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UBC Theses and Dissertations

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

Abstract

The credit unions in British Columbia have experienced spectacular growth during the last fifteen years. Many new credit unions have come into existence and old ones have increased considerably in size. Different pieces of legislation, Federal as well as Provincial, have been passed to ensure safety of members' savings and efficient management of credit unions. This study is an attempt to evaluate the financial management of credit unions in British Columbia. The evaluation has been made from the standpoint of financial soundness, lending practices, accounting system and system of internal control. Since a credit union is an important institution of consumer credit, a general discussion of consumer credit is presented in the beginning of the study. Consumer credit is a major force in our modern economy. Mass production of goods at low costs has been greatly assisted through the advent of consumer credit financing. Modern credit theory divides the field of credit into three categories: emergency credit, convenience credit and instalment credit. Instalment credit is the most significant of these three in terms of its effect upon the economy. The level of this credit depends on the durables bought on an instalment basis, and the sale of durables depends on discretionary income, expectation of future income, the pattern of distribution of income amongst spending units and the growth of income. The consumer credit market is imperfectly competitive. Credit unions provide a significant portion of consumer lending in Canada. They have experienced a more than proportionate growth in their trend of instalment credit lending as compared with the growth trend of other lending institutions. Since savings is the source of consumer credit, the role of credit unions as saving institutions has been studied. Credit unions now act as depositories for a significant portion of total net savings in Canada. Cooperative central banking in Canada, through a recent development, is becoming increasingly popular. In 1953, a Canadian Cooperative Credit Association was formed to act as an apex organization for all the cooperative central banks in Canada. The financial soundness of a credit union depends on the adequacy of reserves, liquidity, and growth. There are various types of reserves in existence, of which the reserve for bad debts is of material importance. Under the B.C. Credit Unions Act, the provision for bad debt losses has to be kept in liquid form. This seems to be an unnecessary provision because the function of the reserve fund is to absorb losses, and because such losses do not necessitate the payment of cash. Total bad loans have been related to loans outstanding and the reserve fund. The overall position has been studied and is considered to be very satisfactory. For measurement of the growth of credit unions, the time series of savings, membership and loans have been analysed by the Gompertz curve method. The annual increase in all the three factors is at a declining rate. The projection of Gompertz curves indicates that it will be a long time before a period of stability is reached. The liquidity of credit unions is analysed by relating the total funds retained to the legal requirements. In almost all cases funds retained are higher than the legal requirements. The effect of the seasonal pattern of demand for borrowings on liquidity has been studied from the statistics obtained from the books of B.C. Central Credit Union. Since B.C. Central Credit Union is the depository of funds of most of the credit unions in British Columbia, their liquidity is directly related to B.C. Central's. B.C. Central's liquidity has been analysed from the standpoint of lending practices, the extent of exercise of the borrowing rights and its compliance with the statutory requirements. The lending practices of credit unions have been studied from the standpoint of the purposes for which loans have been granted, the nature of security taken, the rate of interest charged, and the terms of repayment of loans. Purchase of durables, and real estate constitute more than 60% of the borrowings from credit unions. The effective rates of interest charged by credit unions have been compared with the rates of other lending institutions. The lending of credit unions is kept reasonably on a short-term basis. In order to study accounting systems and the system of internal control, a number of credit unions in Vancouver were visited. The study was made from the standpoint of three management objectives: namely, managerial decision-making, protection of assets and determination of income. Though the systems in use are thought to be reasonably satisfactory, some small credit unions are not making proper use of them. Throughout the study, recommendations have been made that are thought to be helpful in improving the financial management of credit unions in British Columbia.

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