Credit Union Governance: What You Need to Know

Often a thorny issue, credit union governance entails a conundrum and existential conflicts amongst a number of stakeholders. These conflicts are discussed in brief below:

• Members and the elected board of directors: this is often the most traditional source of conflicts. Whether to call it principal-agent or agent-agent or principal-principal conflict, the elected board members may end up not representing the best interests of fellow members. This could probably because when elected, they take up the mythical “it is our turn to eat” and make the most out of it. The good news is that the elected board members do not last for long. At least in Kenya, to survive for over a year in the board, you must have a myriad of “networks” and “connections”, not to say the least, political connections in some credit unions. 
• Owners and managers: This is one instance where the member-owners of the unions have conflicts with the management of the union. Often, the top managers in a credit union are vetted by the board or the central management committee. Once they take up office, they may engage in opportunistic behavior which may jeopardize the credit union. For instance, managers may engage in excessive and risk related party lending where they take up loans for themselves (and who knows, their spouses!). Research has shown that related party loans are associated with conflict of interest and are often abused. Remember that one of the sensitive dimensions of human existence is rationality, and if the human being assumes irrationality, it can be disastrous, to say the least.
• Net savers and net borrowers: One may wish to ask: aren’t these not one and the same thing. From a credit union perspective, the answer is: “probably yes”. But there is a distinction. In credit unions, members have varying levels of savings, with older members holding relatively more savings than younger members. Although the more savings you have the more borrowing you are entitled to, the borrowing levels in a credit union differ. This depends on the loan appetite for the borrowers. Problem arises if majority of the borrowers hold relatively lower savings levels. This literally dries up the credit unions liquidity. If an older member seeks a loan which takes long to be disbursed, then problems suddenly emerge.
• Employees and volunteers: there has been an improvement in the number of individuals employed and paid salaries and/or wages by credit unions in the recent past. This is a shift from the traditional model where the credit union officers were largely on a voluntary basis. As such, this conflict has over time been watered down.

Other governance related problems that bog credit unions include: growth, changing nature of membership, in that credit unions now have diversified membership, complexity of operations and products, regulatory pressures and competition from commercial banks, microfinance institutions and amongst the credit unions themselves. This means that according to Labie & Périlleux (2008), close attention should be paid to the following aspects to help I dealing with credit union governance woes: 

• Intentional and specific mechanisms such as the constitution of the board of directors and rewards given to managers;
• Spontaneous and specific mechanisms such as corporate culture, cross-control between managers and informal trust relationships;
• Intentional and non-specific mechanisms such as the legal framework, the role of legal authorities, etc.;
• Spontaneous and non-specific mechanisms such as the environment of the firm, the social and political environment, etc.

The paper by Labie & Périlleux (2008) conclude by recommending research that can help credit unions provide good governance and experience growth, without compromising on their essence. This research would look into:

• The networking structures of credit unions;
• The relationship between governance and growth;
• Suitability of mechanisms.

Additional information sought from: CGAP Microfinance Gateway Website: http://www.microfinancegateway.org/library/corporate-governance-microfinance-credit-unions

Reference: Labie, M., & Périlleux, A. (2008). Corporate Governance in Microfinance : Credit Unions. CEB Working Paper N° 08/003, Solvay Business School.

URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/14625/1/rou-0221.pdf