Rating Credit Unions in Guatemala

CGAP has recently funded a first of its kind private rating agency for microfinance. Under WOCCU's guidance "...thirteen strong Guatemalan credit unions are setting up a private rating agency that will evaluate and certify their financial soundness (Only 10 percent of Guatemala's credit unions are participating, but they account for 85 percent of the country's credit union savings and loans. Here as in most other countries, one does not have to work with more than a few institutions in order to reach the vast majority of the country's microfinance clients.) The credit unions will not control the rating agency. The situation prompting this step is that public confidence in credit unions is so low that they have to pay 2 percent more than the banks they compete with to raise deposits.

The country's financial authorities have refused to take responsibility for supervising credit unions, so this group of strong institutions is trying a private alternative, at least as a temporary measure. The rating agency will have a large advertising budget to build public recognition of the plaque representing the agency's approval. The principal sanction for a non-complying credit union will be the (well-publicized) revocation of that credit union's plaque. Additionally, contracts with the participating credit unions will give the rating agency the right to replace their boards or management in the event of non-compliance, although enforcement of these rights would probably take too long to be practical.

As the rating agency gains credibility, the participants hope that the government authorities will eventually agree to have the bank superintendency supervise the stronger credit unions, and perhaps use the rating agency in a scheme of delegated supervision. Implementation has not yet begun, so nothing can be said yet about the results of this experiment. "

Source: "The Rush to Regulate: Legal Frameworks for Microfinance" by Robert Peck Christen and Richard Rosenberg. December 12, 1999. p50-51.

Contributed by David C. Grace, dgrace@woccu.org

Hari Srinivas - hsrinivas@gdrc.org
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