tangible way, credit unions appealed to the Polish people for a variety of reasons:

Although WOCCU did not play a major role transmitting technical knowledge to NACSCU due to interpersonal difficulties between the WOCCU Chief of Party and NACSCU, WOCCU drew upon the international credit union network to contract consultants and arrange volunteer liaisons between the Polish credit unions and the U.S., Canadian, and Irish credit union systems. This vast network provided Polish credit union leadership with valuable contacts and expertise in different technical areas. As a result of these contacts, there exists a permanent twinning agreement between Poland and the Georgia Credit Union League of the United States. The voluntary, not-for-profit nature of these liaisons, made possible only by the WOCCU/NACSCU/USAID project, provide valuable assistance to NACSCU.

The tremendous success that credit unions have had in the 1990s in post-communist Poland makes credit union supporters wonder if credit unions could serve the needs of low-income people in neighboring transitional economies with the same degree of success. The success factors discussed in this document point primarily to indigenous elements of success that are not present in other Central and Eastern European countries where WOCCU has current projects.

What is most clear from the Polish experience is that a hospitable regulatory environment is critical for credit unions to be able to scale-up operations quickly and to afford to offer the array of financial services demanded by a heterogeneous membership. The numerous landmark victories that NACSCU has won for individual credit unions, SKOKs, and the credit union system as a whole have allowed for the system to flourish.

Demand for community or employee-based credit unions appears to be widespread in countries such as Ukraine, Latvia, Lithuania, Romania, and Macedonia; however, in these countries the unwavering support of an entity such as the Solidarity Trade Union is unparalleled. The fact that credit unions were welcomed, in fact, started by Solidarity activists translated to instant credibility among potential members, legislators, and press. The subsidies offered to fledgling credit unions by their employer sponsors have not been offered to new credit unions in other countries in the region.

Finally, the most personal of elements in the Polish "recipe" for success is that of the local leadership of the credit union movement. Dedicated, charismatic, and politically well-connected individuals in neighboring countries have yet to appear on the scene with the same vigor, vision and business-orientation which characterize Mr. Jedlinski and Mr. Bierecki. Under the leadership of these two individuals, before the end of 1999, Polish credit unions will almost certainly win their legal struggle to offer business loans to people whose primary source of income stems from their business. This authorization will spark growth in self-employed members in community-based credit unions and will add another example to the many ways that Polish credit unions provide low-income people with microfinance.

Christen, Robert Peck, Elisabeth Rhyne, and Robert Vogel. "Maximizing the Outreach of Microenterprise Finance: The Emerging Lessons of Successful Programs." Consulting Assistance for Economic Reform (CAER) Paper. Arlington, VA: IMCC. 1994.

Gurgand, Marc, Glenn Pederson and Jacob Yaron. "Outreach and Sustainability of Six Rural Financial Institutions in Sub-Saharan Africa." Washington, D.C.: The World Bank. 1994.

Kimenyi, Mwangi S., Robert C. Wieland, and J.D. Von Pischke, Eds. Strategic Issues in Microfinance. Contemporary Perspectives on Developing Societies Series. Brookfield, VT: Ashgate Publishing Co. 1998.

Otero, Maria and Elisabeth Rhyne. The New World of Microenterprise Finance - Building Healthy Financial Institutions for the Poor. West Hartford, CN: Kumarian Press. 1994.

USAID Mission to Poland

Europe & Eurasia

Credit Union Monograph