12275: CREDIT UNIONS TEETER ON BRINK OF FAILURE (fwd)

[Bob Corbett <corbetre@webster.edu>]

From: Greg Chamberlain <GregChamberlain@compuserve.com>

PORT-AU-PRINCE, Jun. 5 (IPS) - A banking scheme that seemed too good to be
true has turned out to be just that for Haitians who deposited their
savings into credit unions promising triple-digit annual interest returns.
   Three months ago, several of the institutions stopped paying interest
completely. That number has now reached 20. While none have officially gone
bankrupt, depositors are worried that they may not get all of their money
back.
   The credit unions had promised to return 10 to 12 percent interest
monthly, which translates into an annual dividend of 120 to 144 percent on
fixed-term deposits. Commercial banks pay only six to 12 percent a year on
the same types of accounts.
   Middle-class families are said to have poured hundreds of millions of
dollars into the credit unions.
   Many economists and bankers doubted the scheme from the start, and in
April lawmakers introduced a bill into parliament to regulate the
institutions.
   "I wondered how they could possibly make so much money during a crisis.
I'd really like to see the formula they used to generate this unbelievable
interest rate," said Kesner Pharel, a well-known radio economist.
   The cooperatives, with a boost from President Jean-Bertrand Aristide,
leveraged a high-profile presence -- replacing the banks as sponsors of
this year's Carnival -- into large amounts of cash. At the same time, most
Haitian entrepreneurs and businesses were struggling in an ever-worsening
economic climate.
   The "new banks of hope" have flourished ever since a speech by Aristide
at the end of 2001 proposed that the government-run literacy program should
be linked with the credit unions' economic development programs.
   This speech, which coined the phrases "alpha economy" and "alpha credit
union," boosted the prominence of the credit unions, whose growth shot
through the roof in only a few months.
   About 300 savings credit unions operate in the country along with
thousands of savings cooperatives.
   Last December, officials began to examine the risk that credit unions
posed to the banking sector as a wave of bank customers started withdrawing
their cash to put it in the credit unions. This flight of customers,
potential customers, and their cash meant an increased risk of collapse for
the banks.
   The first warning bell rang when Sogebank, the country's largest banking
institution, refused to accept credit union deposits.
   "I don't understand the math which allows these credit unions to offer
interest rates of 10 to 12 percent a month on fixed term deposits. Ever
since I was a child, my mother always told me not to do things I don't
understand," said Pierre Marie Boisson, an economist who runs Sogebank.
   The banking industry began proclaiming that the credit unions were
unable to explain the source of all their cash, implying that they might be
laundering drug money.
   Ever since, it has been open war between the banks and the credit
unions. The walls of the capital, usually scrawled with political slogans,
are now covered with anti-bank graffiti.
   In mid-March, several credit unions unilaterally decided to suspend
monthly interest payments to their members, claiming that they were waiting
for monetary officials who had frozen the funds of an insolvent bank to
return their money.
   Others decided to reduce interest payments from 12 to three percent a
month. Despite persistent rumors about the bankruptcy of certain credit
unions, they continued to conduct an interest rate war via gigantic media
publicity campaigns.
   The Haitian news agency Alter Press suggested that "the credit unions
will be probably to found out as money-laundering operations, cleaning up
their cash while the drug traffickers pay out their dividends for them."
   At best, said the agency, "it might just be a pyramid scheme where the
interest is paid for by the deposits of newcomers. Or else it's just a case
of institutional usury."
   Economist Jean Claude Paulvain called for regulation of the credit union
industry in April, noting that they were operating in a legal vacuum so
that victimized depositors would have no recourse to the law in case of
trouble.
   Then minister of cooperation, Marc Louis Bazin, predicted the danger
that the credit unions represented and warned the government to intervene
before the International Monetary Fund (IMF) became involved.
   Subsequently, the administration initiated a review and created a
commission to write laws governing the operation of credit unions.
   A bill to regulate the credit union industry was presented to both
houses of parliament in April. One of its key features is an inspector
general for credit unions based at the Bank of the Republic of Haiti (BRH).
   As of yet, there has still been no action on the bill.
   For two weeks, depositors have asked President Aristide to step in. They
have now taken their case to the streets. Yesterday, in front of the
presidential palace, one depositor reported that he had sold his business
in order to put all his money in the credit unions.
   "It's Aristide who urged us to get involved in the credit unions. He has
to respond to us," said a demonstrator.
   Two ruling party senators last week threatened officials from a credit
union where they had deposited nearly $60,000. The press has reported that
members of an elite police unit took credit union employees hostage,
demanding that their money be returned.
   "Some credit unions are in trouble just like there are some banks in
trouble," Aristide said on May 23. "We need to keep our cool and find an
appropriate solution to the problem," he added.
   Border and airport personnel have been ordered to block managers and
directors of certain troubled credit unions from leaving the country.