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Eastern Europe’s Shining Star

Credit unions are reaching the rural unbanked with Poland guiding the way

Last fall, Paweł Grzesik took a trip to a tiny village in western Ukraine to explore his family’s roots. Travelling through the countryside, watching fields, farmhouses, and villages slip by, he realized something: there hadn’t been a commercial structure, save a post office and few corner stores, for at least 150 kilometres.

“There was not a single financial institution, but there were a lot of villages and small towns,” recalls Grzesik, director of the Warsaw office of Poland’s National Association of Cooperative Savings and Credit Unions (NACSCU). “This gives you an idea of how credit unions are needed there. There is tremendous demand for financial services, particularly in remote and rural areas.”


This is the case throughout much of Eastern Europe: large cities, such as Kiev and Bucharest, enjoy near-universal access to banking services — with the spectrum of national and foreign banks ensconced in the gleaming towers of the business districts. But venture into the rural villages and farming communities, and the picture looks very different.

“If you live in a rural area, you have a post office only. If there are some financial services attached the post office, you’re OK. But in the majority of cases, there are not. You have to take a bus, and if the bus runs twice a day, how will you do your banking?” says Grzesik. “This is how it goes, in the rural areas of Ukraine, for example.”

So there is a financial-service gap, literally and figuratively, in the rural regions of Eastern Europe. And closing the gap will depend, at least in part, on credit unions.

Poland’s credit unions: a brief history

For many former Eastern Bloc nations, Poland is the shining example when it comes to credit unions and financial development.

“Poland, for us, is a great success story of credit unions re-emerging in Europe,” says Brian Branch, president and CEO of the World Council of Credit Unions (WOCCU). While relatively common before WWII, Poland’s credit unions all but disappeared until the fall of the Iron Curtain in 1989.

The first of the new wave were offshoots of Solidarity, the Polish trade union that helped topple communism. These fledgling cooperatives were organized within shipyards, coal mines, and steel plants to offer low-interest loans and basic financial services to employees. In 1996, the government passed the Credit Union Act, which allowed credit unions to form based on associations, societies, and other organizations. And the movement grew from there.

“[Credit union staff] are down there in the fields, working with the farmers. And the farmers are able to grow, thanks to their assistance” – Pawel Grzesik

In subsequent years, international banks moved in. Slowly but steadily, Poland’s population gained widespread access to financial services. By 2003, around 44 per cent of adult Poles had bank accounts. As of 2014, that number had risen to 77 per cent.

Visit any Polish city today, from major centres, like Warsaw and Krakow, to smaller locales such as Lublin and Białystok, and you’ll see banks on most blocks. Tap-and-pay technology is everywhere, and there are enough ATMs to line your wallet with złoty (the local currency), at any time of day. In short: you’d be hard-pressed to distinguish the level of financial service from that of Vancouver, Toronto or St. John’s.

Credit unions make up around 8.1 per cent of the current financial market, serving two million-plus members and possessing US$3 billion in assets — the strongest credit union system of any country in Eastern Europe. And lately, Polish credit unions have been consolidating, says Grzesik. “There are fewer and fewer credit unions in Poland, but they are multi-branch, so the total number of outlets, and points where you can get service as a member is growing,” he says. “We have 44 credit unions right now, with around 2,000 branches. We are present in every town of 10,000 and above throughout the country.”

Bridging the gap: credit unions and the unbanked

There are two billion adults worldwide who don’t have a bank account, or access to financial services. Yet ample research shows that banking — specifically, saving — is critical to well-being and key to development across the globe.

As the World Bank puts it: “Extending access to finance is the first building block for people to build a better life. Not only does it help families plan for long-term goals and emergencies, it also facilitates day-to-day living and yields positive results in many different ways.”

With that in mind, in 2014, WOCCU set a goal for itself: expand credit union membership to at least 50 million new members worldwide by the year 2020, focusing on regions where banking services are needed most. The World Bank has formally included “Vision 2020” in its own financial access program, with the overall goal that “by 2020, adults globally have access to a transaction account or electronic instrument to store money, and send and receive payments.”

Grosz in fingers

Why are credit unions poised to take a leading role in this effort? Reaching the financially underserved is part of their DNA — and their mission statement, says Branch. “The mandate [WOCCU was] given 40 years ago was to serve the underbanked though the credit union model, and to extend credit union services around the world,” says Branch.

And with no external shareholders, credit unions need fewer resources than large financial institutions to operate. So they can go in where banks may fear to tread for lack of profit.

“For years, the notion among banks was that poor people don’t save,” says Branch. “Credit unions went out and offered small savings accounts, and saw there was a lot of liquidity in poor populations, when you provide them with good service. Many of the institutions found they could generate 20 net savers for every borrower. When you accumulate those small savings, you have enough to start providing loans to people.”

Credit unions also bring development benefits that banks and other large financial institutions typically do not. They become community fixtures, setting down deep roots in towns and villages.

Take, for example, Moldova. The tiny nation, sandwiched between Romania and Ukraine, is one
of Eastern Europe’s poorest and most rural countries. Only around 18 per cent of the population has access to banking services. To assist local growers (many of whom produce wine) the country’s credit unions have set up shop virtually amid the farms, arranging loans to help purchase equipment such as greenhouses, refrigerators, and grape crushers.

“They are down there in the fields, working with the farmers,” says Grzesik. “And the farmers are able to grow, thanks to their assistance.”

Modelling the way forward

With its own credit union system flourishing, and a homegrown model proven to suit the challenges of a post-communist free market, Poland has spearheaded WOCCU’s efforts to foster credit union growth in Ukraine, the Czech Republic, Slovakia, Lithuania, Russia, Romania, Macedonia, Moldova, and elsewhere.

“Poland, for us, is a great success story of credit unions re-emerging in Europe” – Brian Branch

Ukraine in particular has benefitted from this relationship. While the country’s population hovers at around half banked, it now has the second-largest credit union movement in Eastern Europe. WOCCU and NASCU are currently lobbying the Ukrainian government for access to the state Deposit Guarantee Fund, which would make Ukrainian credit unions safer places to deposit money.

“That is a very important element of the whole system,” says Grzesik. “We believe in the course of the coming years, [Ukrainian credit unions] will be really strong … and competitive.”

Ukrainian credit unions have recently proved their mettle in the region of Crimea, where many large financial institutions withdrew, in the face of ongoing conflict with Russian forces.

“But the credit unions, which are deeply embedded in those rural areas, continued to operate and tried to respond to the demands of their communities,” says Branch.

Evolving in the east: challenges for European credit unions

For credit unions to function properly, and expand, they need a supportive regulatory framework. This has been the biggest stumbling block in Eastern Europe.

“We can talk endlessly about how credit unions are needed and how fantastic they are, but if you don’t have the proper legislative base — a definition and legal status, a catalogue of services and so forth — then they won’t grow,” says Grzesik. In Romania, for example, credit unions don’t even have a legal right to accept deposits (they get around this by calling them investments, but it’s a stopgap measure).

Ukrainian credit unions continued to operate in the region of Crimea, where many large financial institutions withdrew, in the face of ongoing conflict with Russian forces

Elsewhere, credit unions struggle to convince lawmakers they shouldn’t be subject to the same re- porting and risk-management regulations that govern banks. Instead, they need laws and regulations that account for their smaller size and deposit-dependent capital base, says Grzesik.

Legislation has been a challenge at home in Poland, too. Despite the success of Polish credit unions, the current laws are “highly politicized,” and they restrict growth, says Grzesik. Accounting rules are ever-evolving (five consecutive changes in the last two years, he notes with exasperation).

The problem is a lack of understanding, he says. “But that’s not unique to credit unions. It’s [an issue with] how some policymakers perceive the cooperative sector. Whether it’s milk cooperatives, cooperative banks, credit unions, or housing cooperatives, they just believe, sweepingly, that this is wrong; this is a heritage of the communist past,” he says. Never mind that in some of the world’s foremost free-market economies – Canada, the U.S., Korea, Japan – credit unions are driving economic growth and development.


Among the general population, ignorance about cooperatives is less common, says Grzesik. Co-ops are even enjoying a revival among younger Eastern Europeans. “It’s become quite fashionable to have your own cooperative that sells vegetables; to start a small coffee shop as a cooperative, or an Internet-based radio station,” says Grzesik. “These are young people in their 20s, reinventing the cooperative spirit. It’s very encouraging.”

It also bodes well for the future of credit unions, which may be better suited than any other type of financial institution to serve the unbanked of Eastern Europe. And Poland is primed to lead the way. ◊

The World’s Unbanked

Two billion people are unbanked in the world today. Who are they?

54% come from the poorest households in developing countries

54% are young adults

55% are women

They’re mostly concentrated in Asia and Sub-Saharan Africa. For example:

40% in India, China, and Indonesia

17% in Sub-Saharan Africa

The most common reason given for not having an account is “not enough money to use it”

The next most common reasons are “no need for an account” and “a family member already has one”

30% of unbanked adults cite “lack of trust” – three times the average of other regions in Europe and Central Asia, while there are histories of bank failures and currency devaluations.

Sources: World Council of Credit Unions and World Bank