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An analysis and a critical evaluation of the financial management of credit unions in British Columbia. Barewal, Beant Singh 1960

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AN ANALYSIS AND A CRITICAL EVALUATION OF THE FINANCIAL MANAGEMENT OF CREDIT UNIONS IN BRITISH COLUMBIA by Beant Singh Barewal B.A., Punjab U n i v e r s i t y , 1952 L.L.B., Punjab U n i v e r s i t y , 1956 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION i n the F a c u l t y of Commerce and Business A d m i n i s t r a t i o n Me accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA OCTOBER, I960 o In presenting t h i s t h e s i s i n p a r t i a l f u l f i l m e n t of the requirements f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I agree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r reference and study. I f u r t h e r agree that permission f o r extensive copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the Head of my Department or by h i s r e p r e s e n t a t i v e s . I t i s understood tha t copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be allowed without my w r i t t e n permission. Department of Commerce and Business Administration The U n i v e r s i t y of B r i t i s h Columbia, Vancouver &*, Canada. Date October 1, i960 ABSTRACT i i i The c r e d i t unions i n B r i t i s h Columbia have experienced spec t a c u l a r growth during the l a s t f i f t e e n years. Many new c r e d i t unions have come i n t o existence and o l d ones have increased c o n s i d e r a b l y i n s i z e . D i f f e r e n t pieces of l e g i s l a -t i o n , F e d e r a l as w e l l as P r o v i n c i a l , have been passed to ensure s a f e t y of members' savings and e f f i c i e n t management of c r e d i t unions. This study i s an attempt to evaluate the f i n a n c i a l management of c r e d i t unions i n B r i t i s h Columbia. The e v a l u a t i o n has been made from the standpoint of f i n a n c i a l soundness, lending p r a c t i c e s , accounting system and system of i n t e r n a l c o n t r o l . Since a c r e d i t union i s an important i n s t i t u t i o n of consumer c r e d i t , a general d i s c u s s i o n of con-sumer c r e d i t i s presented i n the beginning of the study. Consumer c r e d i t i s a major f o r c e i n our modern economy. Mass production of goods at low c o s t s has been g r e a t l y a s s i s t -ed through the advent of consumer c r e d i t f i n a n c i n g . Modern c r e d i t theory d i v i d e s the f i e l d of c r e d i t i n t o three c a t e g o r i e s : emergency c r e d i t , convenience c r e d i t and instalment c r e d i t . Instalment c r e d i t i s the most s i g n i f i c a n t of these three i n terms of i t s e f f e c t upon the economy. The l e v e l of t h i s c r e d i t depends on the durables bought on an instalment b a s i s , and the s a l e of durables depends on d i s c r e t i o n a r y income, exp e c t a t i o n of f u t u r e income, the p a t t e r n of d i s t r i b u t i o n of income amongst spending u n i t s and the growth of income. The i v consumer c r e d i t market i s i m p e r f e c t l y competitive. C r e d i t unions provide a s i g n i f i c a n t p o r t i o n of., consumer len d i n g i n Canada. They have experienced a more than proportionate growth i n t h e i r t r e n d of instalment c r e d i t l ending as compared w i t h the growth t r e n d of other l e n d i n g i n s t i t u t i o n s . Since savings i s the source of consumer c r e d i t , the r o l e of c r e d i t unions as saving i n s t i t u t i o n s has been st u d i e d . C r e d i t unions now act as d e p o s i t o r i e s f o r a s i g n i f i c a n t p o r t i o n of t o t a l net savings i n Canada. Cooperative c e n t r a l banking i n Canada, through a recent development, i s becoming i n c r e a s i n g l y popular. In 1953> a Canadian Cooperative C r e d i t A s s o c i a t i o n was formed to act as an apex o r g a n i z a t i o n f o r a l l the cooperative c e n t r a l banks i n Canada. The f i n a n c i a l soundness of a c r e d i t union depends on the adequacy of r e s e r v e s , l i q u i d i t y , and growth. There are v a r i o u s types of reserves i n e x i s t e n c e , of which the reserve f o r bad debts i s of m a t e r i a l importance. Under the B.C. C r e d i t  Unions A c t , the p r o v i s i o n f o r bad debt l o s s e s has to be kept i n l i q u i d form. This seems to be an unnecessary p r o v i s i o n because the f u n c t i o n of the reserve fund i s t o absorb l o s s e s , and because such l o s s e s do not n e c e s s i t a t e the payment of cash. T o t a l bad loans have been r e l a t e d t o loans outstanding and the reserve fund. The o v e r a l l p o s i t i o n has been s t u d i e d and i s considered to be very s a t i s f a c t o r y . V For measurement of the growth of c r e d i t unions, the time s e r i e s of savings, membership and loans have been analysed by the Gompertz curve method. The annual increase i n a l l the three f a c t o r s i s at a d e c l i n i n g r a t e . The p r o j e c t i o n of Gompertz curves i n d i c a t e s t h a t i t w i l l be a long time before a p e r i o d of s t a b i l i t y i s reached. The l i q u i d i t y of c r e d i t unions i s analysed by r e l a t -i n g the t o t a l funds r e t a i n e d to the l e g a l requirements. I n almost a l l cases funds r e t a i n e d are higher than the l e g a l requirements. The e f f e c t of the seasonal p a t t e r n of demand f o r borrowings on l i q u i d i t y has been s t u d i e d from the s t a t i s -t i c s obtained from the books of B.C. C e n t r a l C r e d i t Union. Since B.C. C e n t r a l C r e d i t Union i s the de p o s i t o r y of funds of most of the c r e d i t unions i n B r i t i s h Columbia, t h e i r l i q u i d -i t y i s d i r e c t l y r e l a t e d t o B.C. C e n t r a l ' s . B.C. C e n t r a l ' s l i q u i d i t y has been analysed from the standpoint of len d i n g p r a c t i c e s , the extent of e x e r c i s e of the borrowing r i g h t s and i t s compliance w i t h the s t a t u t o r y requirements. The lending p r a c t i c e s of c r e d i t unions have been stu d i e d from the standpoint of the purposes f o r which loans have been granted, the nature of s e c u r i t y taken, the r a t e of i n t e r e s t charged, and the terms of repayment of loans. Pur-chase of durables, and r e a l e s t a te c o n s t i t u t e more than 60$ of the borrowings from c r e d i t unions. The e f f e c t i v e r a t e s of i n t e r e s t charged by c r e d i t unions have been compared w i t h the r a t e s of other lending i n s t i t u t i o n s . The lending of c r e d i t v i unions i s kept reasonably on a short-term b a s i s . In order to study accounting systems and the system of i n t e r n a l c o n t r o l , a number of c r e d i t unions i n Vancouver were v i s i t e d . The study was made from the standpoint of three management o b j e c t i v e s : namely, managerial decision-making, p r o t e c t i o n of assets and determination of income. Though the systems i n use are thought to be reasonably s a t i s f a c t o r y , some small c r e d i t unions are not making proper use of them. Throughout the study, recommendations have been made t h a t are thought t o be h e l p f u l i n improving the f i n a n c i a l management of c r e d i t unions i n B r i t i s h Columbia. i i ACKNOWLEDGMENTS The w r i t e r wishes to express h i s a p p r e c i a t i o n to s e v e r a l i n d i v i d u a l s who have c o n t r i b u t e d i n important ways t o the development of t h i s study. Valuable help was provided by the members of the Thesis D i s s e r t a t i o n Committee: P r o f . B r i a n E. Burke Chairman Prof. L e s l i e G.J. Wong Prof. Ralph R. Loffmark I t i s d o u b t f u l t h a t t h i s work would have proceeded beyond the planning stage, had i t not been f o r the advice, construc-t i v e c r i t i c i s m and encouragement of the members of the Committee. The w r i t e r f e e l s h i g h l y indebted to them. The cooperative help and encouragement extended by the B.C. C r e d i t Union League, which made a v a i l a b l e to the w r i t e r a l l kinds of s t a t i s t i c a l data r e q u i r e d f o r conducting t h i s a n a l y s i s and e v a l u a t i o n , i s deeply appreciated. P a r t i -c u l a r mention must be made of Mr. R.A. Monrufet, the Managing D i r e c t o r , and Mr. John F. Q u a i l , the F i e l d R epresentative, who a s s i s t e d i n a l l p o s s i b l e ways to c o l l e c t the data, and o f f e r e d t h e i r v a l u a b l e suggestions. The cooperation extended by v a r i o u s c r e d i t unions and i n d i v i d u a l s i n the course of the i n q u i r i e s of the w r i t e r i s acknowledged w i t h a l l g r a t i t u d e . Last but not the l e a s t , the val u a b l e a s s i s t a n c e given by Mrs. G l o r i a Smith i n organizing the m a t e r i a l , i s acknowledged w i t h deep a p p r e c i a t i o n and g r a t i t u d e . v i i INTRODUCTION Speaking to the t w e n t y - f i r s t B r i t i s h Annual Cooperative Congress, A l f r e d M a r s h a l l , the most i n f l u e n t i a l economist of h i s time, s t a t e d about the cooperative movement: I t combines hig h a s p i r a t i o n s w i t h calm and strenuous a c t i o n , .... i t s e t s i t s e l f t o develop the spontaneous energies of the i n d i v i d u a l w h i l e t r a i n i n g him to c o l l e c -t i v e a c t i o n by the a i d of c o l l e c t i v e resources, and f o r the attainment of c o l l e c t i v e ends. I t has p o i n t s of a f f i n i t y w i t h many other movements; but i t i s l i k e no other. Other schemes f o r developing the world's m a t e r i a l resources are e q u a l l y p r a c t i c a l and e q u a l l y business-l i k e , but they have not the same d i r e c t aim to improve the q u a l i t y of man h i m s e l f . Other schemes f o r s o c i a l reforms have e q u a l l y h i g h a s p i r a t i o n s but they have not the same broad b a s i s of p a t i e n t a c t i o n and p r a c t i c a l wisdom .... I t i s at once a strong and calm and wise business, and a strong and f e r v e n t and p r o s e l y t i s i n g f a i t h . 1 A c r e d i t union i s the true embodiment of t h i s thought. In the l i g h t of such a quot a t i o n , i t i s no wonder t h a t c r e d i t unions i n Canada amassed more than a b i l l i o n d o l l a r s i n one generation, and that the membership rose to 13$ of the t o t a l p o p u l a t i o n by 1958. Table A shows the r a t e of growth of membership and assets of Canadian c r e d i t unions. A l l t h i s progress was made without any p r o f i t motive. John T. Croteau, w h i l e c o n s i d e r i n g the psychology of human a c t i o n s t a t e s : There are other motives than the p r o f i t motive i n human a c t i o n . Great t h i n k e r s have appreciated t h i s f a c t . P o s s i b l y the c r e d i t union has succeeded i n • LJohn T. Croteau, The F e d e r a l C r e d i t Union P o l i c y and  P r a c t i c e . Harper and Brothers P u b l i s h e r s , New York, 1956, p. 3. v i i i a t t r a c t i n g l eaders who are appealed to by 'some great idea or elevated sentiment 1. Probably the m a j o r i t y of c r e d i t union o f f i c i a l s would d i s c l a i m such hi g h m o t i v a t i o n ; few of them wear t h e i r hearts on t h e i r s l eeves. Some say that they f i n d the work i n t e r e s t i n g , others work out of a sense of duty t o the group, and s t i l l others can use the e x t r a income from the outside employment which the c r e d i t union a f f o r d s . In the l a s t a n a l y s i s , the r e a l reasons f o r human a c t i o n remain un-known even to oneself.2 TABLE A GROWTH OF CREDIT UNIONS—CANADA 19^0 TO 1958 T o t a l Membership Year C r e d i t Union as a Percentage Assets Membership of T o t a l Popula- M i l l i o n s o f D o l l a r s t i o n 19^0 201,137 19^5 590,79*+ 1950 1,036,175 1955 1,731,328 1956 1,870,277 1957 a 2,059,835 1958 b 2,212,698 1.8 25 h.9 l*+6 7,5 312 11.1 653 11.6 761 12.6 8*f6 13.0 1,008 a Revised f o r Ontario b Estimated f o r Ontario Source: Economic D i v i s i o n , Canada Department of A g r i -c u l t u r e , C r e d i t Unions i n Canada, 1958. A c r e d i t union i s an i n s t i t u t i o n of personal f i n a n c e operating under the c h a r t e r and s u p e r v i s i o n of a P r o v i n c i a l John T. Croteau, op. c i t . , p. k. i x Government, owned and managed by the membership u n i t e d under a common bond, f o r t h e i r mutual b e n e f i t . I t has a dual f u n c t i o n , economic as w e l l as s o c i a l . As an economic u n i t , i t provides i t s members w i t h saving f a c i l i t i e s , and then from the pooled savings makes a v a i l a b l e to them personal loans a t a minimum c o s t . I t i s a n o n - p r o f i t o r g a n i z a t i o n . The s o c i a l impact of c r e d i t unions i s e q u a l l y important. I t a f f o r d s an opportunity f o r people t o j o i n together t o serve the needy through the techniques of democratic and cooperative a c t i o n . I t gives a u s e f u l experience to the membership to run t h e i r own a f f a i r s and observe the r e s u l t s of group a c t i o n i n the betterment of the community. I t helps i n i n c u l c a t i n g the h a b i t of t h r i f t i n i t s members. New methods are being developed to h e l p members solve t h e i r f i n a n c i a l problems. More and more c r e d i t unions are now t h i n k i n g of p r o v i d -ing t h e i r members w i t h f a m i l y f i n a n c i a l planning c o u n s e l l i n g s e r v i c e s . Some c r e d i t unions i n the United S t a t e s give t r a i n i n g to the o f f i c i a l s who i n t e r v i e w the a p p l i c a n t s f o r loans. Some are attempting to solve t h i s problem from the preventive aspect of f i n a n c i a l p l a n n i n g — t h a t i s , submitting f i n a n c i a l plans to f a m i l i e s t h a t w i l l prevent monetary problems from a r i s i n g . - ^ In B r i t i s h Columbia, a c r e d i t union can be formed by any ten persons who belong t o an e l i g i b l e group. An e l i g i b l e group i s a group of persons who have a common bond of occupation or a s s o c i a t i o n , or form a group w i t h i n a community i n a c e r t a i n ^E.A. W i l l i a m , "Federal C r e d i t Union Twenty F i v e Years of S e l f Help S e c u r i t y " , appeared i n S o c i a l S e c u r i t y B u l l e t i n . June, 1959, P. 13-X neighbourhood, or r u r a l or urban d i s t r i c t . Three committees, namely, a board of d i r e c t o r s , supervisory committee and c r e d i t committee manage the a f f a i r s of a c r e d i t union. These are a l l e l e c t e d by the membership. Some c r e d i t unions have an education committee as w e l l which may be e l e c t e d by the membership or appointed by the board of d i r e c t o r s . The B.C. C r e d i t Union League i s a v o l u n t a r y a s s o c i a t i o n of most of the c r e d i t unions i n the Province. The "League" i s a f f i l i a t e d w i t h the C r e d i t Union N a t i o n a l A s s o c i a -t i o n whose name b e l i e s i t s e l f , because i n r e a l i t y i t i s an i n t e r n a t i o n a l a s s o c i a t i o n of C r e d i t Unions. A b r i e f d e s c r i p -t i o n of the f u n c t i o n s of c r e d i t union committees may f a c i l i t a t e an understanding of the f i n a n c i a l management to be developed i n t h i s study. The Board of D i r e c t o r s has the general management of the a f f a i r s , funds, and t r a n s a c t i o n s of the c r e d i t union. The executive powers of the o r g a n i z a t i o n are vested i n the board. The board appoints the t r e a s u r e r who i s i n a sense the general manager of the union. The d u t i e s of the c r e d i t committee i n v o l v e the c o n s i d e r a t i o n of loan a p p l i c a t i o n s and an approval or d i s a p p r o v a l of the same. They must keep themselves informed about the patterns of repayments by d i f f e r e n t c a t e g o r i e s of borrowers and by d i f f e r e n t c a t e g o r i e s of loans. The supervisory committee i s the au d i t o r of a c r e d i t union. I t i s r e q u i r e d t o examine the books of accounts q u a r t e r l y and submit a re p o r t t o the Inspector as to the s t a t e of a f f a i r s of the c r e d i t union. x i The s upervisory committee i s r e q u i r e d to h o l d , or cause to be h e l d , by a chartered accountant or any person approved by the Inspector of C r e d i t Unions, Government of B r i t i s h Columbia, a d e t a i l e d annual a u d i t wherein i t has to express an o p i n i o n regarding the f i n a n c i a l p o s i t i o n of the c r e d i t union. I t s d u t i e s w i l l i n v o l v e an examination of the hooks, an i n s p e c t i o n of s e c u r i t i e s , s u p e r v i s i o n of the acts of Board of D i r e c t o r s , the C r e d i t Committee and employees of the c r e d i t union. The sup e r v i s o r y committee i s not subject to the orders of the board, but the board has the r e s p o n s i b i l i t y of t a k i n g a c t i o n to c o r r e c t s i t u a t i o n s pointed out to i t by the sup e r v i s o r y committee. While the board does not d i r e c t the sup e r v i s o r y committee, i t i s concerned w i t h compliance w i t h the B.C. C r e d i t  Unions A c t , which r e q u i r e s the sup e r v i s o r y committee t o perform p e r i o d i c a l a u d i t s . The board has to see tha t the supervisory committee discharges i t s s t a t u t o r y o b l i g a t i o n s . The d u t i e s of an Education Committee are t o maintain c l o s e l i a i s o n between the executive and the membership and t o help the members appreciate the o b l i g a t i o n s which the management owes t o them, and the o b l i g a t i o n s which they owe t o the management. The purpose of t h i s study i s to evaluate the f i n a n c i a l soundness and the len d i n g p r a c t i c e s of c r e d i t unions i n B r i t i s h Columbia. D i f f e r e n t phases of t h e i r operations w i l l be studie d i n order t o assess t h e i r f i n a n c i a l management, and where p o s s i b l e , to make recommendations to improve the f i n a n c i a l p o l i c i e s and p r a c t i c e s . S t a t i s t i c a l data, c o l l e c t e d from v a r i o u s sources, has been analysed. The main sources of i n f o r m a t i o n have x i i been the B.C. C r e d i t Union League, the Inspector of C r e d i t Unions, Government of B r i t i s h Columbia, the Economics D i v i s i o n of the F e d e r a l Department of A g r i c u l t u r e , and C r e d i t Union N a t i o n a l A s s o c i a t i o n . In Chapter I , the t h e s i s i s i n i t i a t e d w i t h a d i s c u s s i o n of the impact of c r e d i t unions on the Canadian economy. x i i i TABLE OF CONTENTS PAGE Acknowledgments 11 A b s t r a c t i i i I n t r o d u c t i o n v i i CHAPTER I . THE PLACE OF CREDIT UNIONS IN CONSUMER CREDIT . 1 The Economics of Consumer C r e d i t 1 M o t i v a t i o n of a C r e d i t Union Member to Save . 10 Place of C r e d i t Unions i n Consumer Lending i n Canada 11 Cooperative C e n t r a l Banking i n Canada . . . . 16 R e g u l a t i o n of A c t i v i t i e s of B.C. C e n t r a l C r e d i t Union 22 I I . FINANCIAL SOUNDNESS 26 C r e d i t Union Reserves 27 V a l u a t i o n Reserves 27 General C a p i t a l Reserves 28 Secret Reserves 28 Growth of C r e d i t Unions 35 L i q u i d i t y of C r e d i t Unions 39 L i q u i d i t y i n R e l a t i o n to Maximum P r o f i t -a b i l i t y ^3 Sources of L i q u i d i t y ^5 Measurement of L i q u i d i t y of C r e d i t Unions . k6 L i q u i d i t y of B.C. C e n t r a l C r e d i t Union . . 52 I I I . LENDING PRACTICES 6 l x i v CHAPTER PAGE Purpose of the Loan 6 l Nature of the S e c u r i t y Taken 67 Rates of I n t e r e s t 81 Term of Loans 86 IV. ACCOUNTING SYSTEMS AND SYSTEM OF INTERNAL CONTROL 88 Accounting Systems 89 Standard System 90 Other Systems 91 Adequacy of Accounting System, Reporting, and System of I n t e r n a l C o n t r o l 92 Information f o r Managerial D e c i s i o n -Making 93 P r o t e c t i o n of Assets 97 Determination of Income 98 F u r t h e r E v a l u a t i o n of I n t e r n a l C o n t r o l . . 100 Cash Receipts and Cash on Hand 100 Disbursements 103 Confirmation of Loans Receivable . . . . 105 C o n t r o l of Delinquency, Charge-off of Loans 106 Record Procedures 107 Miscellaneous 108 R e s p o n s i b i l i t i e s of Supervisory Committee . 109 Recent Cases of M i s a p p r o p r i a t i o n of Funds . I l l V. CONCLUSIONS 11** BIBLIOGRAPHY 123 X V LIST OF TABLES TABLE PAGE A. Growth of C r e d i t Unions i n Canada v i i i I . Investment C r e d i t i n Canada Ik I I . C r e d i t Union Savings as Percentage of T o t a l Net Savings i n Canada 17 I I I . S t a t i s t i c a l S u m m a r y — P r o v i n c i a l C e n t r a l C r e d i t Unions 19 IV. Percentage of E s t i m a t e d Bad Loans on Books t o T o t a l Loans Outstanding and Bad Loans on Books Plus Loans W r i t t e n Off S i n c e I n c o r p o r a -t i o n t o T o t a l Amount of Loans S i n c e I n c o r p o r a t i o n 33 V. Schedule of Share and Loan Balances ( E x c l u d i n g Endowment Loans) and of the Bad Debt Reserve and Other Reserves as at 31 December 1958 Arranged i n Groupings According to Amount of As s e t s 36 VI. Growth i n Members, Savings and L o a n s — A l l C r e d i t Unions A c t u a l 1951 to 1959 and Gompertz Curve 1951 to 1967 38 V I I . Summary of the L e g a l Cash Requirements and of the Cash Funds Held at 31 December 1958 of A l l C r e d i t Unions Grouped A c c o r d i n g to the Amounts of A s s e t s *+7 x v i TABLE PAGE V I I I . C o n s t r u c t i o n of Funds on Hand of A l l C r e d i t Unions Grouped According to the Amounts of Assets *t9 IX. Excess of Deposit Balances Over Loan Balances to Members of B.C. C e n t r a l C r e d i t Union at Month End f o r the Years 1951-59 I n c l u s i v e . . . . 50 X. R e l a t i o n s h i p of Members' Loans to Members' Deposits w i t h B.C. C e n t r a l C r e d i t Union by Months f o r the Years 1951-59 I n c l u s i v e 51 X I . Loan A c t i v i t y B.C. C r e d i t Union from 1950 to 1959 I n c l u s i v e , Showing Average Repayment P e r i o d Assuming Equal Terms on A l l Loans and Equal Monthly Incidence 55 X I I . Comparison of S t a t u t o r y Borrowing Rights B.C. C e n t r a l C r e d i t Union w i t h A c t u a l Borrowings at 31 December 1955 to 1959 I n c l u s i v e 57 X I I I . S t a t u t o r y L i q u i d i t y Requirements as Provided f o r i n Cooperative C r e d i t A s s o c i a t i o n s Act f o r the Years 1955 to 1959 I n c l u s i v e as Ap p l i e d to F i n a n c i a l Reports of B.C. C e n t r a l C r e d i t Union . 58 XIV. Comparative F i g u r e s of I n s t i t u t i o n s Under the Su p e r v i s i o n of Department of Insurance, Ottawa 59 XV. B.C. C r e d i t Unions: Percentage Amount of Loans Granted, by Purpose 63 x v i i TABLE PAGE XVI. F e d e r a l C r e d i t Unions: Percentage D i s t r i b u t i o n of Number and Amount of Loans Granted, by Purpose 19I+8 6 5 X V I I . B.C. C r e d i t Unions: Percentage Amount of Loans Granted, by Purpose, According to Consumer C r e d i t C l a s s i f i c a t i o n 66 X V I I I . Nature of S e c u r i t i e s Lodged w i t h C r e d i t Unions on Loans Granted during P e r i o d from J u l y 1 5 t h t o September 3 0 t h , 1957? Expressed as a Per-centage of T o t a l Amount of Loans Approved . . 73 XIX. Nature of S e c u r i t i e s Lodged w i t h C r e d i t Unions on Loans Granted during P e r i o d from J u l y 1 5 t h t o September 3 0 t h , 1957? Expressed as a Per-centage of Number of Loans Approved 7*+ XX. Modal Values of Loans Granted during the P e r i o d from J u l y 1 5 t h to September 3 0 t h , 1 9 5 7 , Grouped as to D i f f e r e n t Types of S e c u r i t i e s Lodged i n Respect of such Loans . . >. . . . . 75 XXI. Percentage Amount of C h a t t e l Mortgages not Regi s t e r e d and Percentage Amount of Insurance on Automobiles not Endorsed, of T o t a l Amount of Loans Granted i n D i f f e r e n t S i z e Groups of C r e d i t Unions, on the S e c u r i t y of C h a t t e l Mortgage on Automobiles i n the Per i o d from J u l y 1 5 t h t o September 3 0 t h , 1957 77 x v i i i TABLE PAGE XXII. Percentage of C h a t t e l Mortgage on Household E f f e c t s not R e g i s t e r e d , of T o t a l Amounts of Loans Granted i n D i f f e r e n t S i z e Groups of C r e d i t Unions, on the S e c u r i t y of C h a t t e l Mortgage on Household E f f e c t s , during the Period from J u l y 15th to September 30, 1957 . . 78 X X I I I . A n a l y s i s of R e a l E s t a t e Loans Granted from J u l y 15th to September 30th, 1957? as to the Form of S e c u r i t y — G i v i n g the Percentage and the Mode Under Each Category According t o the S i z e Groups of C r e d i t Unions 80 XXIV. Rates of I n t e r e s t Charged by C r e d i t Unions. . . . 83 XXV. C r e d i t Union-Interest Refunds 8*t XXVI. Years of M a t u r i t y of the F i n a l P r i n c i p a l Repay-ments i n Respect of Loans Granted during the P e r i o d from J u l y 15th, 1957, to September 30, 1957 87 CHAPTER I THE PLACE OF CREDIT UNIONS IN CONSUMER CREDIT No benevolent man ever l o s t a l t o g e t h e r the f r u i t s of h i s benevolence. I f he does not a l -ways gather them from the persons from whom he ought to have gathered them, he seldom f a i l s to gather them, and w i t h a t e n f o l d i n c r e a s e from o t h e r people. Adam Smith, Theory of Moral Sentiments Having considered the p h i l o s o p h y and o r g a n i z a t i o n a l s t r u c t u r e of c r e d i t unions, the next step i s to evaluate the p l a c e of c r e d i t unions i n consumer c r e d i t . This Chapter presents a b r i e f d i s c u s s i o n of the economics of consumer c r e d i t , m o t i v a t i o n of a c r e d i t union member to save, the com-p a r a t i v e p o s i t i o n of c r e d i t unions w i t h o t h e r l e n d i n g agencies i n Canada, c o o p e r a t i v e c e n t r a l banking i n Canada and governmental ( F e d e r a l and P r o v i n c i a l ) r e g u l a t i o n of a c t i v i t i e s of the B r i t i s h Columbia C e n t r a l C r e d i t Union. I . THE ECONOMICS OF CONSUMER CREDIT The development of mass p r o d u c t i o n methods made pos-s i b l e a l a r g e output at low c o s t s . The consumption r a t e had to be stepped up to give impetus to f u r t h e r development and improvement of mass p r o d u c t i o n methods. Consequently, to cre a t e a market f o r an i n c r e a s e d supply of goods, an extens-i v e use of consumer c r e d i t was made. In order to penetrate 2 V i n t o d i f f e r e n t income groups, v a r i o u s c r e d i t techniques were evolved which would adapt d i f f e r e n t terms of s a l e to s u i t the needs of the consumer. S e v e r a l l e n d i n g i n s t i t u t i o n s came i n t o e x i s t e n c e . There was a b r i s k competition i n the c r e d i t f i e l d . Because the p r i c e of consumer c r e d i t i s i n t e r e s t or charges, one would t h i n k t h a t the only c o n s i d e r a t i o n f o r a consumer a t the time of borrowing would be the cost of the lo a n , and so t h i s would be a p e r f e c t l y competitive market s i t u a t i o n . However, t h i s i s not t r u e ; i n p o i n t of f a c t , the consumer c r e d i t market i s f a r from b e i n g p e r f e c t l y competit-i v e . The r e l a t i o n s h i p between borrower and l e n d e r i s governed by f a c t o r s such as the economic s t a t u s of the borrow-er, the s e c u r i t y f o r the l o a n , and the g e o g r a p h i c a l l o c a t i o n which r e s t r i c t s the f u n c t i o n of p r i c e competition i n the con-sumer market. Because of the l e g a l r e s t r i c t i o n s on the r a t e of i n t e r e s t on p e r s o n a l l o a n s , the l o a n market i s not a f r e e market. The most important reason f o r i m p e r f e c t i o n i n the consumer c r e d i t market i s t h a t i t i s a s e l l e r ' s market. The borrower does not want to shop around because he wants as few people as p o s s i b l e to know h i s f i n a n c i a l weakness. Some-times he does not know how and where to shop around. Fur-t h e r , u s u a l l y the borrower needs money i n a hurry, and who-soever i s f i r s t to make i t a v a i l a b l e to him obt a i n s h i s b u s i n e s s . There i s other evidence of imperfect competition i n 3 the consumer market. Although i t seems to be com p e t i t i v e on the s u r f a c e , there i s v e r y l i t t l e c u t t i n g down of r a t e s to secure more b u s i n e s s . I t i s g e n e r a l l y b e l i e v e d i n banking c i r c l e s t h a t expenses i n c r e a s e more than p r o p o r t i o n a t e l y w i t h an i n c r e a s e i n the volume of l o a n s , r e s u l t i n g i n an i n -crease i n income a t a n e g a t i v e r a t e , or an a c t u a l d e c l i n e i n t o t a l income."'" Competitive r a t e c u t t i n g i s a l s o r e s t r i c t -ed by low e l a s t i c i t y of the demand curve of the s e r v i c e s of any one l e n d e r . By low e l a s t i c i t y i t means t h a t the per-centage i n c r e a s e i n l o a n demand from a p a r t i c u l a r l e n d e r w i l l be l e s s than the percentage r e d u c t i o n i n r a t e . Borrowers g e n e r a l l y have a tendency to s t i c k t o the same l e n d e r under a l l circumstances. To s u b s t a n t i a t e t h i s viewpoint W.F. Lougheed draws support from the f i n d i n g s of L.N. Robinson and Maude E. Stearns i n "Ten Thousand Small Loans" (Russel Sage Foundation 1 9 3 0 ) . In Ten Thousand Small Loans the low e l a s t i c i t y of demand was p o i n t e d out: 70% of a l l l o a n s were made to persons who had borrowed p r e v i o u s l y a t the same o f f i c e . The r e -mainder, then, about 30 per cent, had had p r e v i o u s loans from the same o f f i c e but had been a b l e t o XW.F.Lougheed, "The Economics of C r e d i t , " C r e d i t s and C o l l e c t i o n s i n Canada, The Ryerson Press, Toronto, 1 9 5 3 , p.19 . 4 p pay them o f f b e f o r e borrowing a g a i n . In the l o n g run probably the c o n s i s t e n t lower r a t e s of a l e n d e r might a t t r a c t borrowers away from other l e n d e r s . An important p o i n t i n consumer c r e d i t i s whether the present consumption a t the commitment of f u t u r e savings i s economically j u s t i f i a b l e . U n t i l the beginning of the Twentieth Century, the d e s i r e to a v o i d debt under a l l c i r -cumstances, and to f i n a n c e p u r c h a s i n g of a s s e t s out of the savings of the f a m i l y , dominated consumer expenditure. I t caused a t h r i f t y f a m i l y to do without economic goods f o r a major p o r t i o n of i t s l i f e i n order to save. When i t accumulated enough savings to buy c e r t a i n durable goods, i t s members were u s u a l l y too o l d to d e r i v e f u l l b e n e f i t from them. Saving as an economic term means " a b s t a i n i n g from the use of economic goods. I t means consuming l e s s than i s being produced.3 Since by consumer c r e d i t , f u t u r e savings are consumed i n the present, the q u e s t i o n a r i s e s whether or not consumer c r e d i t impedes the r a t e of f u t u r e savings of a f a m i l y . The e f f e c t of consumer c r e d i t on savings i s import-ant because i n d u s t r i a l development and p r o s p e r i t y depends on savings of the community. There are two o p p o s i t e view p o i n t s . ^W.F. Lougheed, "The Economics of C r e d i t " , C r e d i t s and C o l l e c t i o n s i n Canada, The Ryerson Press, Toronto, 1953, p. 19. ^Wilbur C. Plummer, " S o c i a l and Economic Consequences of Buying on the Instalment P l a n " , American Academy of P o l i t i c -a l and S o c i a l Science, 1927, p. 31. 5 Some people b e l i e v e t h a t consumer c r e d i t l e a d s to s a v i n g . A f a m i l y which would not otherwise save because i t has tend-e n c i e s to d i r e c t i t s income to i n t a n g i b l e l u x u r i e s which are temporary i n enjoyment, i s made to save through the payment of i n s t a l m e n t s . His monthly payments i n f a c t r e p r e s e n t an a l t e r n a t i v e form of s a v i n g s . The sound use of consumer c r e d i t may be conducive to more c a r e f u l p l a n n i n g of f a m i l y expenditure. I t i s probably c o r r e c t t h a t i f the l i f e of the goods purchased on c r e d i t i s l o n g e r than the p e r i o d of payment, r e a l s a v i n g takes p l a c e . There are o t h e r s who b e l i e v e t h a t i n s t a l m e n t buying i s not conducive to s a v i n g . The h i g h pressure salesmen cause people t o buy on c r e d i t a r t i c l e s of l u x u r y which are q u i c k l y consumed. They could not have bought these i f they were r e q u i r e d to pay cash. The buyer soon a c q u i r e s the l u x -ury h a b i t by being able to possess these a r t i c l e s , which l e a d s to spending and consuming r a t h e r than s a v i n g . W.C. Plummer a p p r a i s i n g these v i e w p o i n t s , s t a t e s The d i f f i c u l t y of t h i s question i s i n the f a c t t h a t the same kind of i n s t a l m e n t buying seems to a f f e c t d i f f e r e n t people d i f f e r e n t l y . I t i s un-doubtedly t r u e t h a t i n s t a l m e n t buying causes some i n d i v i d u a l s to p l a n t h e i r expenditures and thereby l e a d s to s a v i n g . But i t i s e q u a l l y t r u e t h a t other i n d i v i d u a l s are l e a d i n t o extravagant spending by e x a c t l y the same se t of circumstances.^-% i l b u r C. Plummer, Op.Cit., p. 57. 6 Large production i n the present century i s the r e s u l t of large savings. Along with large production there has been consistently large consumption. More and more durable goods have a l l along been added to the household. In the United States the s t a t i s t i c s show that a spending unit has experienced considerable increase i n i t s net worth. Federal Reserve estimates placed the t o t a l assets of the 54 m i l l i o n spending units in t h i s country at more than $725 b i l l i o n early i n 1953. After deducting debts of $85 b i l l i o n , t h i s l e f t a net worth of over $64 b i l l i o n , or an average of 12,000 per spending unit. And these estimates do not include the value of cash, insurance p o l i c i e s , trust funds and pensions, furniture or clothing.5 In Canada 78% of a l l spending units i n 1956 had i n -comes below $5,000 per a year and 71% of indebted units had i n -comes i n t h i s range.^ In t h i s income range, very l i t t l e would be l e f t a f t e r necessary day to day expenditure, pay-ment of taxes and some provision f o r the "rainy day" has been allowed f o r . Whatever i s l e f t i s more l i k e l y to be spent on something of immediate use than to be set aside as savings u n t i l enough i s accumulated to pay cash f o r a major item of durable goods. If planning i s done wisely, moderate i n s t a l -ment payments can be f i t t e d into the family budget and ^Ernst A. Daner, The Role of Consumer - and of consumer c r e d i t - i n our economy (mimeographed) 1958, p. 9. DWm. C. Hoad, Financing of Economic A c t i v i t y i n Canada, Royal Commission on Canada's Economic Prospects, 1958, p. 151. 7 immediate b e n e f i t s enjoyed. Consumer behaviour i s very d i f f i c u l t to analys e . V a r i o u s approaches to t h i s problem have been made by the economists. Any d i s c u s s i o n of consumption theory i s beyond the scope of t h i s study. The e x i s t e n c e of c r e d i t depends upon the e x i s t e n c e of " d i s c r e t i o n a r y income". I f there i s no " d i s c r e t i o n a r y income", a l l must be spent to keep people a l i v e . Such a c o n d i t i o n means poverty, when the community gets beyond the l e v e l of poverty, the element of savings appears, and t h a t i s what the economists c a l l " r e a l s a v i n g s " . A theory of s a v i n g i s a p a r t of the gen e r a l theory of con-sumption. Consumers are not a f f e c t e d d i r e c t l y by the s a v i n g a c t i o n of others because they do not know about t h e i r savings, but i n d i r e c t l y they are a f f e c t e d . Duesenberry be-l i e v e s t h a t lower income f a m i l i e s w i l l not be i n f l u e n c e d by any a t t r a c t i o n to save because t h e i r d e s i r e s f o r cu r r e n t con-sumption are s t r o n g enough t o overcome any f u t u r e c o n s i d e r a -t i o n s . The upper income group people w i l l t h e r e f o r e do most of the s a v i n g s . His ge n e r a l c o n c l u s i o n s are t h a t t h e r e i s no c o r r e l a t i o n between the aggregate s a v i n g r a t i o and the abso l u t e aggregate income, r a t h e r , the former i s dependent up-on i n t e r e s t r a t e s , the r e l a t i o n between c u r r e n t and expect-ed f u t u r e incomes, the d i s t r i b u t i o n of income, the age d i s -t r i b u t i o n o f p o p u l a t i o n , and the r a t e of growth o f income.''7 ?James S. Duesenberry, Income Saving and Theory of  Consumer Behaviour, Harvard U n i v e r s i t y P r e s s , 1949, p. 45. 8 Some other economists have tended to agree wi t h him. C a r l A. Dauten, a f t e r a p p r a i s i n g v a r i o u s approaches to the consumption theory, has d e r i v e d a k i n d of c r e d i t theory. He d i v i d e s c r e d i t i n t o emergency c r e d i t , convenience c r e d i t and i n s t a l m e n t c r e d i t to buy durable goods. He d i s p o s e s of the f i r s t two c a t e g o r i e s q u i c k l y by s a y i n g : Emergency c r e d i t i s not p a r t of any p a t t e r n of consumer behaviour, but a s a f e t y v a l v e f o r use i n emergencies. I t behaves c o u n t e r - c y c l i c a l l y and probably becomes l e s s important i n r e l a t i o n s h i p to aggregate r e a l income as income r i s e s . Convenience c r e d i t moves with d i s p o s a b l e income, but shows a r i s i n g t r e n d . T h i s i s due to the g r e a t e r acceptance of such c r e d i t by consumers and the expansion of i t s use by merchants.° Dauten t h i n k s t h a t the t h i r d c a t e g o r y , t h a t i s , i n s t a l m e n t c r e d i t , p r e s e n t s the b a s i c problem. The l e v e l of such c r e d i t depends on the s a l e of d u r a b l e s , and f u r t h e r , the p r o p o r t i o n of durables bought on an i n s t a l m e n t b a s i s . The f a c t o r s t h a t i n f l u e n c e s a l e of durables are d i s c r e t i o n a r y income, expecta-t i o n s of f u t u r e income, the p a t t e r n of d i s t r i b u t i o n of i n -come amongst spending u n i t s , and the growth of income. Dauten's t h e o r e t i c a l views may be summarized as f o l l o w s : 1. The l e v e l of consumer debt i s independent of the a b s o l u t e l e v e l of income. S C a r l A. Dauten, "A F r e s h Approach to the P l a c e of Consumer C r e d i t i n Economic and F i n a n c i a l T h i n k i n g " , The  J o u r n a l of Finance, V o l IX, No. 2 (May 1 9 5 4 ) , p. 120. y 2 . I t i s based on the demand f o r durable goods which i s based on d i s c r e t i o n a r y income, the r a t e of change i n such income, expected income, the p a t t e r n of income d i s t r i b u t i o n , the age d i s t r i b u t i o n of the po p u l a t i o n , the stocks of durables on hand and s i m i l a r f a c t o r s . 3 . The proportions of durables bought on c r e d i t are based on the income s t a t u s of the spending u n i t , the f a m i l y s t a t u s , holdings of l i q u i d assets and the l e v e l of other debts. 4 . Also s i g n i f i c a n t are the s i z e of the down payment, the s i z e of the instalments and c r e d i t charges. 5. Because of the l a r g e amounts i n v o l v e d i n most purchases of durable goods i n r e l a t i o n to c r e d i t c o s t s , the use of c r e d i t w i l l be r a t h e r i n s e n s i t i v e to changes i n c r e d i t c o s t s . 6. The propensity to use c r e d i t r i s e s as income r i s e s , but at upper middle income l e v e l s , i t s t a b i l i z e s and then d e c l i n e s . The p a t t e r n i s l i k e l y to change wit h changes i n shape of the income d i s t r i b u t i o n . 7 . The use of consumer c r e d i t w i l l change during the business c y c l e i n part because both granters and users of c r e d i t become more cautious, but p r i m a r i l y because changes i n r e a l income s h i f t f a m i l i e s i n t o r e a l income groups i n which d i f f e r e n t amounts of c r e d i t are used.9 This i s a very recent theory which w i l l have to stand the t e s t of time before i t can be accepted. However, i t i s h i g h l y suggestive, and can give an i n s i g h t i n t o the broad f i e l d of i n s t i t u t i o n a l i s e d consumer f i n a n c i n g . One should C a r l A. Dauten, op. c i t . , pp. 1 2 2 - 1 2 3 . I 1 0 not t r y too hard to apply t h i s to the p r a c t i c a l problems fa c e d by the c r e d i t unions. N e v e r t h e l e s s , i n order to r e t a i n t h e i r c o m p e titive p o s i t i o n i n consumer f i n a n c i n g , the c r e d i t unions have to base t h e i r o p e r a t i o n s upon an understanding of consumer mo-t i v a t i o n i n sa v i n g and d i s s a v i n g . I I . MOTIVATION OF A CREDIT UNION MEMBER TO SAVE We know very l i t t l e about what motivates a c r e d i t union member to save, and then to put h i s savings i n a c r e d i t union i n s t e a d of i n some other f i n a n c i a l agency. Common bond i s undoubtedly one of the f a c t o r s t h a t i n f l u e n c e s a member, but the extent of i t s i n f l u e n c e i s debatable. The c r e d i t unions i n Canada need much b a s i c r e s e a r c h i n t h i s f i e l d . S ince there i s no e m p i r i c a l data a v a i l a b l e , a l l t h a t we can do i s to draw a n a l o g i e s from s t u d i e s made i n the consumer f i e l d i n g e n e r a l . In 1 9 5 3 , the United S t a t e s Savings and Loan L e a g u e ^ conducted a survey on v a r i o u s aspects of savings and l o a n a s s o c i a t i o n s and banks. One of i t s f i n d -i n g s was t h a t the economic c h a r a c t e r i s t i c s o f people who saved i n banks were not much d i f f e r e n t from those of people who saved through B u i l d i n g and Loan A s s o c i a t i o n s . So i t i s not unreasonable to draw an analogy t h a t a saver i n a c r e d i t U n i t e d S t a t e s Savings and Loan League, Consumers ' y Survey on Savings Habits (Washington: U.S. Savings and Loan League 1 9 5 4 ) . 11 union i s motivated by almost the same f a c t o r s as those t h a t motivated a saver i n a bank, or i n a saving and l o a n a s s o c i a -t i o n . The study a l s o found t h a t the main purposes of s a v i n g s were to p r o v i d e f o r emergencies, f u t u r e f a m i l y expenditures and o l d age. Only a s m a l l percentage of people regarded the savings as investments f o r added income. This agrees with B a r o n ' a r g u m e n t t h a t the main reason f o r s a v i n g amongst the working c l a s s was d e f e r r e d expenditure, and not f o r de-r i v i n g income from permanent investments. Since more than t w o - t h i r d s of the b u s i n e s s of c r e d i t unions i s d e r i v e d from manual workers,-^ we f i n d t h a t d e f e r r e d expenditure i s the most prominent reason f o r c r e d i t union members to save. As f a r as the p l a c e of s a v i n g i s concerned, the American survey i n d i c a t e d t h a t s a f e t y and convenience ranked h i g h e s t amongst a l l the f a c t o r s i n making the c h o i c e . The h a b i t of people a l s o p l a y s an important p a r t i n continued p r e f e r e n c e f o r one i n s t i t u t i o n over another. The r a t e of earnings p a i d on savings, w h i l e important to a c e r t a i n de-gree, d i d not govern the d e c i s i o n s of most of the s a v e r s . I I I . PLACE OF CREDIT UNIONS IN CONSUMER LENDING IN CANADA There are q u i t e a number of agencies which are con--^N. Baron, Cooperative Banking (London: P.S. King and Son, 1932), p. 25. 12 E.R. I s b e l l , C r e d i t Unions and the Recession, Ohio C r e d i t Union League, 1959, p. 53. 12 i cerned with consumer loans such as remedial l o a n s o c i e t i e s , pawn brokers, f r i e n d s and r e l a t i v e s . Apart from these, there are f o u r l e a d i n g i n s t i t u t i o n s i n t h i s f i e l d : namely, char-t e r e d banks, i n s t a l m e n t f i n a n c e companies, consumer f i n a n c e companies and c r e d i t unions. Consumer f i n a n c e companies are c a l l e d by many n a m e s — p e r s o n a l f i n a n c e companies, s m a l l l o a n companies, money l e n d e r s , l i c e n s e d l e n d e r s , and r e g u l a t e d l e n d e r s . C r e d i t unions have grown to the p o i n t where they p l a y an important r o l e i n the Canadian economy. The f o l l o w i n g t a b l e w i l l show t h a t c r e d i t unions rank f o u r t h i n i n s t a l m e n t c r e d i t . There i s more than a p r o p o r t i o n a t e growth trend i n c r e d i t unions as compared w i t h other f i n a n c i a l i n s t i t u t i o n s . The s m a l l l o a n companies have shown a d e c l i n i n g t r e n d i n 1957 and 1956*. This i s p a r t l y due to the r e c e s s i o n i n t h a t p e r i o d and probably the 1956 amendment to the Small Loan Act 1939 which reduced the r a t e of i n t e r e s t a company can charge. I t i s i n t e r e s t i n g t o note t h a t when unemployment rose i n 1957 and 195$ , the percentage i n c r e a s e i n i n s t a l m e n t c r e d i t i n c r e d i t unions was more than i n any other i n s t i t u t i o n . T h i s shows t h a t c r e d i t unions have a s t a b i l i z i n g e f f e c t on the economy. They continued to serve t h e i r members even when the p l a n t s were c l o s e d f o r a l o n g time; the reason appears to be t h a t the c r e d i t unions are f u l l y conscious of the d i f f i -c u l t i e s of the members, and t r y to help them i n good as w e l l as bad times. T h i s i s the c o o p e r a t i v e s p i r i t . We w i l l consider i n the l a t t e r part of t h i s study whether or not t h i s cooperation was overdone to a f f e c t the l i q u i d i t y of c r e d i t unions i n B r i t i s h Columbia. I t i s evident from Table 1 t h a t i f the c r e d i t unions keep up the trend which they have shown, they w i l l acquire the t h i r d p o s i t i o n i n volume of c r e d i t i n a l l these l e n d i n g i n s t i t u t i o n s . The percentage d i s t r i b u t i o n of instalment loans by holders i n Canada i n 1959 was: Instalment Finance Companies 27.4% Chartered Banks 24 .9% R e t a i l Dealers 18.2$ Small Loan Companies 16.6% C r e d i t Unions 12.4$ Quebec Savings Banks .5% 100% In the United States of America, C r e d i t Unions held 8.1% of t o t a l instalment loans. The consumer loan can be broken down i n t o two cate-g o r i e s : f i r s t , the loan granted f o r the purchase of con-sumer goods l i k e household equipment and automobiles; and second, the loan granted f o r medical expenses, education, payment of taxes, c o n s o l i d a t i o n of debts, v a c a t i o n expenses and s i m i l a r other purposes. The l a t t e r category of loans i s c a l l e d personal loans. There i s no data a v a i l a b l e regarding ^ C r e d i t Union Year Book I960, C r e d i t Union N a t i o n a l A s s o c i a t i o n , Madison, Wisconsin, U.S.A., p. 19. 14 <*: CO s U «; cO o rH r H IN Do t—1 EH w M o Q PQ W CQ <t) d EH O o •H EH r H MEN Mil c: EH M CO —• S3 Percentage increase from previous year C r e d i t Union Loans Not Secured by Mortgages Percentage Increase from Previous Year [Quebec Savings Banks [Loans Not Secured by Mortgages Percentage Increase from Previous Year [Chartered Banks Selectee. (Personal Loans Percentage Increase from Previous Year Other R e t a i l Dealers Instalment C r e d i t Percentage Increase from Previous Year Department Store Con-d i t i o n a l Sale Agree-ments IPercentage Increase Ifrom Previous Year Small Loan Companies Instalment C r e d i t & Cash Loans IPercentage Increase from Previous Year [Instalment Finance Companies Y E A R CO rH ON CM rH OJ H C M H H c A roto vO -4-H Os -d-CO OJ OJ rH rH rH •€r> O O i U"\ CO t A CN • • • • • • t>to O - j - o i CO I rH C O r H rH CO O i CO r - l "CO t > t 0 vO rH r H r H -€r> O i VO -co CO CO CO CO O i • • • • • • coco H ir\-4-t>-O i I O i rH O i CO r H ^ rH O i "CO O i U - \ O i co -4 l -oO -4" ITN -j"-4" CO CO O i irwo co to Oi to MD MD co'CO • • • • • • • rH ON O-rH Oi Oi ON I rH rH rH NO vO rHtO O vO co covO \Q C d-coO-COvO ON O i O i O i O i O i rH rH r H t O TNtO-CO O i O i • « • • • • • t>- ON ONvO -3-NO NO rH O i O i rH O i ON < | - O H O N O H O N O i O N O - d - r H O - C O O i O i O i rH r H rH rH -€r> l f \ ON C-~\0 NO "CO O i ON-co • • • • • • • O r H !>-ON O i to ON rH O i O i O i H O i rH O i vO ON U N N O -CO -4" O N O t r \ t > - r H C ^ - d - f H - 4 - C O C O O i O i r H r H r H -d-co i r \ H rH-CO [>-4-• • • • • • rH CO LO H - 4 " t 0 Q I o i o i I c o 3 -CO O MD ON O i vO CONO vO -CO ^ ON ON rH O-T50 C v - O O - L O - d - t O c O r H 'CO" to C^-NO L O - 4 - C O O i rH U M r \ u ~ \ u - \ u " \ L r N t r \ v \ . O N O ^ O N O N O N O N O N O N H r H H r H r H r H r H r H o •H • P CO •H O O CO CO < al c o •H - p cO a o •H 0 tD - P •H X5 CD U O o NO ON H o o m u cO CD • o CO •H • crj rH P-. •p « •H CO - P T J c CD • CD 5-. t=> a O !>» cO T J c P-. a •H cti CO •n c CD CO o U o U cO CO CD cs •H «H CO CD o P I c U o o CD CO X J •H p C T J o cO cO PQ S CO CD Ti • • CD H o o u a M o CO 15 the volume of personal loans granted by each f i n a n c i a l i n s t i t u t i o n i n Canada. According to E.R. I s b e l l , there i s the greatest competition between consumer finance companies, banks and cr e d i t unions i n t h i s category of loans. In the United States The commercial bank i s doing about 45% of t h e i r consumer loan business i n t h i s area; the credi t union 60%, and the personal finance company 75%. .. . . I f the cr e d i t union i s to make s i g n i f i c a n t progress i n i t s competition with the other two agencies, i t would seem that i t should be i n the area of the personal loan.14 Apart from consumer credit, the cr e d i t unions are also a source of cr e d i t to small business. I f the proprietor of a business i s a member of a credi t union, he can borrow at an in t e r e s t rate of usually 8% on the unpaid balance. Such loan i s generally secured by a mortgage on buildings and equipment and i s normally f o r a term of les s 15 than f i v e years. The writer investigated the practices of B r i t i s h Columbia Credit Unions regarding credit i n small business. I t was found that very l i t t l e lending i s done to small business and the rate of int e r e s t charged i s usually be-tween 9 and 11 per cent. The cre d i t unions also do a f a i r amount of mortgage -^E.R. I s b e l l , Credit Unions—and the Recession, 1959, Ohio Credit Union League, p. 51. 1 5 S m a l l Business Manual, Department of Trade and Com-merce, Ottawa, Queen's Prin t e r , Third E d i t i o n , 1959, p. 32. lending. An upward trend i n r e a l estate loans i s seen as the cr e d i t unions grow i n s i z e . This type of lending w i l l be discussed i n d e t a i l i n the l a t t e r part of t h i s study. A credit union i s a lending as well as a savings i n s t i t u t i o n . The savings part of i t i s more important be-cause savings provide the major portion of funds for lending. Table No. 2 shows that credit unions act as depositories f o r a s i g n i f i c a n t portion of t o t a l net savings i n Canada. The trend i s continuing upward. Between 1945 and 195^, the net r i s e i n i n d i v i d u a l savings held by cr e d i t unions was about 676%. For Table I I see p. 17. In 1959, credit unions i n Canada held 11.4% of the t o t a l personal savings whereas chartered banks, tr u s t and loan companies, and 'Other banks' held 67.S%, 16.3% and 4.5% r e s p e c t i v e l y . It i s interesting to note that credit unions i n the United States had only 2.6*3% of the t o t a l per-sonal savings. This shows that a cr e d i t union i s better accepted as a saving i n s t i t u t i o n in Canada. 16 IV. COOPERATIVE CENTRAL BANKING IN CANADA As the credit union movement became f a i r l y strong i n Canada, Province-wide cooperative credit s o c i e t i e s , or central c r e d i t unions were formed to function as desposit-Credit Union Year Book, I960, Credit Union National Association, Madison, Wisconsin, P. 18. 17 TABLE I I CREDIT UNION SAVINGS AS PERCENTAGE OF TOTAL NET SAVINGS IN CANADA (Amounts i n M i l l i o n s o f D o l l a r s ) 1 CO CQ 1 co bO C CO CO cf UO C CD 1 •H a bOH > o C - H t> H CO n co c C CD •H C cO - H •H t> CJ ed O a •H •H g bO CQ •H CO > > cO H P<0> CD CO > > a co a CD CO CO CD o co g CO cO cO cO cO bO o CD C ^  CO S hfl CQ • r l O X O CD CO cocx, xi CQ O P- i •P ^  C U CD Q o w o O o •H a CO - H U CJ CD cfl cO CD g •H •P -P bO > & a> a ^ co O S faXi PH O H M H S> CD CD C >> cO JH 1=3 CD CD •r-t O O CO cd u s S-H £ CO P O > }>H flCn &fl r H C a © G O CD Xl O •H C -P o cO H O H O CO r H H r H X> H - H -P CO ,£> co a) cO CO r H C Cfl CD XI CO +J^X) o O ^ cd U U -p P O CD +3 U P CD bO •H CSP E-i CD CD £ O O X > o a CD U PJ Xi CO r H PH P-l P r H W S O - H CD O U CO X O CO C£) 1956 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 $ 2 4 , 3 9 1 2 3 . 0 2 4 2 1 , 8 8 5 19 ,783 1 6 , 4 2 1 1 6 , 3 3 6 1 7 , 3 9 5 1 5 , 6 2 4 1 3 , 4 2 6 1 2 , 6 3 6 1 1 , 9 0 1 1 0 , 3 7 5 9 , 7 1 9 9 , 1 2 0 $ 2 2 , 6 0 0 2 1 , 1 0 7 2 0 , 1 5 3 1 6 , 2 3 9 1 6 , 9 6 4 1 6 , 9 0 4 1 6 , 0 7 2 1 4 , 7 9 4 1 2 , 6 6 6 1 1 , 6 4 9 1 1 , 0 7 9 9 , 5 6 4 6 , 9 2 3 6 , 3 1 1 2 1 , 0 1 2 1 9 , 9 6 4 16 ,633 1 7 , 3 6 9 1 6 , 1 7 5 1 5 , 5 9 2 1 4 , 7 6 1 1 3 , 4 6 0 1 2 , 0 2 6 10 ,923 1 0 , 0 6 5 9 , 0 9 0 6 , 0 3 1 6 , 9 6 9 $ 1 , 5 6 6 1 ,143 1 , 3 2 0 650 609 1 ,312 1 , 2 9 1 1 , 3 3 4 662 926 994 494 692 1 , 3 4 2 $ 1 , 703 1 , 295 1 , 0 7 9 652 664 1 ,226 960 965 563 1 , 033 1 , 0 2 7 546 676 1 , 5 6 1 9 3 3 . 6 7 7 4 . 9 7 0 0 . 6 6 0 2 . 6 5 1 0 . 6 4 5 3 . 6 4 2 6 . 4 3 3 4 . 1 2 6 6 . 9 2 6 3 . 6 2 3 9 . 4 2 0 6 . 9 1 7 6 . 7 1 3 9 . 1 $ 1 5 6 . 9 7 4 . 3 9 7 . 7 9 2 . 2 ."56'.9 2 7 . 3 9 2 . 3 4 5 U 2 5 . 1 2 4 . 5 3 0 . 5 3 0 . 2 3 9 . 6 % 9 . 3 5 . 7 9 . 1 1 4 . 1 6 . 4 2 . 2 9 . 6 4 . 6 4 . 3 2 . 4 3 . 0 5 . 5 4 . 5 S o u r c e : C r e d i t U n i o n Y e a r Book I 9 6 0 . C r e d i t U n i o n N a t i o n a l A s s o c i a t i o n , M a d i s o n , W i s c o n s i n , U . S . A . 18 o r i e s f o r the s u r p l u s funds of the c r e d i t unions and other corporations who i n t u r n could o b t a i n borrowings from them. In the Province of Quebec, however, the set-up i s d i f f e r e n t . There i s one c e n t r a l c r e d i t union under the Quebec C r e d i t Union League which deals only w i t h member c r e d i t unions of the league a l l over the P r o v i n c e . A l a r g e percentage of c r e d i t unions i n Quebec are not members of the league. There are ten r e g i o n a l Caisses P o p u l a i r e s but they are not f e d e r -ated i n t o one p r o v i n c i a l cooperative c r e d i t s o c i e t y . The amount of business done by the p r o v i n c i a l c e n t r a l c r e d i t unions and t h e i r growth from 1954 to 1958 i s given i n Table No. I I I . For Table I I I see p. 19. Table No. I l l d i s p l a y s the s t r e n g t h of the c r e d i t union movement i n Canada. The u t i l i z a t i o n of c e n t r a l bank-in g i s becoming more and more popular amongst c r e d i t unions. The a s s e t s i n 1958 almost doubled the amount i n 1954. As the p r o v i n c i a l c e n t r a l c r e d i t unions prospered i n Canada, a need was f e l t t h a t a n a t i o n a l cooperative c r e d i t s o c i e t y should be formed to act as an apex i n s t i t u t i o n f o r the whole of Canada, A f t e r a prolonged e f f o r t by the Canadian Cooperative Union, the Canadian Cooperative Credit A s s o c i a t i o n s Act was passed,''"''' This was an enabling •^Cooperative C r e d i t A s s o c i a t i o n s Act Sc. 53, c. 28. 19 TABLE III STATISTICAL SUMMARY—PROVINCIAL CENTRAL CREDIT UNIONS bO G CQ 1 G •rH G CO p -H o p u n •H CD o G CO T) u CO G CO S cO p CO CD SL, u !=> CQ p G CO p P CO ed CD <£, TJ CO CD CD •rl G CD P CQ G P S CO cO !>H CD g •H A cO 3 p cO O CD •n o H O CO X ! PH O CD H s CD 1 cd CQ CD CO CD X! u o -P G co > O CO P o o o EH Loa gage G H Loan i Number $000's $000's $000«s $000»s $000's $000's 1958 4,265 711 $126,236 $26,276 67,924 20,554 92,642 45,632 1957 3,912 694 103,122 22,016 54,177 17,092 76,025 46,512 1956 3,913 611 67,551 21,710 50,295 14,271 65,656 45,602 1955 3,663 540 77,456 15,569 46,660 11,754 61,323 27,632 1954 3,302 467 64,531 14,597 39,191 9,664 46,225 23,066 Source: Credit Unions in Canada. Marketing Service Economics Division, Canada Department of Agriculture 1954 to 1 20 legislation only. Consequently a special Act had to he se-cured to incorporate an association under this Act. In the same year "an Act to incorporate Canadian Cooperative Credit Society Ltd.,"l^ was passed. This Act allowed the organiza-tion of the Canadian Cooperative Credit Society. The Canadian Cooperative Credit Society serves as a central savings and credit organization at the National level for credit unions and cooperative movements in Canada. Its financial position as on December 31, 1958, was: Total assets of the Canadian Cooperative Credit Society as of December 31, 1.958, amounted to $104,185. Member societies subscribed 2,656 shares of a total value of $265,000 of which $108,900 was paid up. The Canadian Cooperative Credit Society made i t s f i r s t loans in 1957. In that year loans of $400,000 were made to members.19 The total membership at the end of 1959 was nine. Its pur-pose i s to serve as a depository for surplus funds of member associations and provide them with borrowings.^ To conduct i t s operations i t may have to borrow money from i t s members or the chartered banks. According to the Canadian Cooperative Association's Act the borrowings of the Association plus the deposits plus the amount of repayments, i f any, of i t s mem-bers guaranteed by the Association should' not exceed ten "An Act to incorporate Canadian Cooperative Credit Society Ltd.,", s.c. 53, c.58. Credit Unions in Canada, Marketing Service, Economic Division, Canada Department of Agriculture, 1958, p. 19. 21 times the aggregate of the paid up c a p i t a l , guarantee fund and the s u r p l u s . An a s s o c i a t i o n cannot make any loan or any investment i n funds other than government,municipal or school s e c u r i t i e s i f the aggregate of i t s cash on hand or i n the bank and the market value of e x i s t i n g government, municipal or school s e c u r i t i e s i s l e s s than twenty per cent of the t o t a l amount on deposit w i t h the a s s o c i a t i o n , or i f such l e n d i n g or investment would reduce i t to l e s s than twenty per cent. Further an a s s o c i a t i o n under the Act must keep at l e a s t f i v e per cent of the t o t a l amount of money on deposit w i t h i t i n cash or on deposit i n a chartered bank at a l l times. The Superintendent of Insurance, Federal Department of Insurance has been empowered to carry out i n s p e c t i o n s of the a f f a i r s of an a s s o c i a t i o n and i s r e s p o n s i b l e to r e p o r t to the M i n i s t e r of Finance annually as to i t s f i n a n c i a l p o s i -t i o n . The other main r e s t r i c t i o n s on the a s s o c i a t i o n are that i t cannot lend money to n a t u r a l persons, or t o any cooperative c r e d i t s o c i e t y which does not hold a v a l i d cer-t i f i c a t e i s s u e d by the Treasury Board, nor on the s e c u r i t y of mortgage on r e a l property. Before i s s u i n g the c e r t i f i c -ate, the Board s a t i s f i e s i t s e l f as to the s o c i e t y ' s com-p l i a n c e w i t h the p r o v i s i o n s of the Act and the f i n a n c i a l c o n d i t i o n of the a p p l i c a n t . The t o t a l amount of loans plus the amount invested i n the s e c u r i t i e s of any one member of 22 - an a s s o c i a t i o n should not exceed ten per cent of the t o t a l of the p a i d up c a p i t a l and d e p o s i t s of the a s s o c i a t i o n , u n l e s s the excess i s secured by government, m u n i c i p a l or s c h o o l bonds. An a s s o c i a t i o n under the Act must s e t a s i d e twenty per cent of net annual earnings to be s e t up as a guarantee fund to be used a g a i n s t c o n t i n g e n c i e s , l o s s e s , and u n c o l l e c t a b l e l o a n s . The s e t t i n g a s i d e may be stopped when the t o t a l r e -serve i s equal to ten per cent of the p a i d up c a p i t a l . I t can pay i n t e r e s t a t a r a t e not exceeding f i v e per cent per annum on the p a i d up c a p i t a l , and the r e s t of the earnings must be d i s t r i b u t e d i n d i v i d e n d . The a u t h o r i z e d share cap-i t a l of the N a t i o n a l A s s o c i a t i o n i s one m i l l i o n d o l l a r s w i t h 10,000 shares of $100 par value each. The membership of the Canadian Cooperative C r e d i t A s s o c i a t i o n has been r e s t r i c t e d to the f o l l o w i n g : cooperat-i v e c r e d i t s o c i e t i e s i n c o r p o r a t e d by a s p e c i a l a c t of Parliament; c o o p e r a t i v e c r e d i t s o c i e t i e s d e c l a r e d e l i g i b l e by Parliament through r e g i s t r a t i o n ; a maximum of ten co-o p e r a t i v e c o r p o r a t i o n s (not b e i n g c o o p e r a t i v e c r e d i t s o c i -e t i e s ) c a r r y i n g on b u s i n e s s i n two or more p r o v i n c e s ; and a maximum of f i f t e e n n a t u r a l persons. An a s s o c i a t i o n cannot be a member of any of i t s i n c o r p o r a t e d members. V. REGULATION OF ACTIVITIES OF B.C. CENTRAL CREDIT UNION The B.C. C e n t r a l C r e d i t Union was organized i n May, 23 1 9 4 4 , under the B.C. C r e d i t Union Act a f t e r s p e c i a l amend-ments had been made i n the Act to a l l o w such o r g a n i z a t i o n . In 1 9 5 5 , the B.C. C e n t r a l C r e d i t Union received added powers when i t obtained the c e r t i f i c a t e of the Treasury Board under the Canadian Cooperative C r e d i t A s s o c i a t i o n s Act. On account of the B.C. Ce n t r a l ' s r e g i s t r a t i o n under t h i s Act, i t s a f f a i r s a u t o m a t i c a l l y come under the s u p e r v i s i o n of the Federal Department of Insurance. The B.C. C e n t r a l C r e d i t Union i s governed by two S t a t u t e s , the Canadian Cooperative C r e d i t A s s o c i a t i o n s Act, and the B r i t i s h Columbia C r e d i t Union Act. S e c t i o n 79 of the former Act provides: Every o r g a n i z a t i o n t h a t (a) i s c a r r y i n g on the business of a cooperative c r e d i t s o c i e t y (b) i s declared by Parliament to be e l i g i b l e to become a member of an a s s o c i a t i o n , and (c) i s r e g i s t e r e d on the books of the a s s o c i a t i o n as a shareholder thereof s h a l l f o r the purposes of Par t I I and I I I be deemed to be a cooperative c r e d i t s o c i e t y incorporated by s p e c i a l Act and except as provided i n t h i s P a r t , every such o r g a n i z a t i o n i s inves t e d with a l l the powers, p r i v i l e g e s and immunities conferred on a s s o c i a t i o n by se c t i o n s 6, 8 , 10 and i s subject to the l i m i t a t i o n s , l i a b i l i t i e s and p r o v i s i o n s s et f o r t h i n P a r t s I I and I I I and i n t h i s P a r t . 2 0 The P a r t s I I and I I I mentioned i n the s e c t i o n deal w i t h l i m i t a t i o n s , r e s t r i c t i o n s , a u d i t , s u p e r v i s i o n and l i a b i l i -t i e s . Sections 6 , 8 and 10 deal w i t h o b j e c t s , powers, and purchase or s a l e of business. The P r o v i n c i a l Statute has ^ C o o p e r a t i v e C r e d i t A s s o c i a t i o n s Act, S.C. 1 9 5 2 / 5 3 , c. s. 79. 24 allowed the Cooperative Credit Associations Act the super-ceding power over "central" in case the provisions of the former are inconsistent or repugnant to the provisions of the latter. Section 74 of the B.C. Credit Union Act provides: Notwithstanding the other provisions of this Act, a central credit union which, in compliance with sec. $, has become member of an association within the meaning of the "Cooperative Credit Associations Act" being chapter 28 of the Statute of Canada 1953, shall have the power and capacity to accept a l l powers, privileges and immunities conferred upon i t by the said "Cooperative Credit Association Act"; and, during such time as such central credit union i s invested with powers, privileges and immunities under the "Cooperative Credit Associations Act" any restrictions, regulations or limitations imposed upon such central credit union or i t s powers by this Act which are inconsistent with or repugnant to the provisions of the said "Cooperative Credit Associations Act" shall not apply to such central credit union, save and except sections 42, 43 and 44 of this Act, which shall continue to apply.21 Sections 42, 43 and 44 relate to inspection by the In-spector's Department of the B.C. Government. The Canadian Act requires that a l l "centrals" must make an allowance for the f u l l difference between the book and market value of a l l the investments on hand. The book amount of loans receivable must be reduced by the percent-age allowance determined in relation to the length of an existing default in repayment of an instalment. These percentages in relation to the length of the default are 2 1 C r e d i t Unions Act, R.S. 1948, chapter 82, British Columbia, s. 74. s t i p u l a t e d i n the Act. These r e g u l a t i o n s ensure the secur-i t y and l i q u i d i t y of c e n t r a l c r e d i t unions. A f t e r these requirements have been taken care of, i n t e r e s t payment on paid up c a p i t a l could be made or dividends d e c l a r e d . An investment i n the c a p i t a l of c e n t r a l i s req u i r e d from a l l members. This i s based on t h e i r own s i z e , and doe not exceed two per cent of the paid up share c a p i t a l of any member c r e d i t union. Since c r e d i t unions are r e q u i r e d to ca r r y l i q u i d i t y reserves, and these may be i n term deposits the B.C. C e n t r a l C r e d i t Union i n 1949 set up a Term Deposit account. A comprehensive treatment of the a f f a i r s of the B.C. Ce n t r a l C r e d i t Union w i l l be given i n Chapter I I . J CHAPTER I I FINANCIAL SOUNDNESS In chapter I the p l a c e of c r e d i t unions i n the Canadian economy was d i s c u s s e d . In t h i s chapter, an e v a l u -a t i o n w i l l be made of the f i n a n c i a l soundness of c r e d i t unions i n B r i t i s h Columbia. There are t h r e e main f a c t o r s determining the f i n a n c i -a l soundness of a c r e d i t union: adequacy of r e s e r v e s , l i q u i d i t y , and growth. In t h i s study each f a c t o r w i l l be taken s e p a r a t e l y to assess the s i t u a t i o n i n B r i t i s h Columbia. A c r e d i t union may have l a r g e r e s e r v e s but no l i q u i d -i t y or v i c e v e r s a . The r e s e r v e s are r e q u i r e d to keep mem-ber s ' shares i n t a c t . In times of economic d i s t r e s s , i f adequate r e s e r v e s are not a v a i l a b l e , the s h a r e h o l d e r s ' e q u i t y might be i m p a i r e d . On the o t h e r hand, i f adequate r e s e r v e s have been p r o v i d e d f o r , but there i s not enough ready money to pay f o r the withdrawals of shares or other demands f o r cash, there would be a f o r c e d s a l e of a s s e t s which might more than o f f s e t the r e s e r v e s . Both r e s e r v e s and l i q u i d i t y are important i n t h e i r own p l a c e s . Reserves are the amounts of net earnings s e t a s i d e to absorb f u t u r e l o s s e s , and the de-gree of l i q u i d i t y i n d i c a t e s the a b i l i t y of the c r e d i t union to meet normal demands f o r money. There are v a r i o u s a s p e c t s of the problem of r e s e r v e s — l e g a l , moral and economic. The l e g a l aspect can be disposed'' 2*7 of b r i e f l y because the law on the p o i n t i s c l e a r , and a l l the c r e d i t unions have to abide by i t . The economic and moral c o n s i d e r a t i o n s w i l l be d i s c u s s e d wherever necessary i n t h i s chapter. I. CREDIT UNION RESERVES A l a r g e v a r i e t y of r e s e r v e s has been developed f o r banks, p e r s o n a l l o a n companies and other s i m i l a r f i n a n c i a l i n s t i t u t i o n s . They are not n e c e s s a r i l y s u i t a b l e f o r c r e d i t u n i o n s . C r e d i t union r e s e r v e s may be c l a s s i f i e d i n t o two b a s i c groups. 1. V a l u a t i o n Reserves (a) Accumulated D e p r e c i a t i o n . This i s c r e a t e d by charges to income f o r the l o s s i n economic u t i l i t y of f i x e d a s s e t s — e q u i p m e n t , f u r n i t u r e , b u i l d i n g s , e t c . (b) Allowance f o r bad debts. G e n e r a l l y i n o t h e r opera-t i o n s , t h i s allowance i s c r e a t e d by charges to i n -come to r e p r e s e n t the expected l o s s from u n c o l l e c t -a b l e accounts. In most businesses t h i s account has "tax allowance" treatment, and proper v a l u a t i o n of the account has to be made every year. The theory behind i t i s t h a t charges f o r the l o s s i n r e c e i v e -a b l e s should be made i n the p e r i o d when the r e c e i v -able was a c q u i r e d . In c r e d i t unions, the method i s d i f f e r e n t ; a set percentage of the annual net income i s s e t a s i d e r e g a r d l e s s of the amount of bad debts. The reason f o r t h i s treatment could be f i r s t t h a t the c r e d i t union income i s tax f r e e ; and second, t h a t i t i s easy to c a l c u l a t e , which agrees w i t h the f a c t t h a t c r e d i t union management may not i n some cases be q u a l i f i e d t o understand accounting techniques. General C a p i t a l Reserves (a) Retained E a r n i n g s . Since the c r e d i t u n i o n share c a p i t a l i s u n l i m i t e d and the shares cannot a p p r e c i a t e i n value r e g a r d l e s s of the amount i n " r e t a i n e d earn-i n g s " or other i n c r e a s e i n eq u i t y , the u n d i s t r i b u t e d income r e a l l y becomes an a d d i t i o n t o c a p i t a l , or i n other words, an u n a l l o c a t e d c a p i t a l r e s e r v e . M o r a l l y , a l l net income of a c r e d i t union should be d i s t r i -buted i n d i v i d e n d s ; otherwise f u t u r e shareholders w i l l have the b e n e f i t of t h i s r e t a i n e d money a t the expense of the e x i s t i n g shareholders-. (b) Reserve for c o n t i n g e n c i e s . A contingency i s a p o s s i b i l i t y c o n d i t i o n a l on something u n c e r t a i n , a happening from unforeseen causes s u b j e c t to un-fo r e s e e n c o n d i t i o n s . Such r e s e r v e s are g e n e r a l l y e s t a b l i s h e d when there i s a pending law s u i t , or some f u t u r e p o s s i b l e l o s s e s which have not been pr o v i d e d f o r . They are p r o p e r l y p a r t of the r e t a i n e d earnings and should be r e t u r n e d t o i t when no l o n g e r r e q u i r e d . S e c r e t Reserves T h i s r e s u l t s from the p r a c t i c e of h a n d l i n g i n t e r e s t i n -come by c r e d i t unions. The B.C. C r e d i t Union Survey Report i n d i c a t e s t h a t o n l y twenty-one out of three hundred and twenty-s i x c r e d i t unions accrue i n t e r e s t income i n t h e i r books, and the r e s t account f o r i t on a cash b a s i s . Going f u r t h e r , the Survey analysed the s i t u a t i o n by the f o l l o w i n g c a l c u l a t i o n s : B a l a n c e - i n t e r e s t o f those o p e r a t i n g on cash b a s i s $ 3 , 3 9 9 , 3 0 0 I f one were t o assume t h a t the due dates of l o a n payments were e q u a l l y d i s t r i b u t e d throughout the month, and t h a t a l l repayments were made on such due dates, then on the average b a s i s there would always be one h a l f month's i n t e r e s t accrued but not yet due on any given date. This would suggest a very c o n s e r v a t i v e estimate of an accrued f i g u r e of 5 per cent, or $ 1 7 0 , 0 0 0 , a t 3 1 s t December 1 9 5 8 . 1 For the purposes of t h i s study, s t a t u t o r y r e s e r v e fund w i l l be analysed s e p a r a t e l y , and other r e s e r v e s lumped together and shown i n the t a b l e s under the c a p t i o n "Other Reserves". The B.C. C r e d i t Unions Act r e q u i r e s that: At the end of each f i s c a l year there s h a l l be s e t a s i d e twenty per centum of the net earnings f o r the year, or such f u r t h e r amount as may be a u t h o r i z e d a t the annual meeting, as a r e s e r v e fund u n t i l t h a t fund i s equal to twenty per centum of the share c a p i t a l p a i d up a t the end of the year. T o t a l l o a n i n t e r e s t recorded i n 1958 T o t a l i n t e r e s t income of those adopting accrued i n t e r e s t $ 4 , 3 9 6 , 8 9 3 997 ,593 -LB.C. C r e d i t Union League, Survey Report June I 9 6 0 , Vancouver (mimeographed), p. 5 3 . 30 The r e s e r v e fund s h a l l be used only f o r paying l o s s e s of the c r e d i t union a r i s i n g from bad loans or investments....^ The l a t t e r p a r t of t h i s s e c t i o n i s a f a l l a c y . When a l o s s on bad loans or investments occurs, no payment s h a l l be made by the c r e d i t union. The payment was made when the l o a n was granted or the investment made. In case of l o s s , t h e r e w i l l be no f u r t h e r payment of money; only a p a r t o f payment a l r e a d y made w i l l not be recovered. The w r i t e r f e e l s t h a t the l e g i s l a t o r s , i n f o r m u l a t i o n of the above s e c t i o n , con-f u s e d the r e s e r v e f o r bad debts w i t h l i q u i d i t y of a c r e d i t union. The term " r e s e r v e " has been used so much i n a c c o u n t i n g terminology i n v a r i o u s senses, t h a t i t i s b e t t e r to drop i t s usage. More e s p e c i a l l y f o r c r e d i t unions, i t would be d e s i r e -able to r e p l a c e t h i s term with some other s u i t a b l e words. A p o s s i b l e h a r d s h i p to the c r e d i t unions, caused by the " r e s e r v e " f o r bad debts and l o s s on investments as r e -qu i r e d by the s t a t u t e , w i l l be touched on i n the l a t t e r p a r t of t h i s chapter. How the percentages s t i p u l a t e d i n sec. 34 of the B.C. C r e d i t Union Act were decided i s not r e a d i l y a s c e r t a i n a b l e . The most probable answer would be t h a t they were borrowed from s i m i l a r s t a t u t e s of other p l a c e s . I f so C r e d i t Unions Act, R.S. i 9 4 8 , c. 6 2 , s. 3 4 , s s l and 3 . 31 the q u e s t i o n a r i s e s as t o whether the percentages s t a t e d i n t h o r i g i n a l s t a t u t e were d e r i v e d as a r e s u l t of experience, or j u s t as of r u l e of thumb. Dr. John T. Croteau, r e v i e w i n g a s i m i l a r p i e c e of l e g i s l a t i o n ^ s t a t e d : How the o r i g i n a l 20 per cent and the 10 per cent maximum were a r r i v e d a t r e s t s i n the dim pages of h i s t o r y ; one t h i n g sure i s t h a t they were not d e r i v e d from experience, s i n c e c r e d i t union l e g i s -l a t i o n was passed p r i o r to the o r g a n i z a t i o n of these i n s t i t u t i o n s . Probably the o r i g i n a l r e s e r v e requirements were set by a generous a p p l i c a t i o n of a r u l e of thumb.3 In the l i g h t of t h i s statement, c r e d i t unions would f i n d i t u s e f u l to study the adequacy of t h i s p r o v i s i o n . There i s a c o n s i d e r a b l e d i f f e r e n c e between a bad l o a n and a d e l i n q u e n t l o a n . A c c o r d i n g to the B.C. C r e d i t Union Act, a l o a n i s deemed to be d e l i n q u e n t where any amount of p r i n c i p a l or i n t e r e s t i s i n a r r e a r s f o r more than t h r e e months. A bad l o a n , a c c o r d i n g t o the g e n e r a l connotation of the word, i s a l o a n t h a t i s u n c o l l e c t i b l e . By sec. 24(7) of the same S t a t u t e , a c r e d i t union has a s t a t u t o r y l i e n on the shares and d e p o s i t s of a member f o r a debt due or owing from him. I f an i n s t a l m e n t i s overdue f o r a p e r i o d of th r e e months or more from a borrower who has taken a l o a n f o r two hundred d o l l a r s , and who has f i v e hundred d o l l a r s i n shares of the c r e d i t union, h i s l o a n a c c o r d i n g to the Act becomes 3john T. Croteau, Management Reviews Reserves, Nation-a l C r e d i t Union Management Conference, Los Angeles, C a l i -f o r n i a , October 6-9, 1957 (mimeographed), p. 1. 32 delinquent. The credit union, however,has the power to o f f -set the delinquent loan against the member's equity. Hence such a loan cannot become a l o s s . I f i n any year the amount of delinquent loans exceeds 10% of the loans outstanding, no dividend can be paid out unless the Inspector of Credit 4 Unions allows i t . The degree of delinquency, though not a good yardstick to measure the f i n a n c i a l soundness of a cre d i t union, does r e f l e c t on i t s managerial e f f i c i e n c y . In the Survey conducted i n 1959 by the B.C. Credit Union League to determine the u n c o l l e c t i b l e loans s i t u a t i o n , a s t r a t i f i e d sample by sizes of cre d i t union was taken. The delinquent loans were analysed i n l i g h t of the e x i s t i n g circumstance. For example, such questions as these were asked: when was the l a s t payment received; what amount was paid during the preceding six months; what security was taken; what was the value of the security, etc. The r e s u l t s obtained are given i n Table!/. For Table IV see p. 33-In Table 4 the figures given under the columns, "Total Loans Outstanding" and "Amounts of Loans Granted Since In-corporation" are exclusive of the endowment loans. The per-centages calculated do not show a regular pattern. 1.05% of Credit Unions Act, R.S.1948, c. 82, s. 34 ss 2(d). CO O H vn ro H v n r o c o < O O vn O O vnxi CD o o o o 4 O c+ o 1 1 1 1 I I o CD ro ro h-1 • • o O O vn ro H" O O O O v n O v n r o O O O O O O OVn o o • o < • CD o 09- 1—' 1—• 1—" H CD ro •P- -0 -O O O vn \0 -F-cx • C+ ro VO o a o v o ro \-> ro cz; *m %» +m ** ti oa vn o ro-p- o ^ o ro M H- -F -vnvOr- 'voO-^ lO cu O vO r o O O vn O -P"~ vn vO 13 3 « * ^ « « « « ^ * « « « * « * o. \ o OavO -0 O O v n O v n IT* -p- v m - 1 vo.p-.p-vo-P- ro ^ CD o o o o-<i W ^ H O h-'Og CD C ro O D vn vn<3 vovo ro r — ' «• H vo-p- o oa M vovo ro O Hj CO -0 vOvn oaOavn-0 vn- J d o M M v O O O M O v n H 4 o so vo ro oa-o oa o vo 3 <! CO (D Xi ^ CO h-' H r — 1 1—1 1—1 (—1 ro o • • • • • • • • • c+ CD o - J H H OVo vn ro vn o XI vn O M W O O O v O H o M o c+ •p- -p-vn H ro Hj-V. 1—1 o o vovo oa-P-w »* O O r — 1 r - 1 VO-p- 1-" Oa O-P" vO oavO O u i O H ^ O CD O M - P - O O OvO O a CD c+ C vO vO O ro vn o ro H O ro o-P- o rovo oa-p- vo o o oa H ^0 H vo o v n ro H o O r o v o r o O - P - O v n CO VO vO 1—1 0-P~ -O -P~ vO Vo 3 txi H-• i H- CD O C+ O ro O O vn H Oa-P" H H-m ^ M * • CO • i -0 o v n ro O v n vo vn oa \ o ~o oa-P- -p- ro o -p-Xi vo 0a H vO vo o v n O O o sr o CD o oa-p- M3VocQ . ro oa-p-(-> a Vo OvO Ovnvo-P- M-p-VO Ovo oa-<i oaoaoavn cr < p. po co • • 1 vo VJ-p- VovnVo_p-vo\j-i oa r o o r o v n o H r o o a ro vn-0 ro-p- dq-Ovovo o o o S i z e of C r e d i t Union Assets Number i n the sample T o t a l Loans Outstanding Estimated amount of bad loans % bad loans on books of t o t a l loans outstanding Amount of bad loans w r i t t e n o f f since i n -co r p o r a t i o n T o t a l bad loans on books & w r i t -ten o f f sin c e i n c o r p o r a t i o n Amount of loans granted s i n c e i n c o r p o r a t i o n Percentage bad loans s i n c e i n -corp o r a t i o n of t o t a l leans s i n c e i n c o r p o r a t i o n > & o o m O >-3 > > co m o o cx) M O CO O i-3 W |H CO S O C f l t-3 CO O f< •x) O tri o CO CO H 2! O co M •-9 o . . o O CO S3 M O o ^ M H IS O 3 o o •t) o > M O £3 H-3 O i-9 O > a > o O > co O cn o o CO i-3 O t-9 O i-9 > s > S3 CO o c r-3 CQ i ^ > S3 a \—i s o > i-3 > to tr1 the outstanding loans have been estimated to be bad. The percentage of t o t a l bad debts since i n c o r p o r a t i o n to t o t a l loans since i n c o r p o r a t i o n i s . 3 8 2 . This i n d i c a t e s two t h i n g s : e i t h e r the c r e d i t unions have no r e g u l a r p o l i c y f o r w r i t i n g o f f the loa n s , or the e s t i m a t i o n of the bad debts on the books has been too l a r g e . The former seems t o be the more probable. I t would not be out of place to remark th a t the low l o s s r a t i o i s not n e c e s s a r i l y a measure of good management. A low r a t i o might be secured by f o l l o w i n g an unreasonably c o n s e r v a t i v e lending p o l i c y , which may mean l o s i n g some p r o f i t a b l e business or adopting an e x c e s s i v e l y s t r i n g e n t c o l l e c t i o n a t t i t u d e . These p r a c t i c e s , though f i n a n c i a l l y sound, are against the c r e d i t union philosophy. There i s no data a v a i l a b l e regarding the bad debt experience of banks and consumer f i n a n c e companies on personal loans. None of them wishes to div u l g e any informa-t i o n about personal loans. I t i s q u i t e i n t e r e s t i n g to note t h a t i n the B.C. C r e d i t Unions Act, the adequacy of a bad debt reserve has been r e l a t e d to the outstanding share c a p i t a l . Sec. 3*+ s t a t e s : At the end of each f i s c a l year there s h a l l be set aside twenty per centum of the net earnings f o r the year, or such f u r t h e r amount as may be authorized at the annual meeting as a reserve fund u n t i l t hat fund i s equal to twenty per centum of the share c a p i t a l paid up at the end of the year.? ^ C r e d i t Unions Act. R.S. 19^8, c. 8 2 , s. 3>h. 35 In m e rcantile c o r p o r a t i o n s , the reserve f o r bad debts i s g e n e r a l l y r e l a t e d to loans outstanding. This i s more r e a l i s t i c because the c r e a t i o n of t h i s reserve i s p r i m a r i l y to absorb the l o s s e s o c c u r r i n g from loans outstanding. In c r e d i t unions, however, r e l a t i n g reserve funds to share c a p i t a l may be q u i t e l o g i c a l and meaningful because the amount of loans outstanding and share c a p i t a l keep more or l e s s a constant r e l a t i v e p a t t e r n . This i s shown i n Table V. Apart from t h i s , the purpose of the c r e d i t union reserve fund i s not only to absorb l o s s e s on loans but a l s o to absorb l o s s e s on investment funds. Table V presents a comprehensive p i c t u r e of t o t a l share c a p i t a l , loans out-standing, percentage of reserve fund to loans outstanding and percentage of a l l reserves to loans outstanding. The c r e d i t unions have been d i v i d e d i n t o e i g h t groupings according to amount of ass e t s . The o v e r a l l percentage of reserve fund to loans outstanding i s 3.*+% and the percentage of a l l reserves to loans i s 3«82. I t i s i n t e r e s t i n g to note t h a t the l a t t e r percentage shows a d e c l i n i n g trend w i t h the r i s e i n s i z e of c r e d i t union groupings. I I . GROWTH OF CREDIT UNIONS The growth of c r e d i t unions i n B r i t i s h Columbia can be measured by the annual increase i n savings, membership, and loans. For a n a l y s i s of the time s e r i e s ; regarding savings, membership and loa n s , the Gompertz curve has been used which 36 TABLE V SCHEDULE OF SHARE AND LOAN BALANCES (EXCLUDING ENDOWMENT LOANS) AND OF THE BAD DEBT RESERVE AND OTHER RESERVES AS AT 31 DECEMBER, 1958 ARRANGED IN GROUPINGS OF CREDIT UNIONS ACCORDING TO AMOUNT OF ASSETS n — CD CO CJ to «U CO U CO CO •H Cj 3 r H (Dnd o O H CD - H X I O r l h C E H Q O - P CO r H CD CO U • P CO o h fH §3 l - P D tuQ o a •H r H CO co a a - P CO CO O O - P EH \A W CD I tuO - P CO 3 tuO CD - P CD C H O C > a > O - H fn CD t-t m<x} CD O CD Ti CJ G to a u to c co co CD 3 <D CD 3 O - P cu a, ps fet-q to I to bD <D > a a tO HQ fn CO - H CD CO CD O Ti >-p W H I q (4 (4 CJ CD CO CD CD CD crj «H - P d » o o w • P CD H rH - P O pel CD r H to 3 PH «aj CD O Up to 25 ^56,233 M+2,9l8 li+,569 3.29 3,685 1+.12 25-50 1,080,195 1,081+,928 l+l+,620 i + . l l 6,709 ^.73 50-100 2,388,705 2,1+37,867 101,1+01+ 1+.16 19,1^2 k.9h 100-250 5,6li+,i+97 6,015,768 237,766 3-95 2i+,525 1+.36 250-500 7,6i+6,if95 8,097,803 298,529 3.69 20,1+20 3.9^ 500-1,000 10,816,627 11,^83,108 1+76,7^0 3.50 30,676 3.73 1,000-2,000 12,^57,882 13,610,191 1+76,7^0 3.50 30,676 3.73 Over 2,000 10,26i+, 272 11,1+1^,117 3^6,355 3.01 53,781 3.51 T o t a l 50,7^,906 5*+,586,700 1,909,301 3A96 185,719 3.82 Source: B.C. C r e d i t Union League, Survey Report, June i960 (mimeographed) Vancouver, p. 5*+. 37 describes the growth of a s e r i e s at a decreasing r a t e . Table VI shows th a t the annual increase i n the three f a c t o r s of growth i s at a d e c l i n i n g r a t e . The s e r i e s has been p r o j e c t e d up to 19&7? and i s presented i n g r a p h i c a l form i n Chart A. The question may be asked as to whether a n i n e -years s e r i e s i s long enough to e s t a b l i s h a trend. The period seems to the w r i t e r to be long enough. However, even i f i t i s not, i t i s d o u b t f u l whether the data regarding the abnormal pe r i o d of the l a t e f o r t i e s would have c o n t r i b u t e d to greater p e r f e c t i o n of the long term trend. I t i s i n t e r e s t i n g to note t h a t the growth i n the B.C. c r e d i t unions has been due more to an increase i n savings than to the a d d i t i o n of new members. As seen from Table V I , there i s almost a p e r f e c t f i t of the Gompertz curve and the a c t u a l f i g u r e s from 1951 t o 1959. Some bias i s i n t r o d u c e d , however, by i n c l u s i o n i n the f i g u r e s of loans and shares, the amounts of endowment loans and endowment shares r e s p e c t i v e l y . These amounts had to be i n c l u d e d because the f i g u r e s of loans e x c l u s i v e of endowment loans and of shares e x c l u s i v e of endowment shares were not a v a i l a b l e . Raymond D. P r e s c o t t ^ developed a law of growth of an i n d u s t r y . Though a c r e d i t union, which i s based on no p r o f i t motive, i s not l i k e an i n d u s t r y i n the usual sense, i t i s "Law of Growth i n F o r e c a s t i n g Demand" by Raymond D. P r e s c o t t , J o u r n a l of the American S t a t i s t i c a l A s s o c i a t i o n , V o l . X V I I I , December 1922, pp. k71-79; and Croxton and Cowden, Ap p l i e d General S t a t i s t i c s ? New York, P r e n t i c e H a l l , I nc., 1952. TABLE VI GROWTH IN MEMBERS, SAVINGS AND LOANS - ALL CREDIT UNIONS ACTUAL 1951 TO 1959 AND GOMPERTZ CURVE 1951 TO 1967 Members Savings Loans Y e a r Total Gomoertz (Thousands) (Thousands) l o t a i uomperxz T o t a l Gompertz Total Gompertz o u r v e Curve Curve 1951 52 54 55 56 57 58 59 60 61 62 63 64 65 66 67 6 1 , 8 6 3 74,174 87 ,3^7 1 1 0 , 0 0 0 1 2 5 , 4 2 5 140 ,339 161 ,596 1 8 0 , 4 3 4 1 9 3 , 6 6 3 59,480 74,570 90,480 1 0 7 , 5 0 0 124,900 lM-3,200 1 6 1 , 0 0 0 178,400 1 9 5 , 3 0 0 214,100 2 2 6 , 5 0 0 240,700 253,900 265,900 277,100 287,100 296,400 1 5 , 0 3 3 2 0 , 0 5 5 25,333 32,154 39,949 47,711 54,885 7^,557 89,469 1 5 , 3 ^ 0 2 0 , 0 0 4 2 5 , 3 ^ 0 3 1 , 9 1 0 3 9 , 7 1 0 4 7 , 7 3 0 55,430 7 2 , 2 4 0 8 5 , 8 6 0 1 0 2 , 3 0 0 120,400 1 3 9 , 9 0 0 161 ,000 1 8 6 , 9 0 0 2 1 1 , 7 0 0 241 ,400 268,400 1 3 , 0 9 2 1 7 , 7 8 0 2 2 , 3 6 5 2 8 , 3 4 4 3 4 , 7 3 6 4 3 , 6 8 8 5 4 , 0 4 1 64 , 2 0 7 8 1 , 0 3 3 1 3 , 3 9 0 1 7 , 1 6 0 2 1 , 7 5 0 27,640 3 ^ , 7 9 0 4 3 , 2 0 0 5 3 , 6 4 0 6 6 , 0 0 0 8 0 , 0 7 0 9 5 , 8 3 0 114 ,200 134,500 159,400 1 8 8 , 1 0 0 2 1 7 , 5 0 0 2 5 3 , 2 0 0 2 9 0 , 0 0 0 Gompertz curve: Trend Yc = Ka bx Origin 1 9 5 1 , x units, 1 year Source: F i l e s , Credit Union Office , Inspector of Credit Unions, B r i t i s h Columbia and B.C. Credit Union League, Credit Union Survey, June i 9 6 0 , (mimeographed). 39 f e l t t h a t t h i s law of growth has an a p p l i c a t i o n to c r e d i t unions. Prescott d i v i d e d the growth of an i n d u s t r y i n t o f o u r stages: f i r s t , the p e r i o d of experimentation; second, the p e r i o d of growth i n t o the s o c i a l f a b r i c ; t h i r d , through the point where growth i n c r e a s e s but at a d i m i n i s h i n g r a t e ; and f o u r t h , the period of s t a b i l i t y . Though these stages have not been s p e c i f i c a l l y demarcated, i t i s evident from Table VI and Chart A t h a t the B.C. c r e d i t unions are passing through the t h i r d stage, and the p e r i o d of s t a b i l i t y i s yet to come. I I I . LIQUIDITY OF CREDIT UNIONS Kenneth E. Boulding describes the problem of l i q u i d i t y : I f u n c e r t a i n t y i s u n d e s i r a b l e , e f f o r t s w i l l be made to escape from i t . This may be done by insurance, which i s i n e f f e c t , the replacement of l a r g e u n c e r t a i n l o s s e s by small c e r t a i n l o s s e s (the premiums). I t may a l s o be done by l i q u i d i t y . I t i s almost impossible to understand the asset behaviour of f i r m s without i n t r o d u c i n g the idea of l i q u i d i t y as an escape from u n c e r t a i n t y . The form of l i q u i d assets can be changed e a s i l y i n response to new i n f o r m a t i o n . ' There i s a r e l a t i o n s h i p between growth and l i q u i d i t y f o r c r e d i t unions. From the s t a t i s t i c s f o r measuring growth, i t can be observed t h a t borrowing i s i n c r e a s i n g at a f a s t e r r a t e than the supply of share c a p i t a l . I f the present trend continues on f o r some time, l i q u i d i t y w i l l become a s i g n i f i c a n t problem. The c r e d i t unions cannot expect a r e g u l a r i n f l o w of cash from share c a p i t a l t o take care of withdrawals. Since ^Kenneth E. Boulding, The S k i l l s of the Economist, p. 92. ko the war the c r e d i t unions have passed through a relatively-secure and prosperous economic period. If the economic fluctuations become acute, there w i l l occur a slackening of net savings as well as slower repayments of loans, and the c r e d i t unions w i l l have to resort to some external measures to cope with the s i t u a t i o n . The term l i q u i d i t y has been used i n two d i f f e r e n t senses, l i q u i d i t y of an asset and l i q u i d i t y of an enterprise. By l i q u i d i t y of an asset i s meant the p o s s i b i l i t y of r a i s i n g cash by s e l l i n g the asset, or of borrowing money by pledging i t as a security f o r loan. The l i q u i d i t y of an enterprise means i t s capacity to meet the cash requirements during the normal course of business. L i q u i d i t y of a business i s maintained to protect against uncertainties and consequent l i q u i d a t i o n or insolvency. There i s a s i m i l a r i t y between c r e d i t union l i q u i d i t y and bank l i q u i d i t y . I t i s generally recognised that the theory of l i q u i d i t y i n banking practice has undergone changes during the twentieth century. In North America, the "commercial banking theory", which claimed that l i q u i d i t y could be maintained only by lending on short term commercial papers, had general acceptance i n the f i r s t part of the century. In practice, however, i t never worked that way. The banks were i n f a c t making long term loans under the guise of short term maturities with covenants of perpetual renewal. Around 1920, a new concept " S h i f t a b i l i t y " was introduced i n the banking f i e l d . This meant that the banks would hold i n 1+1 reserve government bonds or other highly liquid assets which would be cashed whenever need be. During the depression of the 1930's, the so-called highly liquid assets declined considerably in value, giving rise to some bank failures. After that i n Canada and the United States, history of banking took another turn. It was recognised that the bulk of bank lending was long term, and i f the long term commercial papers were good they could be rediscounted at the"central banks." On the other hand, the member banks would keep their cash reserves in the "central banks". The system distributed the li q u i d i t y over a broader base. The credit union system in Canada is organized almost on the same lines. There are central credit unions in a l l the provinces which act as depositories for surplus cash of the credit unions and grant borrowings to the members within the statutory limitations. Besides these there i s the Canadian Cooperative Credit Associa-tion, the functions of which have been discussed in Chapter I. The liquidity of a business depends not only on the a b i l i t y to meet the normal cash requirements, but also on the ready convertibility of i t s assets into cash to meet the abnormal cash demands caused by the c y c l i c a l and seasonal fluctuations i n the economy. The demand for borrowings may also arise in the case of a single credit union or a group of credit unions situated in a particular economic region which has experienced adverse times. Since the amount of borrowing a single credit union can undertake i s limited under the B.C. Credit Unions, Act, some external help must be secured 42 to keep i t so l v e n t . The t o t a l amount at any time outstanding of money so borrowed by a c r e d i t union s h a l l not exceed twenty per centum of the value of i t s a s s e t s , e x c l u s i v e of sums unpaid on i t s shares and the value of property of the c r e d i t union already mortgaged or charged by i t . 8 The B.C. C e n t r a l C r e d i t Union cannot be of much help i n h i g h l y abnormal environments because i t s lending powers are r e g u l a t e d by the above p r o v i s i o n . For meeting such contingencies the B.C. C r e d i t Unions Act was amended i n 1958, to s a n c t i o n the formation of the C r e d i t Union Reserve Board. This i s a h i g h l y u s e f u l piece of l e g i s l a t i o n i n s u r i n g the s e c u r i t y and s a f e t y of members' savings. To b u i l d up i t s Reserve Fund, the Board may assess and l e v y upon a l l c r e d i t unions i n the Province any amount up to o n e - f i f t h of one per cent of the t o t a l of each c r e d i t union's share c a p i t a l and money on deposit w i t h i t at the end of the preceding f i s c a l p e r i o d . The Fund may be b u i l t up to a maximum of one per cent of the t o t a l share c a p i t a l o f , and money on deposit w i t h a l l c r e d i t unions. The l i m i t on the accumulation of the Fund seems to be too r e s t r i c t i v e . A Fund of only one per cent of the shares and d e p o s i t s may be enough i n normal times when only a very minor number of c r e d i t unions might get i n t o t r o u b l e and need a s s i s t a n c e . However, i f the Province exper-iences a r a t h e r sharp r e c e s s i o n , t h i s Fund w i l l be completely inadequate to meet the demands. 8credit Unions Act. R.S. 1948, c. 82, s. 14, ss. 2. ^•Statute Law .Amendment Act, 1958, c. 12. ^3 Regarding the d i s p o s i t i o n of the Fund, the Board can make loa n s , advances, or grants i n a i d to member c r e d i t unions. The Board may, i n i t s d i s c r e t i o n , make payments from the Fund f o r the purpose of making loans, ad-vances, or a grant i n a i d to a c r e d i t union t h a t , i n the opinion of the Board, i s i n f i n a n c i a l d i f f i c u l t y and r e q u i r e s a s s i s t a n c e from the Fund i n order to maintain i t s solvency and to meet claims of i t s members f o r withdrawal of t h e i r d e p o s i t s or redemption of t h e i r shares.1 0 The a p p l i c a n t c r e d i t union has t o s a t i s f y the Board t h a t i t i s about to be wound up or l i q u i d a t e d , and the as s i s t a n c e w i l l e i t h e r prevent l i q u i d a t i o n or hasten repayment to members of one hundred per cent of t h e i r deposits and s u b s t a n t i a l l y the f u l l amount of t h e i r share h o l d i n g s . In the case of prevention of l i q u i d a t i o n , the money paid from the Fund w i l l have to be r e p a i d . The other reason f o r obt a i n i n g a s s i s t a n c e i s th a t i n which the a p p l i c a n t s a t i s f i e s the Board that because of the r e l o c a t i o n or c l o s u r e of an i n d u s t r y or occupation on which the ma j o r i t y of the c r e d i t union members depended f o r t h e i r l i v e l i h o o d , there i s an abnormal demand f o r withdrawal of depos i t s or f o r redemption of shares. I n t h i s case, a l s o , the amount borrowed from the Fund w i l l be f u l l y r e p a i d w i t h i n t e r e s t . These are q u i t e r e s t r i c t i v e p r o v i s i o n s , and i t i s l i k e l y that some c r e d i t unions i n d i s t r e s s may not be able to r e c e i v e a s s i s t a n c e . 1. L i q u i d i t y i n r e l a t i o n to maximum p r o f i t a b i l i t y L i q u i d i t y i s not i n i t s e l f a goal of the management. Management has to balance the goal of s a f e t y against 1 Q C r e d i t Unions Act, R.S. 1 9 ^ 8 , 0 . 8 2 , s. 8 0 . kk the goal of p r o f i t a b i l i t y and to seek a proper r e -l a t i o n s h i p among the items which enter the balance sheet c o m p o s i t i o n . i l There are two management o b j e c t i v e s to maintain l i q u i d i t y of the business. ( 1 ) to provide s u f f i c i e n t cash t o meet c u r r e n t and p r o j e c t e d operating needs c o n s i s t e n t w i t h max-imum p r o f i t a b i l i t y of operation and ( 2 ) to have the a b i l i t y to r e t r e a t t o cash without delay i n cases of emergency.12 In order to meet the f i r s t o b j e c t i v e , a c r e d i t union should have a r e g u l a r i n f l o w of cash to meet i t s requirements. A budget of cash f l o w f o r share withdrawals and loans should be prepared i n the beginning of the year. An older c r e d i t union w i l l have enough past experience from which the seasonal p a t t e r n of withdrawal of shares and loan demand can be drawn. There c o u l d not be any accurate general seasonal p a t t e r n f o r a l l the c r e d i t unions because each c r e d i t union i s governed by i t s own environment. I n drawing the budget, some of the f a c t o r s which w i l l determine the cash requirement are: a) The e x i s t i n g economic c o n d i t i o n s ; b) The amount of unused borrowing r i g h t s ; c) The c r e d i t r a t i n g of the c r e d i t union; d) The amount of shares and saving deposits expected; e) The amount of loan repayments expected; f ) The expected share and deposit withdrawals; g) The expected demand f o r loans. H j o h n T. Croteau, Management Looks Ahead and A Study of  Cash Flow. Short and Long Term Investment R a t i o s . N a t i o n a l C r e d i t Union Management Conference, P h i l a d e l p h i a , 1 9 5 8 , p. 2 1 . 1 2 J o h n T. Croteau, op. c i t . . p. 2 0 . h5 The second management o b j e c t i v e can be met only by keeping the assets r e a d i l y c o n v e r t i b l e i n t o cash when faced w i t h unexpected demands, or through outside help. 2. Sources of L i q u i d i t y The i n t e r n a l sources of l i q u i d i t y are: a) Cash on hand or i n bank; b) Investments i n bonds, s e c u r i t i e s and term deposits w i t h B.C. C e n t r a l C r e d i t Union, which can be converted i n t o cash w i t h l i t t l e or no l o s s of v a l u e s ; c) Repayments from loans; d) Receipts from the s a l e of shares and the deposit savings. E x t e r n a l l y , the funds come i n by borrowing from v a r i o u s f i n a n c i a l i n s t i t u t i o n s , i n c l u d i n g the B.C. C e n t r a l C r e d i t Union. I t depends upon good l i n e s of c r e d i t . The s i z e of share accounts has some impact on the l i q u i d i t y . The l a r g e r the s i z e of the share h o l d i n g s , the more e r r a t i c w i l l be the p a t t e r n of share withdrawal, and consequently i t poses a hazard to l i q u i d i t y . I n some cases, a few l a r g e shareholders may f o r c e the c r e d i t union o f f i c i a l s to adopt c e r t a i n p o l i c i e s which could impair l i q u i d i t y , k few l a r g e loans may be taken out f o r s p e c u l a t i v e purposes, the l i q u i d a t i o n of which might become d i f f i c u l t , and consequently bri n g about i n s o l v e n c y of the c r e d i t union. However, the c r e d i t union can be saved t o some extent from t h i s undue c o n t r o l J+6 by a few shareholders, i f the d i r e c t o r s impose the requirement of n i n e t y days' n o t i c e f o r withdrawal of shares. Notwith-13 standing t h i s a u t h o r i t y conferred upon them under Rule 13 t o r e q u i r e the n o t i c e , the w r i t e r has come across no case where the d i r e c t o r s e x e r c i s e d i t . From the management point of view, c r e d i t union shares are l i k e o r d i n a r y savings d e p o s i t s . 3. Measurement of L i q u i d i t y of C r e d i t Unions According to the B.C. C r e d i t Unions A c t, the f o l l o w i n g 14 minimum amounts must be kept on hand: 1) twenty-five per cent of saving d e p o s i t s ; 2) f i v e per cent of share c a p i t a l ; 3) t o t a l amount of Reserve Fund. To review whether these requirements are complied w i t h , the B.C. C r e d i t Union Survey examined the 1958 year end f i n a n c i a l statements of a l l the c r e d i t unions. Table V I I shows "that the t o t a l funds r e t a i n e d by the c r e d i t unions, grouped according to s i z e s , were l a r g e r than the l e g a l r e q u i r e -ment. I t i s q u i t e i n t e r e s t i n g to note that i n bigger c r e d i t unions, the percentage excess of funds to requirements i s lower than t h a t i n smaller s i z e s . This i s probably due t o the f a c t t h a t l a r g e r c r e d i t unions are more conscious of the o v e r a l l p r o f i t a b i l i t y of the business. I n d i v i d u a l l y only a few c r e d i t unions were short of the requirement, but the amounts i n v o l v e d were n e g l i g i b l e . ^ C r e d i t Unions A c t . R.S. 191+8, c. 82, C o n s t i t u t i o n  and Rules, R. 13. ^ C r e d i t Unions A c t. R.S. 1948, c. 82, ss. 13, 24, 34. TABLE VII SUMMARY OF THE LEGAL CASH REQUIREMENTS AND OF THE CASH FUNDS HELD AT 31 DECEMBER, 1958 OF ALL CREDIT UNIONS GROUPED ACCORDING TO THE AMOUNTS OF ASSETS S i z e of Requirements C r e d i t Unions 5 per cent 25 per T o t a l T o t a l (Thousand of cent of Reserve Funds Funds D o l l a r s ) Shares Deposits T o t a l Fund Required Held Up t o 25 22,812 760 23,572 1^,569 38,1^1 97,896 25 - 50 5^,009 1,277 55,286 Mt ,620 99,906 232,^96 50 -100 119,^35 13,*+25 132,860 101,^09 23^,26^ ^9^,729 100- 250 280,725 59,>+31 3^0,156 237,766 577,922 1,01+1,015 250 -500 382,325 73,791 i+56,116 298,529 75^,6^5 1,071,963 500 - 1 , 0 0 0 5^0,831 193,817 73^,6^8 389,313 1,123,966 1 ,602,277 000 - 2 , 0 0 0 622,89^ 200,373 823,272 If 76,7^0 1 ,300,012 1 ,915,078 Over 2,000 5±^,2lh 373,271 887,^85 3*+6,355 1,233,8^0 1 ,262,397 T o t a l s 2,537,2^-5 916,150 3,^53,395 1 ,909,301 5 ,362,692 7,717,851 Source; B.C. C r e d i t Union League, Survey Report, June i 9 6 0 (mimeographed), Vancouver, p. 59. 1+8 In one case, there e x i s t e d a s u b s t a n t i a l shortage, As per the Survey Report, i t happened because of a misunderstanding of the management. The c r e d i t union borrowings as on December 31> 1 9 5 8 , were only 6 . 0 8 $ of the value of the a s s e t s . This i s much l e s s than the s t a t u t o r y maximum l i m i t of 25%. This f a c t , together w i t h Table V I I , i n d i c a t e a sound l i q u i d p o s i t i o n of cash reserve funds i n c r e d i t unions. Table V I I I shows how the funds st a t e d i n the above t a b l e were c o n s t i t u t e d . An i n t e r e s t i n g f e a t u r e of t h i s t a b l e i s t h a t cash requirements i n respect of shares and deposits were i n almost every case c a r r i e d i n cash and demand d e p o s i t s , except i n the l a s t two s i z e groups. In these two groups there are some l a r g e r f i s h i n g and farming c r e d i t unions whose average savings per member are higher than i n other c r e d i t unions, and appear to be l e s s i n need of cash balances. To study the seasonal p a t t e r n of demand f o r borrowings by c r e d i t unions, the B.C. C r e d i t Union Survey analysed the s t a t i s t i c s shown i n Tables IX and X, taken from the books of the B.C. C e n t r a l C r e d i t Union. Because most of the c r e d i t unions c a r r y t h e i r funds w i t h , and o b t a i n borrowings from, the B.C. C e n t r a l C r e d i t Union, the f i g u r e s i n the above-mentioned t a b l e s have been considered to be r e p r e s e n t a t i v e of the s i t u a t i o n . Some bias i s i n t r o d u c e d , however, by the i n c l u s i o n of loans made to cooperative a s s o c i a t i o n s i n these f i g u r e s . The Survey found k9 TABLE V I I I CONSTRUCTION OF FUNDS ON HAND OF ALL CREDIT UNIONS GROUPED ACCORDING TO THE AMOUNTS OF ASSETS S i z e of C r e d i t Unions (Thousand D o l l a r s ) Cash and Demand Deposits One Year Term Deposits Bonds T o t a l Up to 25 8 1 , 0 6 9 1 3 , 8 2 7 3 , 0 0 0 9 7 , 8 9 6 25 - 50 1 8 5 , 4 5 8 4 5 , 1 3 8 1 , 9 0 0 2 3 2 , 4 9 6 50 - 1 0 0 3 ^ 9 , 1 8 2 134 ,526 1 1 , 0 2 1 4 9 4 , 7 2 9 100 - 2 5 0 5 7 7 , 5 3 3 4 4 4 , 1 3 9 2 0 , 3 4 3 1,041 ,015 250 - 5 0 0 5 4 6 , 1 9 8 460 ,915 6 4 , 8 5 0 1 , 0 7 1 , 9 6 3 500 - 1 , 0 0 0 8 3 8 , 4 3 3 7 3 4 , 5 7 3 2 9 , 2 7 1 1 ,602,277 1 , 0 0 0 - 2 , 0 0 0 5 6 1 , 4 0 1 7 3 1 , 1 8 5 622,492 1 , 9 1 5 , 0 7 8 Over 2 , 0 0 0 615,641 646 ,756 — 1 , 2 6 2 , 3 9 7 T o t a l 3 , 7 5 3 , 9 1 5 3 , 2 1 1 , 0 5 9 7 5 2 , 8 7 7 7 , 7 1 7 , 8 5 1 Sources B.C. C r e d i t Union League, (Survey Report, June i 9 6 0 (mimeographed), Vancouver, p. 6 0 . TABLE IX EXCESS OF DEPOSIT BALANCES OVER LOAN BALANCES TO MEMBERS OF B.C. CENTRAL CREDIT UNION AT MONTH END FOR THE YEARS 1951-59 INCLUSIVE (Thousands of D o l l a r s ) Year Jan. Feb. Mar. Apr. May June J u l y August Sept. Oct. Nov. Dec. 1951 2*+2 160 177 163 201 192 76 202 196 252 255+ 390 1952 306 310 299 153 187 305 161 155 219 »+20 551 608 1953 ¥+0 3M+ 255 10 (5+6) 115 1+8 202 315 5+75 693 570 195*+ 552 5*+0 505 5MS 62>+ 617 »+83~ 59>+ 750 687 815 861 1955 1110 733 722 (565) (17) (158) (339) (1103 27 5+33 766 IO63 1956 955 937 1085 918 261+ 131 (853 , 72 301 636 1250 1507 1957 1365 1517 1090 1+51 (858) (767) (1139) (1^50) (115+7) (1258) (310) (199 1958 (2) 197 1+76 369 (240) (281+) (595) (583) 5+5 573 1335+ 1971 1959 15+32 1535 1772 751 109 (298) (1728) (2098) (1895) (155+6) (768) (12 Sources B.C. C r e d i t Union League, Survey Report, June i960, (mimeographed), Vancouver, p. 65. TABLE X RELATIONSHIP OF MEMBERS' LOANS TO MEMBERS' DEPOSITS 'WITH B.C. CENTRAL CREDIT UNION BY MONTHS FOR THE YEARS 1951-59 INCLUSIVE (Expressed as percentages) Year Jan. Feb. Mar. Apr. May June J u l y Aug. Sept. Oct. Nov. Dec. 1951 1952 1953 1954 1955 1956 1957 1958 1959 8 6 . 9 84 .9 7 7 . 4 7 9 . 4 7 5 . 3 8 0 . 8 7 5 . 6 7 6 . 8 6 0 . 5 7 4 . 4 7 2 . 7 7 3 . 7 7 0 . 5 6 7 . 9 1 0 0 . 0 9 6 . 3 7 8 . 4 7 6 . 8 8 2 . 4 84 .2 7 9 . 6 8 8 . 6 8 6 . 3 9 9 . 4 7 9 . 2 7 6 . 8 7 5 . 9 1 2 7 . 8 7 1 . 0 7 4 . 2 7 6 . 7 8 9 . 9 9 1 . 5 9 3 . 5 7 5 . 6 8 8 . 8 80.8 86.9 102 .7 72.9 100.6 92.1 122.4 104.3 98.3 8 2 . 4 8 1 . 5 9 3 . 8 7 3 . 8 1 0 5 . 5 9 6 . 4 1 1 6 . 5 1 0 4 . 8 1 0 3 . 6 8 1 . 6 8 9 . 2 9 7 . 3 7 8 . 9 1 1 3 . 2 1 0 2 . 3 1 2 5 . 9 1 1 0 . 4 1 2 8 . 4 8 O . 3 8 9 . 4 8 9.I 7 5 . 9 1 0 3 . 8 9 8 . 0 1 3 4 . 1 1 0 9 . 8 1 3 3 . 8 83.5 85 .3 84 .2 71.5 9 9 . 1 9 2 . 3 1 2 3 . 7 9 9 . 3 128.5 7 9 . 1 7 3 . 2 7 6 . 6 7 1 . 9 8 6 . 7 84.5 1 2 6 . 9 9 1 . 2 1 2 3 . 2 7 9 . 9 6 7 . 7 6 7 . 7 7 1 . 9 7 7 . 8 7 1 . 9 1 0 5 . 9 7 9 . 9 1 1 0 . 9 7 1 . 8 6 8 . 3 7 5 - 5 6 7 . 3 7 2 . 0 7 0 . 1 1 0 3 . 4 7 3 . 2 1 0 0 . 1 Source: B.C. C r e d i t Union League, Survey Report,June i 9 6 0 , (mimeographed), Vancouver, p. 6 5 . 52 some kind of c y c l e from the above t a b l e s . A strange p a t t e r n i s noted which has been observed by Dr. Croteau i n A Study of C r e d i t Union Growth and  L i q u i d i t y . He s t a t e s t h a t there i s something of a two year c y c l e i n the borrowing p a t t e r n . During the 1950's the demand has be'en heavier i n the "odd" years. 15 The w r i t e r , however, does not see any c y c l e from these t a b l e s . The borrowings have been very e r r a t i c . This must have posed d i f f i c u l t problems to meet the cash r e q u i r e -ments. In a year, the borrowings from May to October are heavier than other months. L i q u i d i t y of B.C. C e n t r a l C r e d i t Union Since the B.C. C e n t r a l C r e d i t Union i s the depository of l i q u i d funds of most of the c r e d i t unions i n B r i t i s h Columbia, t h e i r l i q u i d i t y i s d i r e c t l y r e l a t e d to the l i q u i d i t y of the B.C. C e n t r a l . F u r t h e r , i t s f i n a n c i a l soundness i s more important i n the sense that i t has to prote c t the cash reserves of the c r e d i t unions which have been deposited w i t h i t . B.C. C e n t r a l should c a r r y s u f f i c i e n t reserves to absorb a l l l o s s e s which may be occasioned by bad debts or marketable s e c u r i t i e s . The Canadian Cooperative A s s o c i a t i o n s Act r e q u i r e s that twenty per cent of annual net earning must be set aside as a guarantee reserve u n t i l the cumulative reserve amounts to ten per cent of the t o t a l of members' shares and d e p o s i t s . ^B.C. C r e d i t Union League, Survey Report, June I 9 6 0 , (mimeographed), Vancouver, p. 65. ^ C o o p e r a t i v e C r e d i t A s s o c i a t i o n s Act. S.C.. 1952/53, c. 28. 53 For the purpose of appraising the financial soundness in general, and li q u i d i t y in particular, of the B.C. Central, the following tests w i l l be made: 1) Examine the loaning practices, the securities for loans and loans turnover; 2) Study the extent of exercise of the borrowing rights; 3) Compliance with the Statutory li q u i d i t y require-ments. The B.C. Central Credit Union has credit unions, cooperatives and societies as i t s members. In the past "central" has taken no securities against the loans granted to credit unions. There are two main reasons for this course of action. F i r s t , "central" has a statutory lie n against the shareholdings and a set off against the deposit balances; and second, the credit union borrowings cannot exceed 25% of i t s assets. Thus four dollars worth of assets are behind every dollar of a loan. The loans to cooperatives and societies are normally secured by f i r s t mortgages on real estate, assignment of receivables, debentures, etc. The loans to these two groups as at December 31? 1959 were: To credit unions $5,423,942 To cooperatives and 1 7 societies 2,528,H-3Cr / 'The B.C. Credit Union League, Survey Report, June I960, (mimeographed), Vancouver, p. 69. 54 A l a r g e m a j o r i t y of loans to c r e d i t unions are short term, normally repayable w i t h i n one year. This i s evidenced from Table No. IX. Most of these loans are r e p a i d on the m a t u r i t y dates. But the B.C. C r e d i t Union Survey. I 9 6 0 , d i s c l o s e d t h a t some of the c r e d i t unions which f a i l to repay the instalments on time consider the loans as a part of t h e i r long term c a p i t a l fund. The Survey Report recommended: Considering i t s f i r s t requirement i s t o secure the l i q u i d p o s i t i o n of C r e d i t Unions " C e n t r a l " would be w e l l advised t o guard against such a. tendency. There are two sound reasons why - ( 1 ) from the C r e d i t Unions p o s i t i o n i t s twenty-five per cent borrowing r i g h t stands as a s a f e t y v a lve to o b t a i n cash f o r withdrawals and to meet seasonal demands as they occur. Any type of permanent borrowing has the e f f e c t of minimizing the protec-t i v e purpose of borrowing and a c t u a l l y i n c r e a s e s the exposure of the C r e d i t Union to the vagaries of economic c o n d i t i o n s . (2) " C e n t r a l ' s " funds become l e s s l i q u i d and as a r e s u l t i t s a b i l i t y to spread a s s i s t a n c e at times of peak demands and to meet d i f f i c u l t l o c a l c o n d i -t i o n s i s lessened i n d i r e c t p r o p o r t i o n to the amount of long-term loans outstanding. In t h i s r espect a long-term bond has equal disadvantages except t h a t normally a market e x i s t s through which i t s c urrent value can be r e a l i z e d on short notice.1° Table X I shows the loan a c t i v i t y f o r the l a s t ten years. I t gives some i n d i c a t i o n of the r a p i d turnover of the loans. I f i t i s assumed th a t a l l loans are of equal term and the repayments are evenly d i s t r i b u t e d throughout the year, the average turnover of loans w i l l be approximately seven months. This shows th a t the borrowings from the B.C. C e n t r a l C r e d i t Union are of very short term. ^•^B.C. C r e d i t Union League, Survey Report. June i 9 6 0 , (mimeographed), Vancouver, p. 69. 55 TABLE XI LOAN ACTIVITY B.C. CENTRAL CREDIT UNION FROM 1950 TO 1959 INCLUSIVE, SHOWING AVERAGE REPAYMENT PERIOD ASSUMING EQUAL TERMS ON ALL LOANS AND EQUAL MONTHLY INCIDENCE Percent-Balance Loans Loans ff® B f i " Year Forward Made T o t a l Repaid £ 0 ^ s ance of re-paid to T o t a l 1950 7 2 1 , 4 7 5 1 , 3 1 1 , 1 0 9 2 , 0 3 2 , 5 8 5 1 , 1 6 3 , 3 2 5 . 5 7 . 2 3 1951 8 6 9 , 2 5 9 1 , 5 5 5 , 7 1 7 2 , 4 2 4 , 9 7 7 1 , 1 5 1 , 6 1 0 47.48 1952 1 , 2 7 3 , 3 6 7 1 , 4 1 6 , 6 3 9 2 , 6 9 0 , 0 0 7 1 , 3 5 0 , 7 8 0 5 0 . 2 1 1953 1,339,227 2 , 8 7 4 , 3 8 6 4 , 2 1 3 , 6 1 3 2 , 2 9 6 , 3 2 4 5 4 . 4 9 1954 1 , 9 1 7 , 2 8 8 3 , 7 6 5 , 0 1 3 5 , 6 8 2 , 3 0 2 3,414,202 6 0 . 0 8 1955 2 , 2 6 8 , 0 9 9 2 , 8 6 3 , 3 2 6 5,131,426 2,422,946 4 7 . 2 1 1956 2 , 7 0 8 , 4 8 0 6 , 8 1 4 , 5 8 6 9 , 5 2 5 , 0 6 6 5 , 9 9 6 , 9 1 7 6 2 . 9 7 1959 3,526,148 8,726,340 12,252,489 6 , 2 8 0 , 7 8 0 5 1 . 2 6 1958 5 , 9 7 1 , 7 0 9 9 , 4 2 5 , 2 4 6 1 5 , 3 9 6 , 9 5 5 1 0 , 0 0 9 , 3 6 9 6 5 . 0 0 1959 5 , 3 8 7 , 5 8 6 1 2 , 5 0 3 , 4 2 2 1 7 , 8 9 1 , 0 0 9 9 , 9 3 8 , 6 3 6 55.55 25,972,643 5 1 , 2 5 5 , 7 5 9 7 7 , 2 3 8 , 4 3 3 44,024,902 5 7 . 1 0 Source: B.C. C r e d i t Union League, Survey Report, June i 9 6 0 (mimeographed), Vancouver, p. 7 0 . 56 The extent of the exe r c i s e of the borrowing r i g h t s of the B.C. C e n t r a l throws some l i g h t on i t s l i q u i d i t y . Table X I I shows the borrowings f o r the l a s t f i v e years. High percentages i n 1957 and 1959 are caused by f l u c t u a t i o n s i n the business c y c l e . Bond p r i c e s dropped and loans made to c r e d i t unions increased i n r e l a t i o n to the repayments r e c e i v e d . I t can be seen from Table XI that during these years the B.C. C e n t r a l was not l e f t w i t h much margin f o r f u r t h e r borrowings. I t i s evident t h a t c r e d i t union l i q u i d i t y can be s e r i o u s l y a f f e c t e d by r a t h e r acute f l u c t u a t i o n s i n the economic c y c l e . Since the B.C. C e n t r a l C r e d i t Union s u p p l i e s almost the whole of c r e d i t union borrowings, a s l i g h t l y more acute t u r n i n the economy could bring about a s i g n i f i c a n t impairment of l i q u i d -i t y . Table X I I I shows how w e l l the B.C. C e n t r a l C r e d i t Union complied w i t h the s t a t u t o r y requirements of the Canadian 19 Cooperative C r e d i t A s s o c i a t i o n s Act. ' The cash s i t u a t i o n a l l along has been very s a t i s f a c t o r y . Table XIV presents the comparative p i c t u r e of the B.C. C e n t r a l C r e d i t Union w i t h loan companies, t r u s t companies and chartered banks, r e g u l a t e d by the Department of Insurance, Ottawa. I t i s evident from t h i s t a b l e a l s o that the B.C. C e n t r a l operates w e l l w i t h i n the s t a t u t o r y requirements. From the study of a l l these schedules i t i s evident that the B.C. C e n t r a l C r e d i t Union has been very ably managed. Cooperative C r e d i t A s s o c i a t i o n s Act. S.C. 1952/53, c . 2 8 . 57 TABLE X I I COMPARISON OF STATUTORY BORROWING RIGHTS B.C. CENTRAL CREDIT UNION WITH ACTUAL BORROWINGS AT 31 DECEMBER, 1955 TO 1959 INCLUSIVE ' 1955 1956 1957 1958 1959 Paid C a p i t a l 4 5 3 , 7 0 3 7 6 8 , 2 0 5 7 4 5 , 5 8 0 8 7 3 , 7 6 5 1,008,355 Guarantee Fund 2 3 , 4 8 7 3 4 , 2 8 8 4 9 , 1 0 1 7 0 , 6 2 8 7 0 , 3 5 3 Surplus 2 2 , 5 0 2 17 , 124 2 2 , 7 3 3 2 0 , 5 3 5 T o t a l 4 9 9 , 6 9 4 8 1 9 , 6 1 7 8 1 7 , 4 l 4 9 6 4 , 9 2 8 1 , 0 7 8 , 7 0 8 10 times t o t a l 4,996,940 8 , 1 9 6 , 1 7 0 8,174,140 9,649 ,28110,787,080 Deposits 3 , 6 5 9 , 3 5 2 4 , 9 6 8 , 0 7 2 5 , 8 3 0 , 5 4 7 7 , 2 9 5 , 0 2 4 7 , 4 2 7 , 3 7 3 Bank Loan 1 , 5 7 0 , 5 4 7 — 2 , 3 5 3 , 0 0 0 Bank Overdrafts 5 9 , 7 3 1 5 4 , 8 0 7 T o t a l 3 , 6 5 9 , 3 5 2 4 , 9 6 8 , 0 7 2 7,401,044 7 , 3 5 4 , 7 5 6 9 , 8 3 5 , 1 8 1 Unused Borrowings 1 , 3 3 7 , 5 9 7 3 , 2 2 8 , 1 0 1 7 7 3 , 0 5 1 2 , 2 9 4 , 5 3 2 9 5 1 , 9 0 6 Percentage of a c t u a l borrow-ings to l i m i t 73$ 61$ 91$ 76$ 91$ Source: B.C. C r e d i t Union League, Survey Report, June i 9 6 0 (mimeographed), Vancouver, p. 7 1 . TABLE XIII STATUTORY LIQUIDITY REQUIREMENTS AS PROVIDED FOR IN CO-OPERATIVE CREDIT ASSOCIATIONS ACT FOR THE YEARS 1955 TO 1959 INCLUSIVE AS APPLIED TO FINANCIAL REPORTS OF B.C. CENTRAL CREDIT UNION 1955 1956 1957 1958 1959 % of total deposits 1 8 2 , 9 6 7 248,403 2 9 1 , 5 2 7 3 6 4 , 7 5 1 3 7 1 , 3 6 8 Cash balances 6 4 7 , 7 2 8 8 5 2 , 7 7 0 8 9 2 , 7 7 9 1 , 0 7 0 , 4 2 9 1 , 1 8 7 , 6 7 7 Excess over require-ments 464,761 604,367 6 0 1 , 2 5 2 7 0 5 , 6 7 8 8 1 4 , 3 0 8 Percentage cash to requirements 354$ 343$ 306$ 293$ 319$ 20$ of total deposits 7 3 1 , 8 7 0 993,614 1 , 1 6 6 , 1 0 9 1,459,004 1 , 4 8 5 , 4 7 4 Cash balances 6 4 7 , 7 2 8 8 5 2 , 7 7 1 8 9 2 , 7 8 0 1 , 0 7 0 , 4 2 9 1 , 1 8 5 , 6 7 7 Bonds—Can. and Prov. Govts, their guarantees (less pledged) 8 0 9 , 5 6 7 1 , 3 0 3 , 2 6 4 4 7 7 , 9 3 5 1 , 5 2 5 , 9 8 7 7 0 3 , 1 5 5 Total cash and bonds 1 , 4 5 7 , 2 9 5 2 , 1 5 6 , 0 3 5 1 , 3 7 0 , 7 1 5 2 , 5 9 6 , 4 1 6 1 , 8 8 8 , 8 3 2 Excess over require-ments 7 2 5 , 4 2 5 1,162,421 2 0 4 , 6 0 6 1 , 1 6 7 , 4 1 2 4 0 3 , 3 5 8 Percentage total cash and bonds to requirements 199$ 217$ 118$ 178$ 127$ Source: B.C. Credit Union League, Survey Report, June i 9 6 0 (mimeographed), Vancouver, p. 7 2 . TABLE XIV COMPARATIVE FIGURES OF INSTITUTIONS UNDER THE SUPERVISION OF DEPARTMENT OF INSURANCE, OTTAWA 1958 A l l A l l A l l Canadian B.C. Loan Trust Chartered C e n t r a l Companies Companies Banks (a) (a) (a) 1. 2 . 3 . L i q u i d i t y ( 1 ) 5$ of t o t a l deposits Cash on hand and on deposit i n banks Percentage of cash to l i m i t ( 2 ) 20$ of t o t a l deposits Cash, Govt, and Muni-c i p a l bonds Percentage of cash and bonds to l i m i t L i m i t of borrowings (10 x paid c a p i t a l , reserves and surplus Deposits and borrowed money Percentage of borrowings to l i m i t 3 6 4 , 7 5 1 1 , 0 7 0 , 4 2 9 293$ 1 , 4 5 9 , 0 0 5 2 , 5 9 6 , 4 1 6 178$ 9,649,288 7,354,756 76$ Maximum l i m i t on s i n g l e loan 8 1 6 , 8 7 8 Largest loan made 6 0 0 , 0 0 0 6 , 2 2 2 , 2 0 3 7 , 3 8 2 , 0 8 9 119$ 2 4 , 8 8 8 , 8 1 2 5 0 , 8 5 2 , 1 5 4 204$ 437,644 ,770 3 5 2 , 0 9 2 , 7 9 3 Can. Perm. Mtge. 8; ,324,463 3 , 7 5 6 , 9 9 9 6 , 6 8 6 , 0 1 7 5 9 8 , 7 0 0 , 0 0 0 9,213,846 9 9 8 , 0 0 0 , 0 0 0 138$ 158$ 2 6 , 7 4 4 , 0 7 1 2 , 3 9 4 , 8 0 0 , 0 0 0 1 0 0 , 1 3 1 , 7 9 9 4 , 4 0 0 , 0 0 0 , 0 0 0 374$ 184$ 340 , 196,440 740 ,000,000 237,741,692 1 1 , 9 7 4 , 0 0 0 , 0 0 0 70$ Canada Trust 5 , 2 8 3 , 3 2 8 4 0 3 , 5 5 1 1618$ N.A. NOTE; (a) These companies have not, of course, the same l i m i t a t i o n s as the B.C. C e n t r a l , but f o r comparative purposes, we have assumed they have. Source: L e t t e r no. 1 7 - 2 - 1 dated December 2 , 1 9 5 9 , of A s s i s t a n t Superintendent of Insurance, Dept. of Insurance;,. Ottawa, addressed t o Mr. F. Graham, C A . , Vancouver, B.G. 60 I t i s f o r t u n a t e f o r the c r e d i t union movement i n B r i t i s h Columbia that i t s " c e n t r a l bank" has a l l i t s a f f a i r s b e a u t i -f u l l y i n c o n t r o l . A f t e r having appraised the f i n a n c i a l soundness of c r e d i t unions i n B r i t i s h Columbia, we w i l l study t h e i r lending p r a c t i c e s i n the next chapter. CHAPTER I I I LENDING PRACTICES A c r e d i t union i s e s s e n t i a l l y a n o n - p r o f i t o r g a n i z a t i o n , owned and operated by i t s members. Rule 5 4 of the standard r u l e s of the B.C. C r e d i t Union Act provides t h a t : The committee s h a l l i n q u i r e c a r e f u l l y i n t o the character and f i n a n c i a l c o n d i t i o n of each a p p l i -cant f o r a l o a n , and of h i s s u r e t i e s , i f any, i n order to a s c e r t a i n h i s a b i l i t y t o f u l f i l the o b l i g a t i o n s assumed by him, and s h a l l determine whether the loan sought i s f o r a provident, produc-t i v e , or merchandising purpose, and w i l l be of probable b e n e f i t to the borrower.1 The committee mentioned i s the c r e d i t committee. The purpose may i n c l u d e c o n s o l i d a t i o n of debts, purchase of automobile, home r e p a i r s , v a c a t i o n s , education, payment of medical b i l l s , t a k i n g advantage of f i n a n c i a l o p p o r t u n i t i e s , f a m i l y emergencies and so f o r t h . The lending p r a c t i c e s of c r e d i t unions i n B r i t i s h Columbia w i l l be stu d i e d from the f o l l o w i n g angles: (a) the purposes f o r which loans have been taken; (b) the nature of s e c u r i t y taken; (c) the r a t e of i n t e r e s t charged; (d) the terms of repayment. • I . PURPOSE OF THE LOAN There are d i f f i c u l t i e s i n r e c o g n i z i n g e x a c t l y the C r e d i t Unions Act. R.S.C. 1 9 4 8 , c. 8 2 , C o n s t i t u t i o n and Rules, Rule 5 4 . 62 purpose f o r which c e r t a i n loans are made. For example, i n a l l innocence a month's rent money may be used to buy some house-ho l d equipment, and a lo a n of the same amount may be taken from a c r e d i t union s t a t i n g as i t s purpose the payment of rent money. There are a l s o p o s s i b i l i t i e s that the intended purpose might be d e l i b e r a t e l y concealed by the borrower be-cause the d i s c l o s u r e of the true purpose would impair h i s chances of g e t t i n g the loan. The f o l l o w i n g s t a t i s t i c s should be evaluated i n l i g h t of the obstacles impeding exactitude i n a study of t h i s kind. The B.C. C r e d i t Union Survey sent out a questionnaire to a l l the c r e d i t unions i n the Province, asking questions on v a r i o u s aspects of lending p r a c t i c e s of c r e d i t unions during the year 1957. R e p l i e s representing 8 7 . 1 $ of the t o t a l number, and 95$ of the t o t a l assets of the c r e d i t unions, were r e c e i v e d . The question d e a l i n g w i t h the purpose of loans was: "During the past twelve months, what pr o p o r t i o n of your loan a c t i v i t y , d o l l a r w i s e , was made f o r : ( e s t i m a t e ) . The answers were t a b u l a t e d and are shown i n Table XV. This t a b l e shows t h a t q u i t e a l a r g e percentage of t o t a l l ending by sma l l and medium-sized c r e d i t unions i s f o r the purpose of buying r e a l estate which would u s u a l l y i n v o l v e r e l a t i v e l y l a r g e loans. I t i s a debatable p o i n t from the standpoint of the economic needs of the community whether smaller c r e d i t unions should indulge e x t e n s i v e l y i n r e a l estate loans. The > I—1 vn vn ro a < o o o vn •o CD O o o o < o 1 i 1 i ct 03 CD o H ro (— o cm 4 o vn CD CB o o o o ro b o vn p* o r-" M H" ro OJ UJ ro vn -N3 ro ro i—• o oo ro ro vn -r o ro ro ro i—• f— ro o o o o ro ro ro ro M ro ON (-• co vn H -F~ OJ ro OJ vo o o i—* i—• i—• f—* vn OJ ro ro f-1 CD O CD b c+ M H P H vn -O 00 -F" vo I—'I—' !—1 1—' i—' ro ro OJ OJ -F* H H H H M vn OJ vn OJ i—• I—• l—• t—• i—* i—* o o o o o o o o o o S i z e of C r e d i t Union Assets (Thousand D o l l a r s ) C onsolida-t i o n of Debts Purchase of P r i v a t e Cars Purchase of Commercial Cars and Trucks Purchase of Household Equipment Home Improvement Purchase of Land and B u i l d i n g s F i s h i n g Boats and Gear Medical B i l l s Other T o t a l 61+ answer, to some extent, depends on the demand f o r small consumer loans. The c r e d i t union t h a t encourages loans which c l o s e l y approximate the consumption needs of the comm-un i t y i s c e r t a i n l y performing a u s e f u l s e r v i c e . There are no recent comparable s t a t i s t i c s e i t h e r i n Canada or i n the United S t a t e s . A study regarding the purposes f o r which c r e d i t union members borrow was made i n 191+9 by E d r i s W. Smith of the Bureau of F e d e r a l C r e d i t Unions, U.S . A . This study was based on a sample of 10.6% of the f e d e r a l c r e d i t unions i n operation on December 31? 1 9 4 8 , and covered the loans made during t h a t year. Though the purposes i n t h i s study have not been c a t e g o r i s e d i n the same way as was done i n the B r i t i s h Columbia Survey, i t i s i n t e r e s t i n g to note some comparative f i g u r e s . F u r t h e r , t h i s study does not break down the loan d i s t r i b u t i o n according to d i f f e r e n t s i z e s of c r e d i t unions. Recasting Table XV i n a p a t t e r n based on curre n t consumer c r e d i t c l a s s i f i c a t i o n , i t would perhaps be more i n d i c a t i v e of the purposes of c r e d i t union borrowing. I t would seem from Table XVII t h a t the l a r g e s t percent-age of money loaned, 41$, i s f o r the purchase of durables; r e a l estate comes next w i t h 21$ of the t o t a l amount loaned; w h i l e convenience c r e d i t , emergency c r e d i t and business i n -vestment take t h i r d , f o u r t h and f i f t h p o s i t i o n s r e s p e c t i v e l y . There i s , however, a very t h i n l i n e d i v i d i n g the emergency c r e d i t and the convenience c r e d i t . Though the w r i t e r would 65 TABLE XVI FEDERAL CREDIT UNIONS: PERCENTAGE DISTRIBUTION OF NUMBER AND AMOUNT OF LOANS GRANTED, BY PURPOSE, 19*+8 Percentage D i s t r i b u t i o n Number of Amount of Loans Loans C o n s o l i d a t i o n of debts 15.k lh.9 Purchase of automobiles 7.5 21.3 Household f u r n i t u r e and appliances and other durable consumer goods 7.*+ 6.8 Home r e p a i r expenses 7.2 9.5 M e d i c a l , d e n t a l and h o s p i t a l expenses 15.3 10.3 Payment of: Taxes 3.9 2.5 F u n e r a l expenses .6 .5 Insurance premiums 2.0 1.2 Current l i v i n g expenses 16.1 9.6 Vacation expenses 5.9 3.*+ E d u c a t i o n a l expenses 1.7 1.2 Investment i n : Business ventures 1.3 *+.5 Stocks, bonds, e t c . .3 .5 .All others 15.k 13.8 T o t a l 100.0 100.0 Source: E d r i s ¥. Smith, "Federal C r e d i t Union Loans, 191+8", S o c i a l S e c u r i t y B u l l e t i n . V o l . 12, No. 7 ( J u l y 19*+9). (Items have been reorganized). H B < H (D o B o CD 03 o o era era » 03 B3 D 03 O p. C o CD o <{ P» CD ct> »»_< • < tu 03 01 o CD o P c <! O CD P td • O J vn o • • • • O J o • CD p. LJ. c+ g -r O J p- O J • • o o o tr< CD 03 era c CD r-" ro 00 o 03 • • C - v l o < CD '< CD o a vO c t CH CD ro ro vD H O J ON O i - 1 i—• o o o o vn ro O vn o i O O O H O 0 O 1 i vn ro O vn o o vn ro a O vn xi i vn O i O O c+ O ro vn r-" H I—' O O J I—' 00 O O J ON O ON O •4T -r -r vn -r oo oo O J O O • • • • • o o o o o o o H H I — ro ro ro ro t-» vo o - v i -r o OJ o ro O J vn -r O J -r H H H H I—' o o o o O O O o o o Size of Credit Union Assets (Thousand Dollars) Emergency Credit (Medical b i l l s and 2/3 of "other" Expenses Purchase of Durables (Private auto-mobiles, house-hold equipment, home improve-ments) Convenience Credit (Consoli-dation of debts and 1/3 of "other" Expense) Business In-vestments (Commercial cars, Trucks, Fishing Boats and Gear Real Estate Total 67 r e f r a i n from drawing any d e f i n i t e c o n c l u s i o n from these s t a t i s t i c s because they are based on estimates, i t would seem that the c r e d i t unions i n t h i s Province are drawing away from the " r a i n y day" theory of cooperative c r e d i t . The other major consumer lending i n s t i t u t i o n s are consumer f i n a n c e companies, instalment f i n a n c e companies, and banks. S i m i l a r s t a t i s t i c s f o r these i n s t i t u t i o n s which would be r e p r e s e n t a t i v e of the p r a c t i c e s i n the whole of Canada are not a v a i l a b l e , but the experiences of one l a r g e consumer fi n a n c e company and the main branch of a l a r g e bank i n Vancouver are given i n Appendix 1. One cannot, however, make any g e n e r a l i z a t i o n s from t h i s i n f o r m a t i o n . I I . NATURE OF THE SECURITY TAKEN Vide s e c t i o n 18(53 of the B.C. C r e d i t Unions Act; No loan of any amount exceeding two hundred d o l l a r s s h a l l be made without s e c u r i t y t h e r e f o r i n a d d i t i o n to the o b l i g a t i o n or covenant of the borrower: Provided t h a t the Inspector may author-i z e a c r e d i t union on a p p l i c a t i o n by i t , to make loans exceeding the sum of two hundred d o l l a r s but not exceeding the sum of four hundred d o l l a r s , without s e c u r i t y t h e r e f o r other than the covenant of the borrower, and i n g i v i n g such a u t h o r i t y the i n s p e c t o r may impose such c o n d i t i o n s as he deems a d v i s a b l e . 2 This i s an unreasonably r e s t r i c t i v e p r o v i s i o n . In the s t a t u t e s of most of the American s t a t e s , the boards of d i r e c t o r s have been empowered to set the unsecured loan l i m i t . C r e d i t Unions Act, R.S.C. 19^8, c. 8 2 , s. 1 8 ( 5 ) . 68 Some s t i p u l a t e f i v e hundred d o l l a r s as the maximum l i m i t to which the board of d i r e c t o r s may a u t h o r i z e the c r e d i t committee to act without s e c u r i t y f o r the loan. There are others impos-ing d i f f e r e n t l i m i t s . I t i s commonly b e l i e v e d i n banking c i r c l e s t h a t almost a l l of the c r e d i t union loans are secured. The reason f o r t h i s can t o some extent be a t t r i b u t e d to t h i s s t a t u t o r y l i m i t . When the c r e d i t committee f i n d s an a p p l i c a n t f o r more than $200 a good c r e d i t r i s k , some minor s e c u r i t y l i k e comaker or c h a t t e l mortgage on household e f f e c t s i s i n -troduced t o circumvent the p r o v i s i o n s of the Act.^ In f a c t there i s no i n t e n t i o n of o b t a i n i n g the s e c u r i t y , and i f the s t a t u t o r y r e s t r i c t i o n had not e x i s t e d , no s e c u r i t y would have been taken. In r e a l i t y , loans l i k e t h a t may be c a l l e d un-secured or character loans. The B.C. C r e d i t Union Survey i n d i c a t e s t h a t the percentage of unsecured loans i s q u i t e s m a l l : I f we remove the group of endorsers and the amount of shares pledged, the percentage of one signature loans i s s m a l l . ^ Dr. E.R. I s b e l l , i n h i s paper " C r e d i t Unions and the Recession",^ mentions t h a t i n the United S t a t e s l e s s than three per cent of c r e d i t union loans are unsecured whereas the banks and the personal f i n a n c e companies have 65% and 25% r e s p e c t i v e l y . Although character loans are comparatively s m a l l i n ^Mr. J.F. ;Quail, F i e l d R epresentative, B.C. C r e d i t Union League, Vancouver. ^B.C. C r e d i t Union League, Survey Report. June I960, (mimeographed), Vancouver, p. *+3. ^Dr. E.R. I s b e l l , C r e d i t Unions and Recession, Ohio C r e d i t Union League Workshop, 1959, p. 53. 69 volume, the element of character of the borrower i n any type of loan i s important. From the point of view of s e r v i c e to the community f o r which i t p r o f e s s e d l y stands, a c r e d i t union has to see th a t the loans are r e p a i d from the normal earnings of the borrower, and not through the l i q u i d a t i o n of s e c u r i t i e s . There are four C's of c r e d i t — c h a r a c t e r , compet-ence, c a p i t a l , and business c o n d i t i o n s . I f a p o t e n t i a l user of the c r e d i t has the f i r s t two C's and the lending i n s t i t u -t i o n has the l a t t e r two, i t i s an i d e a l s i t u a t i o n to grant c r e d i t . Though the c r e d i t unions have to apply t h i s yard-s t i c k i n judging the c r e d i t worthiness of a borrower, they g e n e r a l l y do not demand the same degree of p o s i t i v e q u a l i t i e s of a borrower as i s done by other lending i n s t i t u t i o n s . C r e d i t union lending mostly goes to the people who cannot o b t a i n e f f e c t i v e advantage of other i n s t i t u t i o n s . This i s af f i r m e d by the statement of the Royal Commission on Co-op e r a t i v e s , 19*+5: We are s a t i s f i e d t h a t c r e d i t unions perform a h i g h l y u s e f u l f u n c t i o n i n a s s i s t i n g people who are unable to take e f f e c t i v e advantage of savings and loan f a c i l i t i e s provided by other lending i n s t i t u -t i o n s . ° I t i s not easy to judge the r i s k worthiness of a c r e d i t user. Not only are such evaluations of r e l a t i v e q u a l i t y , but they are a l s o d i s t o r t e d by personal b i a s . Report of the Royal Commission on Cooperatives, King's P r i n t e r , Ottawa 19*+5, P. 52. 70 From a p s y c h o l o g i c a l standpoint the character of person i s t h a t aspect of h i s p e r s o n a l i t y t h a t i n -volves h i s moral p r i n c i p l e s and v a l u e s . / I f he s t i c k s to the moral p r i n c i p l e s and recognises t h e i r v a l u e s , he w i l l do h i s best to f u l f i l the o b l i g a t i o n s he has undertaken. A person deri v e s some t r a i t s of h i s person-a l i t y from h i s experience. This i s g e n e r a l l y on account of the i n f l u e n c e of one's home and a s s o c i a t e s . Apart from t h i s , there i s the q u a l i t y of s e l f - r e l i a n c e i n a person. How he has learned to assume the r e s p o n s i b i l i t i e s of h i s l i f e i s q u i t e important. The second "C" i s competence, the a b i l i t y to handle the f i n a n c i a l matters. Competence depends upon two t h i n g s , namely, then person's a b i l i t y and h i s background of experience. A b i l i t y i s d i s p l a y e d by the ways a person organizes h i s a f f a i r s , whether he has s t a b i l i t y i n employment and so on. Generally because of the closeness of the bond between c r e d i t union members, the i n v e s t i g a t i o n of these values of an i n d i v i d u a l i s not too d i f f i c u l t ; n e v e r t h e l e s s , t h e i r e v a l u a t i o n i s always a problem. The growth of the c r e d i t unions has been so spectacular t h a t some of them have a member-shi p of over s i x thousand. For such cases, the t i e s of common bond become i n s i g n i f i c a n t , and c r e d i t i n v e s t i g a t i o n a l l the 'S.N.F. Chant, "The C r e d i t R i s k — A P s y c h o l o g i c a l A n a l y s i s of the C r e d i t . U s e r " , appeared i n Readings on C r e d i t  and C o l l e c t i o n s i n Canada, Ryerson Press, Toronto, 1958, p. 25. 8 I b i d . , p. 23. 71 more d i f f i c u l t . There are c r e d i t unions t h a t serve the communities which have t r a n s i e n t populations. The c r e d i t committee i n such cases has a l i m i t e d basis by which to judge the c r e d i t worthiness of a person. However, c o n s i d e r a t i o n s l i k e f a m i l y u n i t , and the h a b i t of s t i c k i n g to a job, might help i n mak-ing a judgment. In the B.C. C r e d i t Union Survey, c e r t a i n c a t e g o r i e s of borrowers were s i n g l e d out and a course of a c t i o n suggested to d e a l w i t h them. There i s no data a v a i l a b l e to show the amount of un-secured loans made by the c r e d i t unions i n B r i t i s h Columbia and t h e i r experience regarding bad debts on such loans. There are various kinds of s e c u r i t i e s taken by c r e d i t unions such as c h a t t e l mortgage, an assignment of l i f e i n -surance bonds, r e a l e s t a t e , comaker, e t c . I n order to assess the worth of a s e c u r i t y , one has to go beyond what appears on the face of i t . The value of the bond depends upon i t s y i e l d . When c o r p o r a t i o n shares are taken as s e c u r i t y , t h e i r market p r i c e i s important. In the case of c h a t t e l mort-gages, r e a l estate mortgages, and the assignment of l i f e i n surance, the l e g a l requirements f o r the t r a n s a c t i o n should be f u l f i l l e d . For r e a l e s t ate mortgages, i t has to be as-c e r t a i n e d that the property i s i n s u r e d f o r f i r e and d e s t r u c t i o n . I t i s f a i r l y common amongst small c r e d i t unions t h a t c h a t t e l mortgages are not r e g i s t e r e d . Cases have appeared where the c r e d i t union could not have recourse against the 72 property because i t s c h a t t e l mortgage was not r e g i s t e r e d , and some other party had a v a l i d r e g i s t e r e d c h a t t e l mortgage. Regarding l i f e insurance p o l i c i e s , i t i s always ad v i s a b l e t h a t the cash surrender value of the p o l i c y at the time of the assignment i s confirmed by the insurance company. The date the l a s t premium was paid should be v e r i f i e d . The t r e a s u r e r should r e g i s t e r the assignment of the p o l i c y w i t h the insurance company f o r t h w i t h . F u r t h e r , the t r e a s u r e r should o c c a s i o n a l l y v e r i f y from the insurance company th a t the premiums are r e g u l a r l y p a i d , because notwithstanding any assignment, the insurance company has p r i o r c l a i m against the cash value of the p o l i c y f o r the unpaid premiums. Tables X V I I I and XIX show the percentage d i s t r i b u t i o n of loans by amounts and by numbers according to the type of s e c u r i t y taken. Table No. XX gives the modal values. More than h a l f of the number of l o a n s , and one-quarter of the t o t a l amount of loans were made w i t h only signature and shares as the s e c u r i t y . l S . l 1 ^ of t o t a l number of loans were comaker loans. The s e c u r i t y of r e a l estate i s q u i t e popular, accounting f o r 32.95% of the t o t a l amount loaned, arid 12.5+3% of the t o t a l number of loans. I t i s q u i t e i n t e r e s t i n g to note t h a t i n small c r e d i t unions, t a n g i b l e s e c u r i t i e s l i k e c h a t t e l mortgages and r e a l estate c o n s t i t u t e s e c u r i t y f o r a small part of the volume of loans, whereas i n t a n g i b l e s e c u r i -t i e s l i k e comaker, s i g n a t u r e , and share loans c o n s t i t u t e the major p o r t i o n . The s i t u a t i o n i s the other way around i n the TABLE XVI I I NATURE OF SECURITIES LODGED "WITH CREDIT UNIONS ON LOANS GRANTED DURING PERIOD FROM JULY 15TH TO SEPTEMBER 30TH, 1 9 5 7 , EXPRESSED AS A PERCENTAGE OF TOTAL MOUNT OF LOANS APPROVED S i z e of C r e d i t Signa-Union Assets L i f e House- ture (Thousand Insur- Real Automo' - h o l d Co- and D o l l a r s ) Bonds ance E s t a t e Vessels b i l e s E f f e c t s maker Shares T o t a l - Per Cent -Up to 25 -- . 2 1 7 . 0 8 — 1 3 . 0 2 2 . 7 2 3 0 . 2 8 46.69 100 25 - 50 3 . 9 5 . 6 7 1 2 . 2 0 — 2 6 . 7 9 3 . 6 6 2 6 . 3 0 2 6 . 4 3 100 50 - 100 . 2 3 . 5 2 1 6 . 2 7 . 2 0 1 1 . 5 9 3 . 2 0 3 7 . 6 6 3 0 . 3 3 100 100 - 250 1 . 0 3 .64 2 6 . 3 6 . 1 7 19.84 3 . 7 7 2 3 . 8 5 2 4 . 3 4 100 250 - 500 3 . 1 3 . 4 9 3 4 . 6 6 . 7 9 1 5 . 8 2 3.48 2 3 . 2 8 1 8 . 3 5 100 500 - 1 , 0 0 0 1 . 2 8 . 6 9 3 3 . 0 1 . 3 4 14.80 5 . 5 1 1 4 . 4 3 2 9 . 9 4 100 1 , 0 0 0 - 2 , 0 0 0 2 .15 1 .20 3 0 . 6 2 1.13 1 8 . 3 0 4 . 6 1 14.67 2 7 . 3 2 100 Over 2 , 0 0 0 . 3 0 1 .38 5 6 . 1 0 3 . 0 8 1 2 . 7 0 . 3 0 7 . 9 7 1 8 . 1 7 100 Average 1 .61 . 8 5 3 2 . 9 5 . 9 7 1 6 . 2 8 3 . 6 3 1 8 . 6 9 2 5 . 0 2 100 Source: B.C. C r e d i t Union League, Survey Report, June i 9 6 0 , Vancouver (mimeographed), p. 34. TABLE XIX NATURE OF SECURITIES LODGED WITH CREDIT UNIONS ON LOANS GRANTED DURING PERIOD FROM JULY 15TH TO SEPTEMBER 30TH, 1957, EXPRESSED AS A PERCENTAGE OF NUMBER OF LOANS APPROVED S i z e of C r e d i t Signa-Union Assets L i f e House- t u r e (Thousand Insur- R eal Automo- hold Co- and D o l l a r s ) Bonds ance E s t a t e Vessels b i l e s E f f e c t s maker Shares T o t a l - Per Cent -Up t o 25 — .15 2.25 — h.ok 1.20 21.1*+ 71.22 100 25 - 50 5.87 5.01 — 11.87 2.00 19.75 55.07 100 50 - ioo .29 .1+0 5.52 .16 5.1+1+ 2.87 27.20 58.12 100 100 - 250 1.11 .1+8 10.50 .16 10.61 2.92 21.01 53.21 100 250 - 500 12.76 M 15.96 .21 9.kO 2.95 19.53 38.70 100 500 - 1,000 .97 .82 12.01 .19 8.20 k.2k 11+.58 58.99 100 1,000 - 2,000 2.19 .93 12.35 .22 9.08 3.38 15.90 55.95 100 Over 2,000 .55 2.11 25.92 .70 9.87 •31 11.76 1+8.78 100 Average 3. *+5 .76 12.1+3 .22 8.82 2,88 18.1>+ 53-30 100 Sources B.C. C r e d i t Union League, Survey Report, June I960, (mimeographed), Vancouver, p. 3*+. TABLE XX MODAL VALUES OF LOANS GRANTED ..DURING THE PERIOD FROM JULY 15TH TO SEPTEMBER 30TH, 1957, GROUPED AS TO DIFFERENT TYPES OF SECURITIES LODGED IN RESPECT OF SUCH LOANS Size of Credit Union Assets (Thousand D o l l a r s ) Bonds L i f e Insur-ance Real Estate Vessels Automo-b i l e s House-hold E f f e c t s Co-maker Signa-ture and Shares - In Dollars -Up to 25 — 1+00 300 — 700 700 300 100 25 - 50 100 500 1000 — 61+0 600 1+00 100 50 - 100 300 600 2000 100 81+0 1+00 300 100 100 - 250 200 600 2000 500 950 500 300 100 250 - 500 100 300 1000 3000 700 1500 300 100 500 - 1,000 200 100 500 1500 1030 300 300 100 1,000 - 2,000 100 800 1000 2900 950 1000 500 100 Over 2,000 200 600 2000 8600 1520 1130 500 100 Source: B.C. Credit Union League, Survey Report, June I 9 6 0 , (mimeographed), Vancouver, p. 35. 76 case of l a r g e r c r e d i t unions. One c o n c l u s i o n that can be drawn i s tha t w i t h the growth i n s i z e of a c r e d i t union, there are enough surplus funds to permit r e a l e s t a te loans and other l a r g e amount loans which would r e q u i r e t a n g i b l e s e c u r i t i e s . This c o n c l u s i o n i s r e i n f o r c e d by Table XX where the modal values of loans i n v o l v i n g r e a l e s t a t e , v e s s e l s and automobiles as s e c u r i t y , are f a i r l y l a r g e . I t was remarked p r e v i o u s l y that some c r e d i t unions do not comply w i t h the l e g a l requirements i n t a k i n g i n s e c u r i t i e s . In many cases, c h a t t e l mortgages on automobiles and household e f f e c t s are not r e g i s t e r e d . This f a c t i s e x h i b i t e d i n Tables XXI and XXI I . There could be three reasons f o r t h i s o m i s s i o n — e i t h e r ignorance of law, carelessness on the part of the management of a c r e d i t union, or the f a c t t h a t these s e c u r i t i e s are only taken to put moral pressure on the borrow-er to pay instalments on time. I t i s s u r p r i s i n g to f i n d t h a t some of the l a r g e c r e d i t unions w i t h w e l l q u a l i f i e d management commit t h i s mistake. Very few c r e d i t unions have ever taken recourse, against a mortgage on household e f f e c t s . In f a c t , i t i s a kind of character loan i n excess of the maximum loan amount permitted under the Act. Even i f a c r e d i t union t r i e s to r e a l i s e t h i s s e c u r i t y , i t w i l l not o b t a i n enough money to pay o f f the debt, apart from d i s p l e a s i n g the borrower. Nevertheless, i f a s e c u r i t y i s taken, i t should be l e g a l l y workable. As evident from Table XXI, the insurance p o l i c i e s on automobiles are sometimes not endorsed. In case of the d e s t r u c t i o n of the 77 TABLE XXI PERCENTAGE AMOUNT OF CHATTEL MORTGAGE NOT REGISTERED AND PERCENTAGE AMOUNT OF INSURANCE ON AUTOMOBILE NOT ENDORSED, OF TOTAL AMOUNTS OF LOANS GRANTED IN DIFFER-ENT SIZE GROUPS OF CREDIT UNIONS, ON THE SECURITY OF CHATTEL MORTGAGE ON AUTOMOBILES IN THE PERIOD FROM JULY 15TH TO SEPTEMBER 30TH, 1957 •p = f = H r H •H 3 0 CH 1 1 1 1 1 TS CO O -P O O -P O •P q T i 0 -P 0 -P q to 0 H -P CO u H to © u 0 CO CO 0 0 0 to O 3 C H q 0 0 T l 0 q 0 to 0 to rd<-"> _ .a r H bO a cO O CO MX-N a +5 0 bO<-> O r H U to q co O q 0 0 »H CO q CH 0 CO to O M CO CO •H O CH < co u 0 -P O O H q to i-q -P -P r H q 0 •P -P ( D X I r r j O CO CO -P CH CO 0 q 0 0 0 q q 0 -p q q 0 0 q q 3 H q CO 0 bo a © to r H r H 0 3+5 CO CO 0 3 q S 0 O O r H 3 q -p 0 0 q -P -P 0 -H CO O O +3 0 -H cj 0 co 0 isa -H ,q 0 0 CO >> fH -P u cO -H CO bO-O -P H a co bO bD H a H -P -P •H q EH Q a 0 -P O 3 0 O U X! CO O O CD co ,q CO 0 0 CO 3 3 0 r H -H a co <H H 3 0 bO a EH P-i 0 bO M co co q Up to 25 $ 24,1+39 1.74 20.2 6 1 . 1 25 - 50 7 8 , 6 9 7 5 .61 1 9 . 2 5 1 . 1 50 - 100 6 7 , 7 7 6 4 . 8 3 7 .0 6 1 . 2 100 - 250 2 3 6 , 1 7 6 16 .82 4 . 1 40 . 6 250 - 500 241,640 17 .21 7 . 7 27 . 8 500 - 1,000 2 3 8 , 5 5 5 1 6 . 9 9 1 .6 4 7 . 5 1,000 - 2,000 350 ,479 2 4 . 9 6 3 . 7 2 9 . 8 Over 2,000 166 ,249 11.84 4 . 6 3 5 . 5 1,404,011 100.00 5 . 5 6 3 5 . 5 Source: B.C. C r e d i t Union League June I960, (mimeographed), Vancouver, p. , Survey Report, 4 1 . 78 TABLE XXII PERCENTAGE OF CHATTEL MORTGAGE ON HOUSEHOLD EFFECTS NOT REGISTERED, OF TOTAL AMOUNTS OF LOANS GRANTED IN DIFFER-ENT SIZE GROUPS OF CREDIT UNIONS, ON THE SECURITY OF CHATTEL MORTGAGE ON HOUSEHOLD EFFECTS, DURING THE PERIOD FROM JULY 15TH TO SEPTEMBER 30TH, 1957 Size of Credit Union Assets (Thousand Dollars) Amount of loans on the security of chattel mortgage on household effects Percentage of total loans Chattel not Registered Percentage not Registered Up to 25 5,095 I . 6 3 $1,000 19.6 25-50 10,762 3.Mf »4,1+78 1+1.6 50-100 18,730 5.97 ,^3>+2 23.2 100-250 V+,851 1^.30 15,323 3*+. 2 250-500 53,219 16.96 5+,929 11.0 500-1 ,000 88,831 28.30 23,688 26.6 1-2,000 88,330 28.1'+ 8,23'+ 9.3 Over 2 ,000 3,931 1.26 960 21+.1+ 3l3,7 1+9 100.00 62,95*+ 20.1 Source: B.C. C r e d i t Union League, Survey Report, June i 9 6 0 , (mimeographed), Vancouver, p. 1+2. 79 v e h i c l e , the c r e d i t union has nothing to f a l l back upon except the borrower's personal covenant. I t i s a l s o import-ant i n the case of automobile s e c u r i t i e s that the r a t e of repayment on the loan exceeds the r a t e of d e p r e c i a t i o n . Otherwise a time might come when the s e c u r i t y i s worth nothing, and the f u l l amount of the loan has not been l i q u i d -ated. There are v a r i o u s forms by which charges on the r e a l e s t a te may be h e l d : mortgage, c o n d i t i o n a l sale agreement, deposit of t i t l e agreement, and c e r t i f i c a t e of t i t l e . There are so many c o m p l e x i t i e s i n these agreements th a t i t i s always a d v i s a b l e to employ the s e r v i c e s of a l e g a l p r a c t i t i o n -er. The B.C. C r e d i t Union League has p r i n t e d an agreement form which should accompany the deposit of t i t l e . In t h i s agreement the terms under which the deposit of t i t l e i s made are s t a t e d , and the borrower s t i p u l a t e s t h a t he w i l l execute the r e g i s t e r e d mortgage when r e q u i r e d by the c r e d i t union. The "League" has always recommended tha t t h i s type of s e c u r i t y should only be accepted when the amount of the loan i s l e s s than one thousand d o l l a r s . When t a k i n g these s e c u r i t i e s , the c r e d i t union should take i n t o c o n s i d e r a t i o n the extent of d e p r e c i a t i o n during the term of the loan. The f o l l o w i n g t a b l e shows d i f f e r e n t kinds of charges accepted by c r e d i t unions i n r e a l e s t ate loans. I t may be remarked here that t h i s t a b l e does not present a true p i c t u r e regarding small c r e d i t unions, because the survey covers eleven TABLE X X I I I ANALYSIS OF REAL ESTATE LOANS GRANTED FROM JULY 15TH TO SEPTEMBER 30TH, 1957 AS TO THE FORM OF SECURITY—GIVING THE PERCENTAGE AND THE MODE UNDER EACH CATEGORY ACCORDING TO THE SIZE GROUPS OF CREDIT UNIONS Size of Credit Union Assets Registered First Mortgage Registered Second Mortgage Registered Assignment of Agreement for Sale Deposit of Title Agreement Certificate of Title CO -P O EH 1-25,000 Percentage of t o t a l R e a l E s t a t e Loans MODE 26.7% 435 3.8$ 500 — 13.6$ 500 55.9$ 500 100.0$ 25,000-50,000 Percentage of t o t a l R e a l E s t a t e Loans MODE 23.8$ 1,000 -- 2.8$ 1,000 60.8$ 1,000 12.6$ 500 100.0$ 50,000-100,000 Percentage of t o t a l R e a l E s t a t e Loans MODE kk. 7% 1,500 — 20.7$ 700 22.3$ 300 12.3$ 500 100.0$ 100,000-250,000 Percentage of t o t a l R e a l E s t a t e Loans MODE 49.7$ 500 2.4$ 2,000 1.3$ 1,610 30.0$ 600 16.6$ 300 100.0$ - continued -< 03 D a o s < CD W 4 o c 4 o CD o o 4 CD P* H-<+ £ O £> tr* CD 03 era CD oa C 4 <! jCD *i W CD ft* O 4 ct CD H v D ON O 5 H* B CD O C«J 4 03 * & CD P-h s r o CD CD ~ 03 4 O 1—1 O O CD O t?3 £s -» W ct O c+ 03 cu cm ct CD CD O O O o 03 b CO 03 £> H } p i C+ O o < Ct CD 03 4 ro o v n ro o-o o» o o I—1 - -r OU3 o*^ H o -r o • O v O ro O CO o • ou> t—' o I o g JD h l H O CD CD «» Q 03 4 O S H O O CD O t n c + O ct 0> O co era o ct CD I CD ro o -H } O o 03 o ct O o -ct O 03 O H O v n O O • o-o v n r o o • o ON ro - -r o • OvO o^% H - ro o-o o» O H o -r o • o-o o I o g £d >rjvn O CD CD O C J 03 4 O S H O » CD O c n ct o Ct 03 I 03 OP H ct CD >* CD tr* o 03 £5 w oo o H j O ct O o o ct O 03 ou> o • O 00 ro -ru> o • o-o v n v n • o OD o"*& ro OJU> o • OOJ v n L u O • H O O • o g td »ti ro o CD CD v n O 0 3 4 o CD O t?U & O W ct O ct 03 I CD era v n ct CD o CD t"* o 03 S3 t o O o -H > 0 o ct O O ct 03 ro OUJ o» O ^ l ro - ro oo o • 00. o • o-o OtA H1 - ro o ON o • O U J vn o o H ro ou> O " ^ o O O S i z e of C r e d i t Union Assets R e g i s t e r e d F i r s t Mortgage Re g i s t e r e d Second Mortgage Reg i s t e r e d Assignment of Agree-ment f o r Sale Deposit of T i t l e Agreement C e r t i f i c a t e of T i t l e T o t a l ¥08 81 weeks only , and small c r e d i t unions have only a small percentage of r e a l e s t ate loans. Second mortgages do not seem to be very common. As the amount of the r e a l e s t ate loan should r e l a t e t o the cu r r e n t value of the property, i t i s e s s e n t i a l t h a t some method be employed by the c r e d i t union to assess the value. The B.C. C r e d i t Union Survey^ i n d i c a t e s t h a t 59 .2$ of r e a l e s t ate loans were granted without any a p p r a i s a l of the property i n v o l v e d . Most of the a p p r a i s a l s out of the other 40 . 8 $ were made by c r e d i t union o f f i c e r s . This i s a serious omission and the c r e d i t unions should appraise the property before t a k i n g i t as s e c u r i t y . I t i s always d e s i r a b l e that the f i r e insurance p o l i c i e s on r e a l estate be endorsed payable to the c r e d i t union at the time a lo a n i s granted. Almost one-half of the amounts of such p o l i c i e s are without endorsement.'1'0 More p a r t i c u l a r l y , the small c r e d i t unions seem to be unaware of the importance of t h i s p r o t e c t i v e step. I I I . RATE OF INTEREST The B.C. C r e d i t Union Act r e q u i r e s t h a t : The r a t e of i n t e r e s t on a lo a n s h a l l not exceed one per centum f o r each month, i n c l u s i v e of a l l charges f o r making the l o a n , and s h a l l be payable only on the unpaid b a l a n c e . 1 1 ^B.C. C r e d i t Union League, Survey Report, June, I 9 6 0 , (mimeographed), Vancouver, p. 39. 1 Q I b i d . , p. 40. i : L C r e d i t Union A c t , R.S.C. 1 9 4 8 , c. 8 2 , s. 8 ss. 7. 82 There i s no standard r a t e of i n t e r e s t amongst the c r e d i t unions i n B r i t i s h Columbia. The s e t t i n g of r a t e s of i n t e r e s t i n d i f f e r e n t c r e d i t unions depends on a l a r g e v a r i e t y of c o n s i d e r a t i o n s . I n l a r g e r c r e d i t unions, the r a t e of i n t e r e s t on personal loans may sometimes be c l o s e to 12$ per annum, but r e a l e s t ate loans would have a somewhat lower r a t e . S i m i l a r l y , some c r e d i t unions charge a lower r a t e of i n t e r e s t on loans which are secured by shares. The B.C. Survey Report d i v i d e d the c r e d i t unions which do not d i f f e r -e n t i a t e between types of loans i n t o three groupings of i n t e r e s t r a t e s : (1) One r a t e only between 6$ and 12$ per year. (2) M u l t i p l e r a t e s 12$ on the f i r s t part of the loan ( l a s t t o be repaid) and ranging from 6$ to 9$ on the balance of the loan i n d i f f e r e n t c r e d i t unions. (3) Same as i n (1) and (2) w i t h 6$ per annum to apply on an amount equal t o member's share balance at time loan i s made and f r o z e n as . . 12 s e c u r i t y . Table XXIV presents the percentage of the number of c r e d i t unions i n each category. The i n t e r e s t charge i n i t s e l f does not present a true p i c t u r e , because a l a r g e percentage of c r e d i t unions make 12 B.C. C r e d i t Union League, op. c i t . , p. ih. T o t a l Assets Rates 12$ 40$ 1% 1$ TABLE XXIV SINGLE RATES ALL LOANS BY NUMBER OF CREDIT UNIONS (Assets i n $ Thousands) $1-25 $25-50 $50-100 $100-250 $250-500 $500-1000 Over $1000 22$ 13$ 13$ 6$ 2$ 2$ 5$ 1$ 1$ 1$ 1$ 1$ 2$ 1$ — 2$ MULTIPLE RATES ALL LOANS BY NUMBER OF CREDIT UNIONS Rates 12$ between $200-1200 Balance 6$ 8$ 7$ 10$ 2$ 6$ 2$ 12$ on loans between $300-1000 Balance 7-Q-9J 1$ 1$ 1$ 2$ li$ 1$ 9$ up t o $2,000 Balance 7% Reduced r a t e on 2$ 1$ 1$ 2$ 3$ 1$ s e c u r i t y of shares MULTIPLE RATE PER TYPE OF LOAN—PERSONAL. REAL ESTATE. EDUCATIONAL BY NUMBER OF CREDIT UNIONS 12$ Personal Loans 6-9$ Real E s t a t e Loans 1% 2$ 1$ 1% 1% - continued -TABLE XXIV (continued) $1-25 $25-50 $50-100 $100-250 $250-500 $500-1000 Over $1000 9$ Personal Loans 6 - 8 $ R e a l E s t a t e Loans 12$ Personal Loans 6 - 7 1/2$ R e a l E s t a t e Loans 6$ shares as s e c u r i t y Personal 12$ up t o $300 6$ on balance 7$ Real E s t a t e Loans 7$ shares as s e c u r i t y Personal 12$ up t o $500 6$ on balance 7- 8$ Real Estate A l l Loans 12$ 4 - 6 $ Education 1$ 1$ 1$ 1$ 1% 1% 1$ Source: B.C. C r e d i t Union League, Survey Report June i 9 6 0 , (mimeographed) Vancouver, p. 1 3 . 0 0 8k interest refunds at the end of the year. Table XXV shows the refunds made during the last two years. TABLE XXV CREDIT UNION'S - INTEREST REFUNDS Total No. No. of Credit % Credit Rate of Re-Year of Unions making Unions fund to Credit Refunds making Total In-Unions Refunds terest Paid to Total 1959 326 168 51.5 10% 1958 317 110 3^.7 10% Source: I960 Credit Union Year Book; 1959 Credit  Union Year Book, Credit Union National Association, Madison, Wisconsin. The Consumer Finance Companies are regulated by the Small Loans Act 19^9 as amended by B i l l 51, August 6, 1956. The permitted rate of charge on loans up to $1500 i s as follows: (a) The cost of a loan shall not exceed the aggregate of (1) two per cent per month on any part of the unpaid principal balance not exceeding three hundred dollars, (2) one per cent per month on any part of the unpaid principal balance not exceeding three hundred dollars, (3) one-half of one per cent per month on any re-mainder of the unpaid principal balance exceeding one thousand dollars. (b) Where a loan of five hundred dollars or less i s made for a period greater than twenty months or where a loan exceeding five hundred dollars i s made for a period greater than thirty months, the cost of the loan shall not exceed one per cent per month on the unpaid principal balance thereof. , (c) No charges can be paid, deducted or received in advance. J B i l l 51, An Act to /Amend the Small Loans Act, August 6, 1956, The Queen's Printer and Controller of Stationery, Ottawa, 1956. 85 There are no s t a t i s t i c s a v a i l a b l e to show what r a t e of i n t e r e s t i s a c t u a l l y charged by Consumer Finance Companies. J.G. O ' S u l l i v a n , reviewing the i n t e r e s t r a t e s , s a i d : I n the past some l e n d e r s , u s u a l l y the l a r g e companies, have seen f i t to reduce r a t e s t o a f i g u r e below the 2% maximum allowed. However, r i s i n g c o s t s have f o r c e d a l -most, a l l lenders t o r e v e r t back t o maximum charge of 2 $ . 1 4 This was the s i t u a t i o n i n 1953 p r i o r to the amendment of the Small Loans Act. Now when the maximum i n t e r e s t r a t e has been somewhat lowered, i t i s most probable t h a t the Consumer Finance Companies are charging the maximum r a t e . 1 5 Under the Bank Act ' the chartered banks are allowed to charge i n t e r e s t r a t e s up to the maximum of 6% per annum on the average amount of loan outstanding. In p r a c t i c e , almost a l l the banks charge 6% per annum on personal loans. Above t h a t , s e r v i c e charges are made which are based on the amount and the term of loan. Some banks c r e d i t the repayments on a personal loan to the savings account of the borrower. A f t e r the end of the term of a l o a n , t o t a l repayments made are t r a n s f e r r e d to the lo a n account. By t h i s d e vice, a bank i s able to charge a higher p r i c e on loans because the i n t e r e s t r a t e g e n e r a l l y paid on the savings account i s l e s s than 3$ per annum and the i n t e r e s t r a t e charged on the personal loan 1 4 J . G . O ' S u l l i v a n , "Personal Loan Companies", C r e d i t s  and Collections i n Canada 1953 ; The Ryerson Press, Toronto, P. 7 2 . 1^Bank Act. S.C., 1953/54, c. 48. 86 i s 6% p e r annum. The o v e r a l l c h a r g e g e n e r a l l y comes t o between 10 and 12 per c e n t p e r annum. The R o y a l Bank o f Canada d e s e r v e s m e n t i o n h e r e . As p e r i n q u i r i e s of t h e w r i t e r , t h i s i s t h e o n l y bank i n V a n c o u v e r w h i c h does n o t make any s e r v i c e c h a r g e s o v e r and above 6% i n t e r e s t r a t e on t h e a v e r a g e amount o f l o a n s o u t s t a n d i n g . I V . TERM OF LOANS The c r e d i t u n i o n s p r o f e s s e d l y g r a n t s h o r t t e r m l o a n s . T h e r e i s an i n c r e a s i n g t r e n d t o w a r d r e a l e s t a t e l o a n s w h i c h a r e n o r m a l l y l o n g t e r m . To m a i n t a i n l i q u i d i t y , t h e c r e d i t u n i o n s s h o u l d r e s t r i c t l o n g t e r m l o a n s . T a b l e X X V I shows t h e m a t u r i t y of l o a n s g r a n t e d d u r i n g t h e p e r i o d f r o m J u l y 1 5 t h t o September 1957 . Qk.k8% o f t h e t o t a l l o a n s w i l l be f u l l y p a i d w i t h i n two y e a r s and t h r e e m o n t h s . A l m o s t 33%> o f t h e s e l o a n s a r e r e a l e s t a t e l o a n s w h i c h a r e s u p p o s e d l y l o n g t e r m . T h i s shows t h a t t h e l o a n s a r e k e p t on a r e a s o n a b l y s h o r t t e r m b a s i s . H a v i n g s t u d i e d t h e f i n a n c i a l c o n d i t i o n of t h e c r e d i t u n i o n s , t h e n e x t s t e p w i l l be t o a p p r a i s e t h e a c c o u n t i n g methods and i n t e r n a l c o n t r o l w h i c h t h e y employ i n t h e i r o p e r a t i o n s . T h i s s u b j e c t s h a l l be c o n s i d e r e d i n C h a p t e r I V . TABLE XXVI 87 YEARS OF MATURITY OF THE FINAL PRINCIPAL REPAYMENTS IN RESPECT OF LOANS GRANTED DURING THE PERIOD FROM JULY 15, 1957 TO SEPTEMBER 30, 1957 Year Amount of Repayments Percentage Re-payments of the T o t a l Amount of Loans Granted Cumula-t i v e Percent-age 1957 $3,170,950 3 6 . 7 8 $ 3 6 . 7 8 $ 1958 2,635,635 30.58$ 67.36$ 1959 1,1+75,621 17 .12$ 84.1+8$ I 9 6 0 704,850 8 . 1 8 $ 9 2 . 6 6 $ 1961 275 ,786 3 . 2 0 $ 95 .86$ 1962 and a f t e r 2 0 3 , 6 1 2 2 . 3 7 $ ' 1 0 0 . 0 0 $ 8 , 6 1 9 , 9 0 2 1 0 0 . 0 0 $ 1 0 0 . 0 0 $ Source: B.C. C r e d i t Union League, Survey Report, June i960 (mimeographed), Vancouver, p. 46. CHAPTER IV ACCOUNTING SYSTEMS AND INTERNAL CONTROL Broadly speaking, the purposes of accounting and r e p o r t i n g i n any business e n t e r p r i s e are ( 1 ) to provide use-f u l f i n a n c i a l data f o r management purposes; ( 2 ) to p r o t e c t the assets and other resources of the e n t e r p r i s e , and (3r3 t o determine income of the e n t e r p r i s e f o r an accounting p e r i o d and f i n a n c i a l p o s i t i o n from time t o time. Accounting data to be u s e f u l must be r e l i a b l e , t i m e l y and w e l l organised and should cover the e n t i r e range of management d e c i s i o n . The assets and other resources t o be protected i n c l u d e a l l the p h y s i c a l and i n t a n g i b l e assets. Income from an account-i n g standpoint i s g e n e r a l l y conceived t o be the r e s i d u e which emerges out of the matching of expired c o s t s against revenue. Accounting does not match cash r e c e i p t s and disbursements but e f f o r t s and accomplishments, s e r v i c e s acquired and s e r v i c e s rendered and t h i s can only be done by'Accrual account-i n g . " There are v a r i o u s accounting concepts and conventions f o r income determination l i k e "costs a t t c h " , "matching costs and revenue", "income emerges", "conservatism", "accounting p e r i o d " , which are important but any d i s c u s s i o n of the t h e o r e t i c a l b a s i s f o r which i s beyond the scope of t h i s t h e s i s . An e f f e c t i v e system of i n t e r n a l c o n t r o l i s e s s e n t i a l f o r any business e n t e r p r i s e . Management of a c r e d i t union has the 89 r e s p o n s i b i l i t y to devise and i n s t a l a system of i n t e r n a l control to (1) safeguard the assets; ( 2 ) check the accuracy and r e l i a b i l i t y of accounting data; (3) promote operational e f f i c i e n c y and (*+) encourage compliance with the managerial p o l i c i e s . In order to achieve these objectives, the manage-ment has to provide an adequate organisational structure of a c r e d i t union; a system of authorization and recording; sound practices; and competent employees to carry out the duties assigned to them. A c r e d i t union should have a plan of i n t e r n a l control l a i d out i n writing. There should be a procedures manual outlining the accounting procedures i n operation. A properly prepared manual can be a h e l p f u l guide to new employees and further provides a standard with which currently used pro-cedures may be compared to detect departures which might lead to i r r e g u l a r i t i e s . Before proceeding with the discussion of the adequacy of accounting systems and system of i n t e r n a l control i n use i n c r e d i t unions i n B r i t i s h Columbia, i t w i l l be useful to describe the systems b r i e f l y . I. ACCOUNTING SYSTEMS For accounting systems i n use, the c r e d i t unions may be divided into two categories: f i r s t , those which have assets of less than f i v e hundred thousand d o l l a r s , and second, those with assets of over f i v e hundred thousand d o l l a r s . 90 The f i r s t category generally adopts the standard accounting system suggested by the B.C. Credit Union League. This i s a very simple system which can be understood by people with a l i t t l e accounting knowledge. As the operations increase i n size, this system becomes unsuitable, and more extensive bookkeeping methods have to be adopted. The division into categories i s quite loose. A credit union with over five hund-red thousand dollars i n assets may follow the standard system, or the one with less than that amount may have an extensive system. A. Standard System It i s a simple system mainly designed for one man operations. The following i s the review of transactions that generally flow through the books of a credit union. Cash Receipts come from deposits to current accounts against which withdrawals may be made, share capital, repay-ments of principal and interest on loans, interest on invest-ments, borrowings of a credit union from the B.C. Central Credit Union or banks, admission fees, and sale of investments. Cash disbursement in a credit union i s caused by withdrawals from deposit accounts, redemption of shares by members, pay-ments of loans, purchase of investments and payment of expenses. In small credit unions, a single copy of a deposit sli p i s generally prepared at the time a member makes a pay-ment. This s l i p shows separately the amounts paid on account of shares, deposits, personal loans, real estate loans, 91 endowment loans, i n t e r e s t and admission fees, At the end of every day, a l l the deposit s l i p s are i n d i v i d u a l l y entered i n a c o l l e c t i o n s sheet, cash i s debited and cr e d i t s are made to shares, deposits, personal loans, etc. fl. synoptic Journal with control columns f o r cash, B.C. Central Credit Union or bank, deposits, loans, shares, and income and expense items, i s used. Monthly t o t a l s from c o l l e c t i o n sheets are transmitt-ed to the synoptic. A general ledger control account i s maintained f o r every column of the synoptic. The d e t a i l s of deposits, shares, and loans of every member are kept i n the member's subsidiary ledger. Disbursements may be either by cash or by cheque. Normally i n small c r e d i t unions, payments f o r loans to members are made by cheque. Cash payments may be made i n case of withdrawal of shares or when the amount involved i n a transaction i s f a i r l y small. Expenses may be paid by cash or out of a bank account, whichever i s more convenient. A l l disbursements f o r expenses are to be supported by vouchers. The d a i l y disbursements are entered i n the Synoptic. B. Other Systems In large c r e d i t unions the operation i s e s s e n t i a l l y the same, but the accounting becomes more detailed. Some cr e d i t unions, instead of entering the deposit s l i p s i n the c o l l e c t i o n sheets, run a tape of d a i l y deposits and enter the t o t a l d i r e c t l y i n the synoptic. There are others which even 92 skip the synoptic and post the t o t a l d a i l y receipts straight i n the general ledger. Some large c r e d i t unions maintain a disbursement Journal. Instead of entering d a i l y disbursements i n the synoptic, they are journalised and monthly t o t a l s entered i n the general ledger. Sometimes separate member's subsidiary ledger cards are maintained f o r loans, shares and deposits. A variety of accounting machines i s i n use i n large c r e d i t unions and consequently the systems are modified to adapt to the machines. For example i n c r e d i t unions where accounting machines designed to do posting operations i n presence of the member are used, deposit s l i p s or withdrawal s l i p s are not prepared. At the time a member makes a deposit, entries are made by the machine i n the member's passbook, subsidiary ledger card and d a i l y control sheet. The entry i n the passbook acts as the member's receipt f o r the payment he makes. Instead of preparing c o l l e c t i o n sheets and synoptic Journal, a Cash Receipts Journal i s prepared which gives the disposal of the d a i l y transactions. Postings are made from t h i s Journal to the general ledger. I I . ADEQUACY OF ACCOUNTING SYSTEM, REPORTING, AND SYSTEM OF INTERNAL CONTROL Since an accounting system and system of i n t e r n a l control are so c l o s e l y i n t e r r e l a t e d , a separate discussion of each i s not considered p r a c t i c a l l y f e a s i b l e . However, c e r t a i n phases of the system of i n t e r n a l control w i l l be discussed 93 s e p a r a t e l y at a l a t e r stage of the d i s c u s s i o n . !kn approach to the problem of systems has been made from the standpoint of three major management o b j e c t i v e s , i . e . , p r o v i d i n g s u i t a b l e data f o r managerial decision-making, p r o t e c t i o n of assets and income determination. The w r i t e r , i n order t o study the systems i n use, v i s i t e d twelve c r e d i t unions, which comprised r e l a t i v e l y s m a ll s i z e operations t o some of the l a r g e s t i n the Province. A. Information f o r Managerial Decision-Making One of the important tasks of the management of a c r e d i t union i s the p e r i o d i c review and a p p r a i s a l of the r e s u l t s accomplished i n i t s business operation. For t h i s purpose, a balance sheet, an income statement, a r e p o r t on progress of repayments on loans, an operating budget, and, i f p o s s i b l e , a statement of source and a p p l i c a t i o n of funds employed, are r e q u i r e d . The i n f o r m a t i o n i n the statements should be e f f e c t i v e l y condensed and pro p e r l y arranged. The layout of the balance sheet and p r o f i t and l o s s statement g e n e r a l l y prepared by the c r e d i t unions, i s not s a t i s f a c t o r y . The e q u i t y s e c t i o n of the balance sheet i s not d i v i d e d i n t o l i a b i l i t i e s and memberrs equity sub s e c t i o n s . This i n p a r t i c u l a r c reates confusion regarding the nature of the "reserves" which may be e i t h e r l i a b i l i t y or c a p i t a l r e s e r v e s . I t i s suggested t h a t e q u i t y s e c t i o n should be c l a s s i f i e d i n t o l i a b i l i t i e s and member's equity . L i a b i l i t i e s must be f u r t h e r d i v i d e d i n t o current l i a b i l i t i e s and long-term 94 l i a b i l i t i e s . I n the member's eq u i t y sub-section, r e s e r v e s , member's share c a p i t a l and r e t a i n e d earnings should be l i s t e d s e p a r a t e l y . The present c l a s s i f i c a t i o n of the asset side of the balance sheet does not e x p l a i n adequately the nature of the a s s e t s . I t i s suggested t h a t assets should be c l a s s i f i e d i n t o c u r r e n t a s s e t s , long-term investments, f i x e d a s s e t s , d e f e r r e d charges and 'other a s s e t s . ' The income statement g e n e r a l l y prepared by the c r e d i t unions l i s t s expenses and revenue, and the d i f f e r e n c e i s taken t o be the net income. Such a statement does not d i s c l o s e the extent of margin f o r v a r i o u s c l a s s e s of expenses and claims which can be very u s e f u l f o r managerial purposes. The f o l l o w i n g layout of the income statement i s suggested. Income Statement f o r the Year ended December 31 , 19 Income Loan I n t e r e s t Bond I n t e r e s t B.C. C e n t r a l I n t e r e s t Endowment Income Chequing S e r v i c e Income Operating Expenses I n t e r e s t on member's depos i t accounts I n t e r e s t on borrowings Bond Premium w r i t t e n o f f 95 B.C. C e n t r a l or Bank Se r v i c e Charges Gross Operating Income A d m i n i s t r a t i v e and General Expenses S a l a r i e s Rent, L i g h t , Heat O f f i c e S u p p l i e s Insurance League Dues De p r e c i a t i o n Expense General Expense Income on operations Other income Cuna Mutual Dividends Entrance fees Net Income _ = =_ =_ s : s_ =. I t may he remarked t h a t t h i s i s not an a l l i n c l u s i v e income statement. More items can be added depending on the requirements of a c r e d i t union. The e x i s t i n g methods of r e p o r t i n g i n the c r e d i t unions i n B r i t i s h Columbia do not provide the management w i t h any i n f o r m a t i o n regarding c l o s i n g of accounts or opening of new accounts. I t i s suggested t h a t a monthly l i s t be prepared of new accounts and of members who c l o s e d t h e i r accounts. Copies of t h i s l i s t should be submitted t o the board of d i r e c t o r s and the Supervisory Committee. This l i s t w i l l i n d i c a t e the e f f e c t i v e n e s s of e f f o r t s t o encourage p o t e n t i a l members to j o i n the c r e d i t union. I t w i l l a l s o d i s c l o s e whether a s p e c i a l i n v e s t i g a t i o n should be made as to the reasons why members are c l o s i n g t h e i r accounts. 96 Another r e p o r t t h a t can be u s e f u l f o r managerial purposes, i s a condensed statement on the progress of repay-ments on loans. In the present system, management of a c r e d i t union has to look up members' s u b s i d i a r y ledger cards to examine the repayments and follow-up on loans outstanding. I t i s suggested t h a t small c r e d i t unions should use a loan r e g i s t e r w i t h columns f o r name of the borrower, kind of s e c u r i t y taken, amount of l o a n , r a t e of i n t e r e s t , a l l dates of repayment according to the agreement, and f o r remarks. There should be two sub columns under each column f o r date of repayment, one f o r p r i n c i p a l and the other f o r i n t e r e s t . This r e g i s t e r w i l l not only be u s e f u l to the board of d i r e c t o r s and the supervisory committee but a l s o to the t r e a s u r e r who w i l l get t i m e l y i n f o r m a t i o n f o r f o l l o w - u p of overdue i n s t a l -ments. This r e g i s t e r i s i n f a c t a summary of the loan s e c t i o n of the members' s u b s i d i a r y ledger. At the end of the month, the t o t a l of loans r e c e i v a b l e according to the r e g i s t e r should be compared w i t h the general ledger c o n t r o l account.v..The loan r e g i s t e r may not, however, be adequate f o r l a r g e c r e d i t unions and f o r them some other r e p o r t i n g system can be devised. Very few c r e d i t unions i n B r i t i s h Columbia prepare an operating budget f o r the next year. E q u a l l y important w i t h the review of the current and the past r e s u l t s of operations i s an estimate f o r the r e s u l t s f o r f u t u r e operations. Only by budgeting the income and expenditures, can the board of d i r e c t o r s a r r i v e at a sound b u s i n e s s l i k e b a s i s f o r d i r e c t i o n 97 and c o n t r o l . The budget can e a s i l y be drawn from the past one or two years experience of the c r e d i t union. A f t e r the end of the budget year, the a c t u a l data should be compared w i t h budget and variances analysed. I t i s suggested t h a t an operating budget should be drawn up by every c r e d i t union. Apart from the operating budget, a fl o w of cash budget should be prepared i n the beginning of the year. The f e a s i b i l i t y of such a budget has already been discussed i n Chapter I I . At the end of the f i n a n c i a l year, i f p o s s i b l e , a source and a p p l i c a t i o n of funds statement may be prepared. This can prove u s e f u l t o the management f o r analysing the causes of the changes i n the working c a p i t a l during the year. Such a statement w i l l only be f e a s i b l e i n l a r g e c r e d i t unions. B. P r o t e c t i o n of Assets A v a r i e t y of p r o t e c t i v e devices are i n use i n c r e d i t unions. These i n c l u d e locked cash drawers, s a f e s , v a u l t s and the s e r v i c e s of banks, among others. Such devices provide p r o t e c t i o n against a c c i d e n t a l hazards and unauthorized t r a n s -a c t i o n s . The assets g e n e r a l l y protected through these devices are investment s e c u r i t i e s , borrower's s e c u r i t i e s and other valuable records. Another p r o t e c t i v e device used by some c r e d i t unions i s insurance against p h y s i c a l dangers to the va l u a b l e a s s e t s . According t o Rule h6, the t r e a s u r e r i s r e s p o n s i b l e f o r the safe custody of s e c u r i t i e s and other valuables."'" For J-Credit Unions Act. R.S. 19*+8, c. 8 2 , C o n s t i t u t i o n and Rules, R. k6. 98 b e t t e r i n t e r n a l c o n t r o l , i t i s suggested t h a t the l a r g e c r e d i t unions should make two o f f i c i a l s r e s p o n s i b l e f o r the custody of s e c u r i t i e s . A l l employees of the c r e d i t unions handling cash and s e c u r i t i e s are p r o p e r l y bonded. C. Determination of Income The management must review the p r o f i t a b i l i t y of the c r e d i t union operation. For t h i s purpose, an accurate and properly drawn up income statement i s e s s e n t i a l . The c o r r e c t determination of income of c r e d i t unions i n B r i t i s h Columbia i s not p o s s i b l e , because the main item of income, v i z . , i n t e r e s t , i s normally not accrued. Only twenty-one c r e d i t unions out of some three hundred and twenty-six accrue i n t e r e s t i n t h e i r books; here each month i n t e r e s t income i s c r e d i t e d w i t h the amount earned even though i t has not been r e c e i v e d — the charge i s t o accrued i n t e r e s t r e c e i v a b l e and when the i n t e r e s t i s f i n a l l y r e c e i v e d , the c r e d i t i s made to accrued i n t e r e s t r e c e i v a b l e account....The l a r g e m a j o r i t y do not accrue i n t e r e s t but c r e d i t income only as loan repayments are received.2 One of the c a r d i n a l p r i n c i p l e s of accounting i s matching cos t s against r e l a t e d revenues; a c c r u a l and deferment are c l o s e l y r e l a t e d phases of the process of matching. I t i s e s s e n t i a l f o r the c o r r e c t statement of income that income accrued but as yet u n c o l l e c t e d should be recognised. I f accrued income i s ignored, s e r v i c e s rendered by the c r e d i t union w i l l be i n c o r r e c t l y expressed. Since a c r e d i t union under Rule h6 has to prepare ^B.C. C r e d i t Union League, Survey Report. June i 9 6 0 , (mimeographed), Vancouver, p. 53* 99 a monthly statement showing the c o n d i t i o n of the c r e d i t union as at the c l o s e of the month, i t i s e s s e n t i a l t h a t i n t e r e s t income be accrued every month. C e r t a i n c r e d i t union o f f i c i a l s object to accruing i n t e r e s t income on the grounds t h a t there i s a p o s s i b i l i t y of an u n j u s t i f i a b l y high d e c l a r a t i o n of dividends because of the i n c l u s i o n i n the f i g u r e of net annual earnings, an amount of accrued i n t e r e s t . This may be t r u e i n c e r t a i n cases, but i t i s not a v a l i d reason f o r mis-statement of income. I t i s the duty of the B.C. C r e d i t Union League to educate the c r e d i t unions to appreciate and under-stand t h e i r f i n a n c i a l c o n d i t i o n and avoid an u n j u s t i f i e d d e c l a r a t i o n of dividends. There i s another aspect of c r e d i t union income de t e r -mination t h a t needs c o n s i d e r a t i o n . Bad debt expense which i s a v a l i d operating expense i s not taken i n t o account w h i l e determining the income. Any comparison of income between one c r e d i t union and another and between a c r e d i t union and some other lending i n s t i t u t i o n i s impossible because of t h i s omission. The r e s p o n s i b i l i t y f o r the omission can l a r g e l y be a t t r i b u t e d t o the B.C. C r e d i t Unions Act~ J which r e q u i r e s 20 per cent of the annual earnings t o be set aside i n reserve fund to take care of the l o s s e s on bad loans and investments. This precludes the n e c e s s i t y of estimating l o s s e s on bad loans and consequently charging bad debt expense against the income. The f e a s i b i l i t y of a supplementary income statement which ^ C r e d i t Unions Act. R.S. 19^8, c. 8 2 , s. 3*+. 100 would take bad debt expense i n t o account, i s debatable. Probably some l a r g e c r e d i t unions can a f f o r d to prepare such a statement. I I I . FURTHER EVALUATION OF INTERNAL CONTROL In t h i s s e c t i o n , the e f f e c t i v e n e s s of i n t e r n a l c o n t r o l w i l l be studi e d i n respect of cash r e c e i p t s , cash d i s b u r s e -ments, c o n f i r m a t i o n of loans r e c e i v a b l e , c o n t r o l of delinquent l o a n s , and the record procedures. 1. Cash r e c e i p t s and cash on hand Rule 27 provides t h a t A l l payments made by or to a member s h a l l be evidenced by a passbook, which s h a l l c o n t a i n separate columns f o r recording payments made by or to the member. Every entry i n the passbook s h a l l be i n i t i a l l e d by the t r e a s u r e r or other o f f i c e r r e c e i v i n g or paying out the money, and no money s h a l l be r e c e i v e d from, or paid t o , a member unless the passbook i s presented and proper entry made t h e r e i n . ^ This r u l e has been con s i d e r a b l y contravened by the c r e d i t unions. Admittedly, i t i s a hard p r o v i s i o n to observe, but on the other hand i t has many a d v a n t a g e s — i t a c t s as a r e c e i p t f o r payments and withdrawals, and i s evidence of the balance outstanding. F u r t h e r , i t i s a sound p r a c t i c e , en-suring the i n t e g r i t y i n reco r d i n g the t r a n s a c t i o n i n c r e d i t union books. G e n e r a l l y , i n the absence of the passbook, ^ C r e d i t Unions Act. R.S. 1 9 4 8 , c. 8 2 , C o n s t i t u t i o n and Rules, Rule 27. 101 c r e d i t unions prepare deposit s l i p s i n d u p l i c a t e , and a copy-i s given t o the member as a r e c e i p t . In some small c r e d i t unions, i t has been found t h a t i r r e s p e c t i v e of the p r e s e n t a t i o n of the passbook by the member, a s i n g l e copy of the deposit s l i p i s prepared which i s kept by the c r e d i t union i t s e l f . The member has no proof of having made the payment. C e r t a i n t r e a s u r e r s of small c r e d i t unions sometimes r e c e i v e payments from members outside the o f f i c e without i s s u i n g any r e c e i p t . J This i s a very dangerous p r a c t i c e . The t r e a s u r e r may f o r g e t to record proper e n t r i e s i n the books, or even i f he does not f o r g e t , the money i n h i s pocket provides an e x t r a inducement f o r dishonest p r a c t i c e s . Deposit s l i p s should be prenumbered and prepared i n d u p l i c a t e at a l l times i r r e s p e c t i v e of pr e s e n t a t i o n of passbook. The t e l l e r should be made r e s p o n s i b l e to account f o r a l l the s l i p s . I n cases of c r e d i t unions w i t h more than one t e l l e r , the deposit s l i p s w i t h d i f f e r e n t number s e r i e s may be used. Such a system w i l l ensure against d e s t r u c t i o n of d e p o s i t s l i p s and manipulation of cash. P o s t i n g s to the synoptic of c o l l e c t i o n sheet t o t a l s and of other t r a n s a c t i o n s should be c a r r i e d out r e g u l a r l y . I n c e r t a i n s m all c r e d i t unions posting i s behind as f a r as two months. Posting t o members' s u b s i d i a r y ledger f o r deposits ^Mr. J.F. Q u a i l , F i e l d R epresentative, B.C. C r e d i t Union League, Personal i n t e r v i e w September 15, i960. 102 and withdrawals i s a l s o delayed i n c e r t a i n cases. Because of the nature of operation of c r e d i t unions, the accounting work must be up-to-date at a l l times. Any delay i n posting i n d eposit and share accounts may r e s u l t i n a l l o w i n g withdraw-a l s i n excess of c r e d i t i n the account and l e a d to o v e r d r a f t s . A l l the l a r g e c r e d i t unions v i s i t e d by the w r i t e r were q u i t e up-to-date i n postings. A case came to the n o t i c e of the w r i t e r where cash had not been r e c o n c i l e d f o r an unreasonably long pe r i o d of time and members' s u b s i d i a r y ledger was out of balance w i t h the c o n t r o l account. This i s a s e r i o u s i r r e g u l a r i t y . Cash should be r e c o n c i l e d d a i l y . In small c r e d i t unions where the number of t r a n s a c t i o n s i n a day i s q u i t e s m a l l , r e c o n c i l i a -t i o n may be c a r r i e d out once a week. Wherever p o s s i b l e , r e c o n c i l i a t i o n should be c a r r i e d out by a person other than the t e l l e r who r e c e i v e d cash. C r e d i t unions are r e q u i r e d by law to prepare a bank r e c o n c i l i a t i o n at l e a s t q u a r t e r l y . Some la r g e c r e d i t unions f i n d i t a cumbersome p r o v i s i o n because r e c o n c i l i a t i o n of m i l l i o n s of d o l l a r s r e q u i r e s great amount of e f f o r t and expense. They are of the opinion t h a t the Inspector of C r e d i t Unions may be empowered to decide the requirement of bank r e c o n c i l i a t i o n on the performance of a c r e d i t union. This does not seem to be a sound suggestion. A q u a r t e r l y f i n a n c i a l statement has t o be submitted by every c r e d i t union to the Inspector of C r e d i t Unions. I f a bank r e c o n c i l i a t i o n i s not 103 c a r r i e d out, there i s a l i k e l i h o o d of mis-statement of balance sheet accounts. Going a l i t t l e f u r t h e r , a bank r e c o n c i l i a t i o n should be c a r r i e d out monthly f o r c o r r e c t p r e s e n t a t i o n of the c o n d i t i o n of the c r e d i t union i n the month end statement r e q u i r e d under Rule k6.^ I f a f r o n t o f f i c e bookkeeping machine i s used, i t must be ensured that access to the machine proof sheet i s l i m i t e d t o the t r e a s u r e r , o f f i c e manager or supervisory committee who do no c a s h i e r i n g . The t e l l e r s should not be allowed to balance share and loan accounts w i t h general ledger c o n t r o l s and they should not have access to the cash records. F u r t h e r , the t e l l e r s should not be allowed to prepare d e p o s i t s to banks or to r e c e i v e bank statements. The t e l l e r s , i f assigned t o s p e c i f i c blocks of accounts, must be r o t a t e d from time t o time. 2. Disbursements Rule hh r e q u i r e s the President t o s i g n a l l cheques, notes, d r a f t s and other negotiable instruments on behalf of the c r e d i t union. According to Rule *+6, the t r e a s u r e r s h a l l 7 c o u n t e r s i g n a l l these documents.' In p r a c t i c e , i t i s found t h a t the cheques are sometimes signed i n blank by the P r e s i d e n t . Though t h i s p r a c t i c e i s against the law and con-t r a r y to the recognised p r i n c i p l e of i n t e r n a l c o n t r o l that r e q u i r e s a system of a u t h o r i s a t i o n adequate to provide reason-able accounting over a s s e t s , l i a b i l i t i e s , revenues and " C r e d i t Unions Act. R.S. 19*+8, c. 8 2 , C o n s t i t u t i o n and R u l e s , Rule *+6. 7lbid. , Rules ¥+ and k6. 104 expenses, i t should be admitted t h a t i t i s r a t h e r onerous f o r the President who r e c e i v e s no remuneration, to come down to the c r e d i t union o f f i c e every day to s i g n the cheques. The Survey Report, reviewing t h i s question s t a t e d : However, the reason f o r t h i s i s a most dangerous p r a c t i c e — 6 7 . 2 $ answered q>. 140 i n the a f f i r m a t i v e , i . e . , the Pre s i d e n t or V i c e - P r e s i d e n t signs blank cheques, etc.° Going f u r t h e r , the Survey Report made c e r t a i n recommendations to modify t h i s p r o v i s i o n : We suggest t h a t c r e d i t unions having a f u l l time t r e a s u r e r and one other employee should be f r e e to name any two o f f i c e r s and/or employees or a l t e r n a t e s who may s i g n cheques, notes, e t c . , provided t h i s p r o v i s i o n i s contained i n the r u l e s of such c r e d i t union. Rule 44 would t h e r e f o r e be pr e s c r i b e d f o r a l i m i t e d group of c r e d i t unions of smaller s i z e . 9 I t may be remarked here that the C o n s t i t u t i o n and Rules given under the C r e d i t Unions Act can be amended by a c r e d i t union w i t h the approval of the Inspector. I t i s f a i r l y common among l a r g e c r e d i t unions f o r cheques t h a t have been signed by the t r e a s u r e r t o be handed to an a s s i s t a n t i n the o f f i c e f o r m a i l i n g . This i s a weakness i n i n t e r n a l c o n t r o l ; the cheques should be mailed by the tr e a s u r e r h i m s e l f . I t has been observed t h a t some c r e d i t unions do not prenumber the cheques. The sound p r a c t i c e s of i n t e r n a l c o n t r o l r e q u i r e the cheques t o be prenumbered and a l l numbers accounted o B.C. C r e d i t Union League, Survey Report June I960, (mimeographed), Vancouver, p. 114. ^Loc. c i t . 105 f o r . M l s p o i l e d or voided cheques should be r e t a i n e d f o r a u d i t purposes. C e r t a i n cases have been n o t i c e d where paid i n v o i c e s are not c a n c e l l e d and sometimes double payments are made."^ The i n v o i c e s and b i l l s f o r c r e d i t union expenses should be marked " P a i d " w i t h the date of payment i n i n k or by stamp, to prevent t h e i r being used more than once to support a d i s b u r s e -ment. 3. Confirmation of Loans Receivable Under the Rules, the supervisory committee must cause a l l the members1 account balances to be confirmed at l e a s t once a year."''"'' / i l l b e n e f i t of co n f i r m a t i o n procedure i s l o s t i f the supervisory committee l o s e s c o n t r o l over the con f i r m a t i o n s . The B.C. C r e d i t Union Survey Report i n d i c a t e s t h a t i n about f o r t y per cent of cases the supervisory committees los e a l l c o n t r o l over the confirmations and the l e t t e r s are mailed by the t r e a s u r e r s . About t h i r t y per cent of the c r e d i t unions request the members t o re p o r t d i f f e r e n c e s 12 d i r e c t l y t o the t r e a s u r e r or to the c r e d i t union. The supervisory committee must compare the amounts i n c o n f i r m a t i o n l e t t e r s w i t h members' ledger accounts and the l e t t e r s should be kept i n i t s custody u n t i l they are mailed. The addresses 1 0 M r . J.F. Q u a i l , F i e l d Representative, B.C. C r e d i t Union League, Personal i n t e r v i e w Spetember 15, I960. IJ-Credit Unions Act. R.S. 191+8, c. 82, C o n s t i t u t i o n and Rules, R. 61. 1 2B.C. C r e d i t Union League, Survey Report. June I960, (mimeographed), Vancouver, pp. 23-21+. 106 on the envelopes should be checked w i t h those given i n membership a p p l i c a t i o n s . The r e p l i e s t o the confirmations must be addressed to the supervisory committee at some p r i v a t e address. The t r e a s u r e r or h i s s t a f f should i n no case have any access to the confirmations or have any part i n s e l e c t i o n of accounts f o r c o n f i r m a t i o n or the m a i l i n g of c o n f i r m a t i o n or handling of r e t u r n s from members. The c o n f i r m a t i o n may be c a r r i e d out at one time or i n batches so that by the end of the year, a l l accounts have been confirmed at l e a s t once. 4. C o n t r o l of delinquency, charge-off of loans Almost a l l c r e d i t unions present monthly r e p o r t s on delinquent loans t o the boards of d i r e c t o r s . The boards g e n e r a l l y i s s u e d i r e c t i o n s t o the t r e a s u r e r regarding the follow-up of these loans. In some c r e d i t unions, the boards r e f e r delinquencies t o Delinquent Loan Committees f o r f u r t h e r a c t i o n . ^ 3 In cases where repayments on a l o a n are excused or the terms of the o r i g i n a l agreement are modified, a memorandum o u t l i n i n g the new terms should be prepared. This i s done by a l a r g e m a j o r i t y of the c r e d i t unions but there are some which Tlx f a i l t o make any r e c o r d of the amended agreement. This i s a s e r i o u s omission and proper records should be maintained. A l l charge-off of loans should be decided by the board of d i r e c t o r s and the d e c i s i o n s recorded i n the Minutes s p e c i f y i n g each case i n d i v i d u a l l y . The mechanics of c o n t r o l l i n g accounts i n a r r e a r s or delinquency d i f f e r from one c r e d i t union 1 3 S u r v e y Report, op. c i t . , pp. 4 and 9 . l L | " I b i d . , p. 14. 107 to another, and i n c l u d e such systems as: (a) the a f f i x i n g of tags or " f l a g s " t o the ledger card w i t h d i f f e r e n t c o l o u r s denoting the degree of delinquency or a c t i o n taken; (b) f u l l segregation i n t o boxes a p p r o p r i a t e l y marked, of a l l cards i n a r r e a r s , w i t h s e c t i o n s (or degree, or a c t i o n taken); (c) the use of a combination desk calendar pad marked w i t h the numbers of the payments due on each p a r t i c u l a r day w i t h spaces f o r t i c k i n g when payment r e c e i v e d ; (d) l e t t e r s from the t r e a s u r e r s , supervisory committees, delinquency committees and/or boards of d i r e c t o r s t o the members at v a r i o u s stages of ar r e a r s or delinquency; (e) a 'personal approach' system to be combined w i t h , or f o l l o w - a f t e r the 'wait' system. This could a l s o i n c l u d e telephone c o n t a c t s ; ( f ) i n a very few cases, d i f f e r e n t coloured cards are used to denote extremely delinquent accounts, but t h i s system i s n e i t h e r e f f e c t i v e nor e f f i c i e n t . 5. Record Procedures The c l a s s i f i c a t i o n of data w i t h i n the s t r u c t u r e of accounts has not been p r o p e r l y done i n c e r t a i n c r e d i t unions. For example, o f f i c e s u p p l i e s and o f f i c e equipment are put together i n one account. The accounts should be l a i d out i n such a way t h a t the assets and l i a b i l i t i e s and the revenues, costs and expenses are s u f f i c i e n t l y broken down to be u s e f u l to the management i n i t s c o n t r o l of operations. 108 I t was observed i n one c r e d i t union t h a t "convention expense" which i s an expense item was set up as an asset i n the accounts. I t i s suggested t h a t B.C. C r e d i t Union League should prepare a standard c h a r t of accounts which i s provided t o a l l the c r e d i t unions. This chart should meet the f o l l o w i n g requirements: (a) S t a t e c l e a r l y and a c c u r a t e l y what should be contained i n each account; (b) Demarcate c l e a r l y the boundary l i n e s between c a p i t a l a s s e t s , and expense items; (c) Give c l e a r account t i t l e s and an adequate numbering of accounts; (d) Provide c o n t r o l accounts where necessary; (e) F a c i l i t a t e economical p r e p a r a t i o n of r e p o r t s and f i n a n c i a l statements. 6. Miscellaneous Some c r e d i t unions do not adopt any r e g u l a r system of am o r t i z a t i o n of assets. Overstatement of assets has been observed i n some c r e d i t unions which do not depreciate equipment, f u r n i s h i n g s and f a i l t o amortize prepaid expenses. Due to t h i s i r r e g u l a r i t y there cannot be proper matching of costs against revenues and consequently income i s overstated. C e r t a i n cases have been observed by the w r i t e r where e n t r i e s i n the ledgers are made i n p e n c i l and an unreasonable number of c o r r e c t i o n s are made which completely o b l i t e r a t e the 109 f i g u r e s . A l l records of c r e d i t unions should be maintained i n i n k or typed by accounting machines. C o r r e c t i o n s should be made i n such a manner t h a t the change can l a t e r be v e r i f i e d . Most of the i r r e g u l a r i t i e s committed i n the c r e d i t unions can be avoided i f the supervisory committee performs i t s d u t i e s up t o the standards set under the B.C. C r e d i t  Unions Act. IV. RESPONSIBILITIES OF A SUPERVISORY COMMITTEE The supervisory committee must, i t s e l f , make or without d e t r a c t i n g from i t s own r e s p o n s i b i l i t i e s , cause i t t o be made by a chartered accountant or other person approved by the I n s p e c t o r , at l e a s t an annual au d i t of the accounts of c r e d i t union. I t s h a l l make a r e p o r t to the members on the c o n d i t i o n of the c r e d i t union found as a r e s u l t of t h i s a u d i t , and on every balance sheet l a i d before the c r e d i t union i n general meeting during the tenure of o f f i c e . The r e p o r t must states (a) whether or not the committee has obtained a l l the informa-t i o n and explanations i t has r e q u i r e d ; and (b) whether i n i t s o p i n i o n , the balance sheet r e f e r r e d to i n the r e p o r t i s properly drawn up so as t o e x h i b i t a t r u e and c o r r e c t view of the s t a t e of the c r e d i t union's a f f a i r s according to the best of i t s i n f o r m a t i o n and the e x p l a n a t i o n given to i t , and as shown by the books 15 of the c r e d i t union. y ^ C r e d i t Unions A c t . R.S. 19*+8, c. 8 2 , s. 29. 110 H a l l and Loffmark, viewing the nature of the audi t r e q u i r e d , s t a t e : I t would appear t h a t by s e c t i o n 29 of the C r e d i t  Unions Act there i s imposed on the supervisory committee a duty t o perform an a u d i t s i m i l a r i n scope t o tha t mentioned i n s e c t i o n 152 of the Companies Act ( B r i t i s h Columbia). An a u d i t of the balance sheet and the accounts of a c r e d i t union may be defined as an examination of the records of the c r e d i t union s u f f i c i e n t l y comprehensive as to j u s t i f y the expression of an opinion by the super-v i s o r y committee and the making of a r e p o r t by them t o the members on the accounts examined by them and on the balance sheet. I t should be emphasized that the opinion upon the accounts and a balance sheet i s given only a f t e r an examination of such a nature and scope as w i l l j u s t i f y the expression of such an opinion.16 I t should be pointed out tha t an aud i t by a chartered account-ant or other person approved by the Inspector of C r e d i t Unions does not i n any way l e s s e n the r e s p o n s i b i l i t i e s of the supervisory committee. Apart from the annual a u d i t , s e c t i o n 29(2) and Rule 58 r e q u i r e the supervisory committee t o make an examination of the a f f a i r s of the c r e d i t union and audit i t s accounts at l e a s t q u a r t e r l y . I t i s a l s o r e q u i r e d t o submit a w r i t t e n r e p o r t i n d u p l i c a t e w i t h i n t h i r t y days of t h i s examination to the Inspector. A copy of the case r e c o n c i l i a t i o n r e p o r t has 17 a l s o t o be submitted along w i t h t h i s r e p o r t . H a l l and Loffmark, B r i t i s h Columbia Corporation Manual, Richard De Boo L i m i t e d , 137 W e l l i n g t o n S t . West, Toronto, Canada, 1957, p. 1014. ^ C r e d i t Unions A c t . R.S. 1948, c. 82, s. 29(2), and C o n s t i t u t i o n and Rules, Rule 58. A b r i e f d i s c u s s i o n of a few recent cases of misappro-p r i a t i o n of funds, w i l l b r i n g f o r t h the importance of the supervisory committee and the consequences t h a t can ensue i f i t n e g l e c t s i t s d u t i e s . V. RECENT CASES OF MISAPPROPRIATION OF FUNDS IN CREDIT UNIONS A l l reported cases of m i s a p p r o p r i a t i o n occurred i n l a r g e c r e d i t unions. I t i s q u i t e i n t e r e s t i n g to note t h a t i n s p i t e of untrained management and loose c o n t r o l s i n c e r t a i n s m a ll c r e d i t unions, there has been p r a c t i c a l l y no case of m i s a p p r o p r i a t i o n of funds i n the h i s t o r y of small c r e d i t 1 8 unions of t h i s Province. Lapping has been reported as the method of misappro-p r i a t i o n i n one case. The cheques f o r p a y r o l l deductions were r e c e i v e d every month. The t r e a s u r e r had a cheque cashed and pocketed the money. He d i d not enter the cash r e c e i p t i n the books. The cheque f o r the subsequent month was adjusted towards the payment f o r the previous month and t h i s p r a c t i c e was c a r r i e d on f o r more than a year. The supervisory committee c o u l d have discovered the lapping had i t confirmed the memberrs account balances. In another case, where a s u b s t a n t i a l sum of money was i n v o l v e d , the t r e a s u r e r s t a r t e d t a k i n g money out of the t i l l and stopped l8Mr. J.F. Q u a i l , F i e l d Representative, B.C. C r e d i t Union League, Personal i n t e r v i e w , September 1 5 , i 9 6 0 . 112 making a d a i l y cash r e c o n c i l i a t i o n . Going f u r t h e r , he s t a r t e d f o r g i n g the signatures of the members on the withdrawal s l i p s , and iss u e d cheques i n members1 names and then cashed them w i t h i n the c r e d i t union o f f i c e a f t e r making forged endorsements. This was a case of gross d i s r e g a r d of i n t e r n a l c o n t r o l p r i n c i p l e s and sloppiness on the part of the supervisory committee. This c r e d i t union was a two-man opera-t i o n . Presumably the complete handling of cash t r a n s a c t i o n was done by the t r e a s u r e r h i m s e l f ; otherwise the removal of cash would have been detected by one of the other employees. In order t o conceal the m i s a p p r o p r i a t i o n , the t r e a s u r e r made c e r t a i n adjustments, and r a i s e d the balance i n the suspense account to more than $10,000. The supervisory committee d i d not i n v e s t i g a t e the causes f o r such a l a r g e balance, and f u r t h e r , ignored the f a i l u r e t o r e c o n c i l e the cash d a i l y . In another case of m i s a p p r o p r i a t i o n , the t e l l e r would destroy the d e p o s i t s l i p s and pocket the money. She, however, made c o r r e c t e n t r i e s i n the members' s u b s i d i a r y ledger. The general ledger c o n t r o l account was out of balance w i t h the t o t a l of the s u b s i d i a r y accounts. I t was a long time before t h i s discrepancy was detected, the reason being t h a t the supervisory committee d i d not r e g u l a r l y compare the balance i n the c o n t r o l account w i t h the t o t a l of the s u b s i d i a r y ledger. In t h i s case a l s o the balance i n the suspense account was enormous, but the supervisory committee f a i l e d to i n v e s t i g a t e i t s causes. 113 The "League" should i n i t i a t e an education programme which makes the supervisory committee r e a l i s e i t s s t a t u t o r y o b l i g a t i o n s . I t i s suggested t h a t the "League" should r e q u i r e each supervisory committee to submit a r e p o r t at the time of each i n s p e c t i o n or a u d i t , s t a t i n g v a r i o u s t e s t s and procedures c a r r i e d out and the r e s u l t s obtained. P r e f e r a b l y a p r i n t e d proforma check l i s t o u t l i n i n g the procedures might be s u p p l i e d t o the c r e d i t unions. B a s i c accounting knowledge i s e s s e n t i a l f o r the t r e a s u r e r s to perform t h e i r d u t i e s p r o p e r l y and e f f i c i e n t l y ^ I t i s t h e r e f o r e suggested t h a t a l l u n q u a l i f i e d t r e a s u r e r s be r e q u i r e d by law t o take at l e a s t one basic course i n accounting. For new t r e a s u r e r s , t h i s course should be a p r e r e q u i s i t e f o r hold i n g the post as such. With t h i s e v a l u a t i o n of c r e d i t union systems and i n t e r n a l c o n t r o l s , we come to the conclusions which w i l l be considered i n the f o l l o w i n g chapter. CHAPTER V CONCLUSIONS One hundred and n i n e t y - f o u r thousand wage earners i n the Province of B r i t i s h Columbia have i n v e s t e d more than seventy-eight m i l l i o n d o l l a r s i n c r e d i t union shares. These people have s u c c e s s f u l l y ventured to solve the i n t r i c a t e problems of consumer c r e d i t i n a cooperative way. Not only were t h e i r c r e d i t problems solved, but they learned how t o stand on t h e i r own f e e t i n a true democratic set up. In rendering cooperative s e r v i c e to t h e i r membership, the c r e d i t unions have proved the saying of D e s j a r d i n s , "The people's welfa r e can best be secured by i n s t i t u t i o n s organized by the people themselves."' 1' The spectacular growth trends as depicted by t a b l e s i n Chapter I and p r o j e c t i o n charts i n Chapter I I might give an impression that c r e d i t unions i n a couple of decades w i l l d i s p l a c e some of the competitive l e n d i n g i n s t i t u t i o n s , An o v e r - e n t h u s i a s t i c c r e d i t union man might make a statement to the e f f e c t t h a t c r e d i t unions someday w i l l supply a l l the c r e d i t and t h r i f t needs of the masses. This i s most u n l i k e l y and a l s o undesirable. There i s a basic t r u t h i n the f i n d i n g s of the Royal Commission on Cooperatives i n 195+5* •^ Roy F. Bergengren, C r e d i t Union North America, Southern P u b l i s h e r s , Inc., New York, 19*+0, p. 1. 115 We are a l s o s a t i s f i e d that c r e d i t unions are not d i s p l a c i n g any other type of business e n t e r p r i s e , except to provide an a l t e r n a t i v e source of loans i n a f i e l d where i n d i v i d u a l money lenders or lending i n s t i t u t i o n s do not provide s i m i l a r c r e d i t f a c i l i t i e s at comparable net ra t e s .2 The c r e d i t unions have many l e g a l r e s t r i c t i o n s — t h e y must be confined to groups of people who have a common bond of occupation or a s s o c i a t i o n or form an i d e n t i f i a b l e segment w i t h i n a community i n a c e r t a i n neighbourhood or r u r a l or urban d i s t r i c t ; there i s a l i m i t on the amount of unsecured loan a c r e d i t union can grant; f u r t h e r primary emphasis i s l a i d on the s e r v i c e t o the i n d i v i d u a l s and excludes business e n t e r p r i s e s . I n s p i t e of a l l these l i m i t a t i o n s c r e d i t unions have a lar g e p o t e n t i a l f o r growth. This p o t e n t i a l mainly l i e s w i t h i n o r g a n i z a t i o n s and communities where i n d i v i d u a l s have a common bond of i n t e r e s t . Though Chart k e x h i b i t s t h a t the growth of savings, loans and membership i n c r e d i t unions i s at a d e c l i n i n g r a t e , nevertheless they are showing b e t t e r performance i n instalment lending than any other instalment lending i n s t i t u t i o n i n the market, (Table ' I ) . C r e d i t unions have done very l i t t l e a d v e r t i s i n g to promote t h e i r business. In modern economic systems, a d v e r t i s -i n g i s an indispensable media to promote an idealogy. In the past, c r e d i t unions seem t o have c a p i t a l i z e d upon the poten-t i a l f i e l d of cooperative minded people. This f i e l d i s more Report of the Royal Commission on Cooperatives, King's P r i n t e r , 1945, p. 52. 116 or l e s s l i m i t e d and now the c r e d i t unions i n order t o expand t h e i r business, w i l l have to educate the people to t h e i r philosophy and the b e n e f i t s of borrowing from them. This can be done only by perpetual a d v e r t i s i n g campaigns by the B.C. C r e d i t Union League. Much of modern consumption theory i s a p p l i c a b l e to c r e d i t unions. However, i t should be kept i n mind th a t t h i s i s not a p e r f e c t theory. C e r t a i n fundamental questions of consumer moti v a t i o n f o r saving and d i s s a v i n g are not adequate-l y answered by i t . I n c r e d i t unions, i t would seem th a t people save not f o r investment but f o r f u t u r e consumption, e i t h e r f o r purchase of durable goods or f o r a " r a i n y day". C r e d i t unions have a good record of c o l l e c t i o n of loans. As at December 31? 1 9 5 8 , 1 . 0 5 $ of t o t a l loans outstand-ing were estimated to be u n c o l l e c t i b l e . The percentage of t o t a l bad debts since i n c o r p o r a t i o n to t o t a l loans since i n c o r p o r a t i o n was . 3 8 2 . Some c r e d i t unions show a very low l o s s r a t i o . A low l o s s r a t i o i s not e s s e n t i a l l y a measure of good management. This may be secured by f o l l o w i n g a con s e r v a t i v e p o l i c y or adopting an e x c e s s i v e l y s t r i n g e n t c o l l e c t i o n a t t i t u d e . The s t a t u t o r y reserve fund has been adequately provided f o r . The percentage of reserve fund to t o t a l loans outstanding i s 3 . 4 which more than adequately takes care of the estimated bad loans, i . e . , 1 . 0 5 $ . The s t a t u t o r y reserve fund according to the B.C. C r e d i t Unions Act i s r e q u i r e d t o be used only f o r paying l o s s e s 117 of the c r e d i t union a r i s i n g from bad loans or investments. I t seems tha t reserve and l i q u i d i t y have been confused i n t h i s Act. When a l o s s on bad loans or investments occurs, a reserve i s r e q u i r e d to absorb the l o s s ; i t cannot be paid f o r out of cash, consequently there i s no need t o keep the reserve i n l i q u i d form. The i n t e n t of t h i s Act w i l l be f a r more understandable t o the c r e d i t unions i f the requirements as to allowance f o r bad debts and l i q u i d i t y are s e p a r a t e l y s t a t e d . F u r t h e r , i t would be more l o g i c a l t o base the requirement f o r reserves upon a r e l a t i o n s h i p t o loans out-standing r a t h e r than share c a p i t a l as i s r e q u i r e d by the Act now. L i q u i d i t y i s another measure of f i n a n c i a l soundness. The c r e d i t unions i n B r i t i s h Columbia have a good record of l i q u i d i t y . As at December 3 1 , 1 9 5 8 , t o t a l funds r e t a i n e d by c r e d i t unions were l a r g e r than the l e g a l requirements. (Table V I I ) . In l a r g e r groups of c r e d i t unions, the percentage excess of funds t o requirements i s lower than t h a t i n smaller groups. This may mean t h a t the management of a l a r g e c r e d i t union i s more conscious of the o v e r a l l p r o f i t a b i l i t y of the business. Though the c r e d i t unions can maintain l i q u i d i t y during normal times i t might become a s i g n i f i c a n t problem i n a r e c e s s i o n i f repayments of loans were not r e g u l a r l y made and savings d e c l i n e d w h i l e , at the same time, there was a heavy demand f o r withdrawals. Such a s i t u a t i o n might reduce cash 118 funds below the s t a t u t o r y minimum. I f c r e d i t unions con-t i n u e d to make loans i n these circumstances, l i q u i d i t y would be c o n s i d e r a b l y impaired, A c r e d i t union should stop making new loans u n t i l i t s cash funds are r e s t o r e d t o the minimum amount r e q u i r e d under the Act. .Another f a c t o r i n l i q u i d i t y i s seasonal demand f o r withdrawals from c r e d i t unions. There i s g e n e r a l l y a heavy demand f o r withdrawals during the per i o d s t a r t i n g from May and extending t o September or October (Tables X and X I ) . L i q u i d -i t y i s a l s o a f f e c t e d by long-term loans. There i s a r i s i n g trend towards r e a l estate loans which are g e n e r a l l y long-term. I f t h i s t rend continues on f o r some time, there w i l l be a need f o r higher amounts of cash r e s e r v e s . Considering the lending p r a c t i c e s of c r e d i t unions, i t seems t h a t the major p o r t i o n of lending i s done f o r the purposes of purchasing durables and r e a l e s t a t e . Convenience c r e d i t and emergency c r e d i t c o n s t i t u t e only 18$ and 13$ of t o t a l l ending r e s p e c t i v e l y . I n smaller c r e d i t unions where the funds a v a i l a b l e are r e l a t i v e l y s m a l l , loans f o r household equipment, c o n s o l i d a t i o n of funds and other s i m i l a r purposes predominate. On the other hand, i n l a r g e r c r e d i t unions q u i t e a l a r g e percentage of loans are made f o r r e a l e s t a t e , home improvements and the purchase of durables. More than one-half of the number of loans and one-quarter of the t o t a l amount of loans are made w i t h only signatures and shares as s e c u r i t y . The s e c u r i t y of r e a l estate 119 i s q u i t e popular, accounting f o r 33$ of the t o t a l amount l o a n -ed and 12$ of the t o t a l number of loans. In small c r e d i t unions, t a n g i b l e s e c u r i t y l i k e c h a t t e l mortgages and r e a l estate c o n s t i t u t e s e c u r i t y f o r a small part of the volume of loans whereas i n t a n g i b l e s e c u r i t i e s l i k e comaker and shares i n the c r e d i t union predominate. The s i t u a t i o n i s the other way around i n l a r g e c r e d i t unions. The demand f o r small loans i s being met by a l l c r e d i t unions but i n l a r g e c r e d i t unions enough funds are a v a i l a b l e f o r r e a l estate and other l a r g e loans. Quite a number of c r e d i t unions do not comply w i t h the l e g a l requirements i n t a k i n g loan s e c u r i t i e s . In many cases c h a t t e l mortgages on automobiles and household e f f e c t s are not r e g i s t e r e d . The management of c r e d i t unions has t o be educat-ed to the consequences of these omissions. I t i s d e s i r a b l e that the insurance p o l i c i e s on r e a l estate and automobiles are endorsed payable to the c r e d i t union at the time s e c u r i t y i s taken. About 6 0 $ of r e a l estate loans are granted without an a p p r a i s a l of property. Though, i n some of these cases, the c r e d i t union o f f i c i a l s may be f a m i l i a r w i t h the property and consequently there may be no need f o r a p p r a i s a l , yet i n others, i t i s very e s s e n t i a l that a proper a p p r a i s a l i s made. The r a t e s of i n t e r e s t charged on loans vary from one c r e d i t union to another. At the end of the year, a l a r g e percentage of c r e d i t unions make i n t e r e s t refunds to borrowers. The net charge of c r e d i t unions on loans i s most reasonable as compared w i t h other lending i n s t i t u t i o n s . 1 2 0 Loans are kept on a reasonably short-term b a s i s . Bearing i n mind th a t 33$ of loans are r e a l estate l o a n s , the f a c t t h a t 85$ of the t o t a l loans (Table XXV) are repayable w i t h i n twenty-seven months, i n d i c a t e s a reasonably s h o r t -term f o r loans. The accounting systems i n use, though reasonably s a t i s f a c t o r y , are g e n e r a l l y not used p r o p e r l y i n a l a r g e number of small c r e d i t unions. The standard methods of i n t e r n a l c o n t r o l used i n mercantile c o r p o r a t i o n s cannot a l l be a p p l i e d t o small c r e d i t unions. A small c r e d i t union i s u s u a l l y a one-man operation and a d i v i s i o n of f u n c t i o n s i s not p o s s i b l e . Most of the r e s p o n s i b i l i t y f o r proper c o n t r o l of the operations of a c r e d i t union l i e w i t h the supervisory committee. The supervisory committee, f o r proper s u p e r v i s i o n of the progress of loa n s , r e q u i r e s ready i n f o r m a t i o n about t h e i r m a t u r i t y dates. For t h i s purpose the use of a loan r e g i s t e r has been suggested. Such a r e g i s t e r w i l l g ive a comprehensive p i c t u r e of repayments and the follow-up of loans. There are c e r t a i n phases of i n t e r n a l c o n t r o l which could be made a p p l i c a b l e to c r e d i t unions but are sometimes not a p p l i e d . For example, sound p r a c t i c e s l i k e , prenumbering of deposit s l i p s , cheques, and proper a c c o u n t a b i l i t y f o r a l l the numbers; g i v i n g a r e c e i p t t o the member at the time of payment of money t o the c r e d i t union; r e q u i r i n g the signatures 121 of two r e s p o n s i b l e persons on cheques; c a n c e l l i n g the documents of o r i g i n a l e n t r y l i k e i n v o i c e s and b i l l s when the payment i s made on them, can e a s i l y be brought i n t o use. Wherever p o s s i b l e , the methods of i n t e r n a l c o n t r o l should be enforced. I t i s f e l t t h a t the management of a c r e d i t union does not use some of the important accounting t o o l s f o r proper d i r e c t i o n and c o n t r o l of i t s a f f a i r s . For t h a t , the prepara-t i o n of operating budget and cash f l o w budget i s suggested. A l s o , the l a r g e c r e d i t unions should prepare a statement of source and a p p l i c a t i o n of funds. The supervisory committees i n small c r e d i t unions are not d i s c h a r g i n g t h e i r d u t i e s properly. I t i s f e l t t h a t i n some cases, the members of t h i s committee are completely ignorant of t h e i r o b l i g a t i o n s under the B.C. C r e d i t Unions  Act. I t i s the duty of the "League" t o educate the c r e d i t union o f f i c i a l s about t h e i r d u t i e s and the methods to discharge those d u t i e s . I t i s suggested that the "League" should r e -quire each supervisory committee to submit a r e p o r t t o i t at the time of every i n s p e c t i o n s t a t i n g v a r i o u s procedures and t e s t s c a r r i e d out and the r e s u l t s obtained. Some t r e a s u r e r s show gross ignorance and d i s r e g a r d of accounting methods. I t w i l l be h i g h l y u s e f u l t o the c r e d i t union movement i f a l l the t r e a s u r e r s are r e q u i r e d by law t o take at l e a s t a basic course i n accounting. The o v e r a l l f i n a n c i a l h e a l t h of c r e d i t unions i n B r i t i s h Columbia i s s a t i s f a c t o r y but the back bone of f i n a n c i a l o p e r a t i o n s — a c c o u n t i n g systems and i n t e r n a l c o n t r o l r e q u i r e s e r i o u s c o n s i d e r a t i o n . The c r e d i t unions of t h i s Province have a secure and prosperous f u t u r e , and i t i s hoped th a t more and more wage earners w i l l b e n e f i t from t h i s unique c r e d i t union philosophy. 123 BIBLIOGRAPHY A. BOOKS Backer, Morton. Handbook of Modern Accounting Theory. New York: P r e n t i c e - H a l l , I nc., 1955,PP. 620. B a i l y , Henry Heaton. S p e c i a l i z e d Accounting Systems. New York: John Wiley & Sons, Inc., 1951,pp. 579. Baron, N. Cooperative Banking. 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Presented at the Workshops f o r Economic E d u c a t i o n i n d i f f e r e n t u n i v e r s i t i e s of the U.S.A., 1958. I s b e l l , E.R. C r e d i t U n i o n s — a n d the Recession. (Mimeographed). Presented at the Workshop of Ohio C r e d i t Union League, Ohio, 1959-C. ARTICLES Dauten, C a r l A. "A F r e s h Approach to the Place of Consumer C r e d i t i n Economic and F i n a n c i a l T h i n k i n g " , The J o u r n a l  of F i n a n c e . V o l . IX (May, 1954), pp. 93-110. F i n g a r s o n , L.E. " S p o t l i g h t on Saskatchewan C r e d i t Unions", The Canadian C h a r t e r e d Accountant, V o l . 67, October 1955, pp. 283-290 Gardner, Ronald M. " F i f t y Years of C r e d i t Union Operations", S o c i a l S e c u r i t y B u l l e t i n . V o l . XXII (Dec. 1959), pp.10-13. W i l l i a m , E. A l l a n . " F e d e r a l C r e d i t Unions Twenty-Five Years of S e l f Help S e c u r i t y . S o c i a l S e c u r i t y B u l l e t i n . V o l . 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Ottawa: King's P r i n t e r , 1945. F. PUBLICATIONS OF OTHER ORGANIZATIONS C r e d i t Union N a t i o n a l A s s o c i a t i o n . C r e d i t Union Year Book. Madison, Wisconsin: C r e d i t Union N a t i o n a l A s s o c i a t i o n , 1954-1960. 126 Appendix 1 Percentage D i s t r i b u t i o n of Loans by Purpose Main Branch of a Large Bank i n Vancouver Med i c a l Expenses 7$ C o n s o l i d a t i o n of Debts 7% Taxes, Mortgages, and Insurance 11$ Education 5$ T r a v e l and Vacation 12$ Purchase of automobiles 24$ Household f u r n i s h i n g s and appliances Miscellaneous 30$ Sources Personal i n t e r v i e w . Percentage D i s t r i b u t i o n of Loans by Purpose Consumer Finance Company i n Canada (Name not d i s c l o s e d ) Remedial and Emergency C o n s o l i d a t i o n of e x i s t i n g debts and medical expense 5 2 . 9 $ Current and Miscellaneous Repairs 6 . 2 $ A s s i s t i n g r e l a t i v e s 2 . 5 $ C l o t h i n g , food, r e n t , e t c . 5-2$ Taxes 4 . 3 $ Moving expense . 8 $ Miscellaneous 9 . 2 $ 2 8 . 2 $ Investment and Health Advancement Automobile 5 . 4 $ Investments 2 . 3 $ F u r n i t u r e 1 . 9 $ Insurance 1 .3$ Mortgage and i n t e r e s t . 2 $ T r a v e l and v a c a t i o n 7«2$ Education . 6 $ 1 8 . 9 $ 1 0 0 . 0 $ Source: CM. Benadom "Consumer Finance Companies" appeared i n C r e d i t s and C o l l e c t i o n s i n Canada, 1958,.The Ryerson Press, Toronto. 

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