Health Check: Credit Unions

The credit union movement, with its 206,000 members, is the third largest player in Barbados’ financial system. This is according to the 2018 Financial Stability Report (FSR), a joint publication by the Central Bank of Barbados and the Financial Services Commission, the island’s two financial regulators.

Credit unions’ assets grew by 9.5 percent to reach $2.42 billion in 2018, the report reveals. It notes, however, that these assets are concentrated among a few entities, with seven of the sector’s 33 credit unions controlling 93 percent of those assets.

Increase in Deposits

During the year, the sector’s loan portfolio grew by 4.2 percent, outpacing both commercial banks and trust and finance companies.

The sector’s increased ability to lend was due in part to more Barbadians shifting their savings from commercial banks to credit unions, which currently offer higher interest. Since the deregulation of interest rates in 2015, which led to banks paying significantly less interest, deposits at credit unions have increased by an average of 11 percent each year.

However, while these additional funds (the money deposited by savers) have given the sector the capacity to issue more loans, they have simultaneously created a challenge for credit unions. The growth in loans has not been able to keep apace with the upsurge in deposits.

Non-Performing Loans

Another concern facing credit unions is the increase in non-performing loans (NPLs), that is loans that borrowers have not made payments on in more than three months. At the end of 2018, non-performing loans stood at 8.9 percent of all loans issued, as compared to 7.8 percent in 2017. The Financial Stability Report reveals that more than half of these loans were for real estate or mortgages.

Non-performing loans remain a concern for credit unions, and stress tests (hypothetical scenarios used to determine the sector’s ability to withstand adverse conditions) show that a significant increase in them would pose a greater risk to credit unions than to other types of financial institutions due to generally lower capital levels in the sector.

Debt Restructuring

Although the 2018 domestic debt restructuring did not impact credit unions as significantly as it did other financial institutions, it did create a conundrum for them.  Previously, the sector met its obligation to have a certain percentage of liquid assets by purchasing treasury bills – short term Government securities – which are no longer available. As a result, credit unions have increased their cash holdings, which provide lower returns, potentially decreasing the sector’s profitability.

The 2018 Financial Stability Report provides a detailed analysis of how the sector was impacted, but also reveals that it is weathering these challenges.

Read the Financial Stability Report’s section on the credit union sector.