Discussion » Financial Cooperatives Issues in Regulation, Supervision, and Institutional Strengthening by Carlos E. Cuevas and Juan Buchenau
Financial Cooperatives (FCs) are important providers of financial services to poor and middle-income people, and significant drivers of financial inclusion. Aside from their strong presence and relevance in developed economies, especially Europe and North America, the significance of financial cooperatives in terms of financial inclusion in the developing world cannot be underestimated. Their pervasive presence in rural areas, and their potential to expand financial inclusion with multiple services to under-served segments make enabling the sustainable functioning of FCs a sensible policy objective. This issues paper reviews current knowledge about, and recent examples of FC development practice that generate lessons deemed valuable and useable in diverse contexts. The review provides background for an informed discussion around the following propositions:
• Legal and regulatory frameworks for FCs adapted to the organizational nature and institutional structure of local FC entities, especially their governance and capital structure, are essential for FC stability and growth.
• Adequate legal and regulatory frameworks including appropriate safety nets need to closely follow the development of the local FC market segment. Failure to provide an enabling framework runs the risk of stunting FC development, and undermining trust among the potential clientele/ membership. In addition to ensuring financial soundness, effective regulation and supervision are essential to help FCs achieve scale by fostering mergers, or enabling the integration of individual retail entities into federated (apex) structures.
• Integrated approaches that combine legal and regulatory reforms with support to the institutional strengthening of the FC sector have shown important results in terms of financial inclusion, and fostered the modernization of financial cooperatives as effective financial institutions. Rapid introduction of electronic banking in FC networks seems to be badly needed, but requires a degree of preparedness, and a functional structure that most FC networks have yet to attain.