By the technical assistance project ‘Support to the Rural Financial System of Ukraine’
Implementers: Gemeinschaft für Technische Zusammenarbeit (GTZ)
Deutsche Gemeinschaft- und Raiffeisen-Verband (DGRV)
Financed by: the Government of the Republic of Germany
Experience allows us to see the mistake when we have made it again
Information gives us foreknowledge of a mistake so that we can decide whether to make it or not
What is a credit union?
A credit union is
A not-for-profit organization founded on the basis of cooperation by physical persons, professional unions and their associations for the purpose of satisfying the union members’ needs in mutual crediting and financial services through the aggregated contributions made by members.
To benefit from the services of a credit union, one needs first to become its member. Members of a credit union are also its co-owners. The mission of their credit union is to satisfy their needs in financial services. Thus, in a number of ways a credit union has advantages over other financial institutions:
Ownership and management form
Members of a credit union are also its co-owners and consumers of the financial services it provides. Credit union management is democratic: in a general meeting, each union member would have one vote.
This enables each person who chooses to be a credit union member, to influence the union’s activities.
A credit union is a not-for-profit organization, since receiving profits from its operations is not its end goal.
The services provided to credit union members may generate a certain income, which is used for statutory activity (i.e. paying employee salary, office maintenance etc). Thus, the services are provided for the nearest equivalent of the original cost.
Closeness to service consumers and an individual approach to their needs
The majority of credit unions operate within one administrative-territorial unit (region or district). They may also be based on an enterprise, a professional union, and a public or religious organization.
This enables a credit union to apply an individual approach towards each member, for example, to negotiate agreeable credit return terms (the body of the credit) and interest rates, to select the right term for a deposit etc.
A credit union will also provide members with consultations on the cost of various financial services, on planning the family budget or drafting a business plan.
Product quality and simplicity
The financial products offered by credit unions are distinguished by their quality and the simplicity of terms. A credit union will provide you with comprehensible information on the crediting terms and conditions or on placing your money onto a deposit, and will calculate the actual value of these services for you.
Unlike other financial institutions, credit unions will easily cooperate with borrowers in need of small sums of money – that is, they will provide micro-credits. This is one of the few financing sources available in rural areas.
Credit unions are open financial institutions. They regularly publish annual financial reports, and union members are free to make themselves acquainted with a credit union’s operations information.
The relatively small size of credit unions causes them to require less paperwork for formalizing a credit or a deposit agreement.
The cost of the loan provided by a credit union can easily be calculated. A union will openly list the interest, commission fees, additional outlays etc. as crediting terms.
Be careful! Keep an eye open for unusually high deposit/contribution interest rates!
The idea of credit cooperation was born in the 19th century in response to the need for mutual financial support within communities in times of a grave banking crisis. Friedrich Wilhelm Raiffeisen from Germany is considered to be the founder of the first credit union.
In Ukraine, the law entitles credit unions (CUs) to provide the following services:
· Giving out loans to members;
· Attracting contract-based member contributions (deposits);
Additionally, a credit union has the right to:
· Accept entry fees and mandatory equity contributions from CU members;
· Give loans to other CUs and be a member of payment systems;
· Pay for goods and services at the request of members within the limits of the credits provided to them;
· Do charity.
Any other economic activity of CUs is forbidden by the law.
According to the World Council of Credit Unions, around 50 thousand credit unions in 96 countries extend their services to 177 million members and have assets whose net worth exceeds $1.2 trillion. Credit cooperation is progressing in leaps and bounds worldwide. Ukraine comes second in the ranking of the European countries with the most intensive credit cooperation. Around 800 credit unions currently exist in Ukraine, bringing together more than 2 million members.
Your rights and obligations as member of a credit union
To make use of the services of a CU, first one needs to become a member. The membership procedure includes the payment of an entry fee and the mandatory equity payment. The entry fee and the equity payment are one-time contributions made on a physical person’s entering a credit union. The size of these payments is the same for all members. The entry fee is unrefundable, unlike the equity payment, which is reimbursed to a member leaving a CU, provided that the organization maintains its normative financial indices.
As member of a credit union you have the following rights:
Taking out loans from a credit union and utilizing all other services it provides;
Receiving information on the state of your investments, on the activity and financial status of the union; perusing the annual balance and financial reports;
Receiving your equity income;
Voting and being elected for the union management board;
Presenting your proposals to the union’s management;
Making yourself acquainted with the statute and inner regulations of a credit union, management board meeting protocols, the decisions adopted by the management and other documents;
Participating in resolving any issues of a CU’s activity by voting during a general meeting;
Stopping your membership in a credit union according to the regulations of the law and the union’s statute.
As member of a credit union your obligations are as follows:
Not divulging confidential information on a credit union’s functioning;
Adhering to the statute and other regulations of the credit union; complying with the decisions of the management board;
Participating in the formation of a credit union’s assets, namely paying the entry fee and the equity unit as well as making other contributions listed in the Statute;
Fulfilling other obligations provided in the Ukrainian legislation and the union’s statute.
The number of mistakes we make is inversely proportionate to the amount of information we have
Choosing Your Credit Union
Listed below are some tips to help you choose the credit union you can trust.
Make inquiries on how many years the union has been on the market and ask its members for recommendations.
A reliable credit union commands great authority in the eyes of its members. Find out whether your colleagues, friends or acquaintances might be members of this credit union and get their opinion of the experience.
Make sure the credit union is on the State Register of Financial Institutions
A credit union must have a certificate of registration in the State Register of Financial Institutions placed in a conspicuous place on its premises (a subsidiary would provide a warrant of its inclusion into the register).
These documents are provided by the State Commission for the Regulation of Financial Service Markets of Ukraine and contain the authority’s stamp. A credit union’s inclusion into the Register may be checked online at the State Commission’s official website at www.dfp.gov.ua.
Make sure the credit union has been licensed to place deposits (contributions) of members onto deposit accounts.
If you are planning to invest your money into a deposit account at a credit union, make certain that the union has a valid license to attract deposits (contributions) from members. The license is provided by the State Commission for the Regulation of Financial Service Markets of Ukraine.
Some credit unions may suggest that you invest your funds into an additional equity unit rather than a deposit account. This transaction would not require a credit union to have a license and sometimes, more advantage is to be gained from it than from placing your money onto a deposit account.
However, unlike deposits, additional equity units become the property of the credit union. Provided the union stays within the margins of financial norms, it will reimburse this sum on a member’s leaving the credit union or at his/her written request according to the Law. Conversely, if a credit union does not have a sufficiently high capital adequacy ratio, the equity sum may be withheld from the member.
Not only does a credit union not need a license to attract additional equity contributions – a contract is not required to formalize the agreement, either. While a deposit account is guaranteed an accrual of interest according to the agreement signed, an additional equity contribution will accrue interest only if the credit union makes a profit and adheres to the financial norms.
Find out whether the credit union is a member of a local or all-Ukrainian association of credit unions, or a participant of the ‘Deposit Security Program’ credit union association.
Like most other socially-oriented organizations, Ukrainian credit unions jointly form a system overseeing their development and facilitating the delivery of best-quality services to their members.
Local credit union associations bringing together some 350 unions have been created in 22 of Ukraine’s regions and in the cities of Kyiv and Sevastopol. On the national level, their interests are represented by the All-Ukrainian Association of Credit Unions (AUACU). There are two other national credit union associations, namely the National Association of Ukrainian Credit Unions (NAUCU) and the All-Ukrainian Association of Credit Unions for Military and Security Agency Servicemen.
o/a 26005301100694, Podil subsidiary of the ‘VTB Bank’ OJSC, Kyiv, BIC 300777, USREOU 35199696
To provide additional security, credit unions participating in the Deposit Security Program association practice insuring their clients’ deposits.
Membership in a credit union association or participation in the Deposit Security Program is usually certified by a respective document.
Find out whether the credit union submits its financial status reports to the ‘Open Credit Union’ project
The Deposit Security Program is currently administrating a project facilitating public access to a credit union’s financial performance information, the ‘Open Credit Union’ project (located at www.pzv.net.ua/opencu).
Inform yourself about the credit union’s financial reports. Pay attention to the reserve capital size.
Each credit union submits quarterly or monthly financial reports to the State Commission for the Regulation of Financial Service Markets of Ukraine. The data contained in the reports is non-confidential and is published in the mass media every year. It is worth investing some time into familiarizing oneself with a credit union’s reports (a reliable CU is not supposed to have negative profit, and must maintain a no less than 15% ratio of reserve capital to total assets).
Build your opinion about the transparency and simplicity of the services the CU offers as well as about the justification of the prices
CUs offer simple and effective credit products geared toward satisfying their members’ financing needs. If:
The product is offered to you under non-transparent conditions;
You do not get the money at once;
You are offered unusually high deposit interest rates that are much higher than the average market values;
It is suggested that you ‘queue up’ for the services:
It is likely that you are dealing with a pseudo-credit union – in other words, a financial pyramid.
Do not be taken in by promises, cooperate with reliable, financially sound and stable credit unions!
Below you will find several tips to help you be a smart borrower and make your budget into a generator of effective savings.
Before 1917, more than 3 thousand credit unions existed in Ukraine. They were all annihilated by the Soviet government, and it was only in 1992 that the credit cooperation movement began its revival in Ukraine. A number of technical assistance projects financed by the governments of Canada, Germany, the USA and the EU have been carried out to facilitate the development of the cooperative movement.
Money is never a lot.
And even when they are many -
there are additional expenses
Various events in a person’s life (such as birth, marriage, education or death), emergencies and the opportunity to acquire property or start a business may cause a person to require larger sums of money than they personally own. The only reliable and profitable way of accumulating the needed sum is through making savings.
Anyone can generate savings, regardless of age and income. Regularly putting money aside is the only real precondition.
How to draft your savings plan
A savings plan is a major tool of managing your financial flows to meet your current, middle-term and long-term goals. The following is needed to draft your savings plan:
Determine what the purposes of the savings are;
Find out how much money you need to set aside for your purpose and in how much time. Determine the target amount of your savings;
Calculate your current earnings for a certain period of time, see how regular or irregular they are and how much you can set aside on a regular basis.
Go through your expenditures and see which you can cut back on. Try to convert that sum into your savings;
Decide where you will keep your savings. Have a look at the deposit packages that are offered to you, and analyze their strong and weak points.
Plan the frequency and the amount of your contributions to your savings ‘pool’. For example, you may set aside some money in an envelope on pay day, or at the end of your operations day and keep the money in a secure place until you can take it to the credit union and invest it there. Visit the CU on the same day of the week or month. Alternatively, you may arrange for your employer to make an automatic transfer of a part of your earnings to your deposit account.
Control your savings. Keep regular track of your progress towards your goal, and compare the saved amount with your final requirements. Study all sources relevant to information about your savings.
The rules of making savings.
There is a range of rules you could make use of while making decisions on your savings and consumer budget.
Try to save as much and as quickly as possible.
Put the money aside as soon as it arrives.
Try stowing away 10% of your income, even if you’re not going to buy anything. This will be your little reward!
Calculate the amount by which your money will grow if you regularly add it to your account, plus interest.
Do not keep large sums of money on you to avoid the temptation of spending it all.
Pay back your debts. The total amount of a family’s debt should not exceed 36% of the family’s earnings.
Use your money sparingly. Think of how much you could earn by selling something you had bought before. Try saving by buying durable things wholesale.
Invest a sum equivalent to your expenses of 3-6 months into an emergency fund that you can use in case of unexpected situations. Having an emergency fund eases tension and anxiety.
It is very important to keep a part of your savings ‘out of reach’. Open two deposit accounts. One will contain your emergency fund; you will have access to it at all times, and taking money off it will not entail sanctions (demand deposit). The other account will contain your savings for other purposes, and cannot be accessed so easily (for example, a time deposit).
Find out which deposit terms meet your goals best.
Saving is about discipline:
discipline comes from practice!
Choosing a deposit service
A deposit (in the case of a credit union, a member’s contribution to a deposit account) is a world-recognized, proven and reliable instrument for saving and protecting your savings from inflation. Before making your final decision, it is best to study what kind of deposit services are on offer. Invest your time into finding out what the maximum and minimum interest rates are. Finance institutions offering above-average rates are either undergoing rapid development or make risky investments, thus raising the deposit non-return risks.
Deposit accounts are commonly opened for the following reasons:
Investing your savings and receiving additional income in the form of interest at the end of the deposit term.
Receiving a monthly interest bonus to the family budget, the so-called ‘salary add-on’.
Accumulating costs for a big purchase or first installment of a bank loan.
Keeping your money in a bank and receiving profits, but also being able to extract money from the account at any given time.
The following criteria are used when choosing a suitable deposit ‘package’:
The financial institution’s stability and reliability
A constant interest rate, unchanging terms and conditions of interest payment
Flexible deposit replenishment and withdrawal conditions
The more fuss is made about an item’s advertising, the less it is really worth.
Do you know that a Ukrainian customer overpays an average 50 to 100% of an item’s value when purchasing it with a credit advertised as a 0% loan?
Another important factor in crediting is the financial institution’s reliability and reputation. Cooperate with those who offer transparent transactions, complete information and help you make a balanced decision.
Consider all the pros and cons to make a balanced decision on the rationality of taking out a loan.
Loans: Pros and Cons
Making a borrowing gives you access to things which you otherwise couldn’t afford: a car, or a good university
A credit costs money. The longer the time period, the larger the costs.
When you get a loan, you can immediately utilize your purchase as you pay the loan back gradually
Having a credit may encourage a person to make expenses he or she cannot afford. Without a loan, only the most necessary things will be acquired.
A credit is one of the few options open in unforeseen circumstances, and will let you spread your expenses out in time
With a credit, one needs to channel a part of future expenditures into paying it back. Thus, the future purchasing power decreases.
A credit gives you more economic possibilities and allows you to invest into family assets which can be paid for during a more lengthy period of time
If a credit cannot be paid back, the creditor may take away the purchase, or demand collateral.
For any borrower, a loan entails risks. If you cannot pay the loan back, you may run against huge disadvantages.
How much can you pay on a monthly basis?
+ all other income
- communal/leasing expenses
- clothing and food
- monthly savings
- current credit payoff
- other monthly expenses
= cost balance
This is the sum of money you can count on having. You can channel it into paying for your new loan. Do not forget to add expenses such as birthday celebrations, vacation, car repairs and healthcare, into your list.
Choosing a credit package.
Advertisements of ‘0% rates’ and ‘lowest rates on the market’ commonly promise nothing but cheese in the mousetrap.
When choosing a credit package, please be advised of the following most common pitfalls that await borrowers on the market:
An unusually low or 0% credit rate
A credit payoff schedule where the rate is not specified
A monthly or annual commission that is extracted in addition to the rate, but only becomes evident to the borrower when he starts paying
Overly high rates for furnishing collateral: valuation of collateral, risk insurance etc.
Additional expenses such as consideration of request letters, changes in the payoff schedule, other terms and conditions
Unjustifiable fees for delays in payment or additional fees for advance payment
Group purchase (you pay for the credit today and then ‘gamble’ the purchase among members of a group)
Pay attention to the small print in your credit agreement (it will usually contain conditions that put you at a disadvantage).
Questions to ask your creditor:
What types of loans are on offer?
What are the demands concerning collateral?
What are the demands concerning the savings?
What is the rate?
What is the commission to be paid?
What is the payment delay fee?
How quickly can one get a credit?
How many times does one need to come to office to formalize the credit application?
Evaluating the true cost of a credit:
Total sum of all rates during the whole credit payoff period.
+ all commissions
+ collateral expenses
+ additional expenses
= real cost of credit
Through comparing this total for various institutions, you will be able to choose the credit terms that suit you best.
A budget is a plan describing what you are going to do with your money. A well-tailored budget will help you pay your outlays and set aside some savings.
How to keep from exceeding the budget
Before drafting a budget, try to keep track of your family’s earnings and expenditures for 2 months. This will keep you from omitting even the least significant expenses, and will give you an idea of the dynamics of prices on clothing and food.
Drafting a budget is easy for most people. However, following the budget may turn out to be a much bigger challenge which you will need discipline to overcome. The following recommendations will help you maintain the discipline necessary for each aspect of your budgeting process.
Setting financial goals:
Think of long-term and short-term projects you are going to invest into.
Set at least one goal which can be achieved quickly. In this way, you can reward yourself for your efforts.
Make periodical changes to your financial goals and budget.
Cut back on the money outflow – this is the main method of generating savings. Smart expense management will enable you to save.
Make a list of all the possible ways of cutting back on your daily expenditures. You will save more by setting a limit to everyday spending than by eliminating one big expense.
In the first line, spend your money on things that may bring you profit.
Either pay back your debts or return the money on the latest date possible without violating the agreement. Thus, you will make use of the funds available to you during the maximum of time.
Make notes on how much you spend and what on.
First invest at least 10% of your income into making savings!
Create a reserve fund comprising no less than your current expenses during 3 to 6 months.
Restrict access to the savings.
Remember that there are two ways of increasing the saved amount:
Increasing income (earning more) – due to looking for additional assignments, using unutilized assets, skills and abilities;
Decreasing expenses (economizing) – smart spending, purchase planning, decreased consumption of resources (electricity, water, heating), cutting back on bad habits etc.
Becoming aware of one’s real financial state (even if it is poor) is the first step towards overcoming financial hardship in your family or augmenting the family budget.
The technical assistance project ‘Support to the Rural Financial System of Ukraine’ implemented by the Gemeinschaft für Technische Zusammenarbeit (GTZ) and Deutsche Gemeinschaft- und Raiffeisen-Verband (DGRV) would like to thank the CUA ‘Deposit Security Program’ and the following pilot credit unions for their help in the writing of this publication:
8 Narodna Str., Stryj, Lviv region
77 M. Hrushevskoho Str., Drohobych, Lviv region
38/15 S. Bandery Str., Zalischyky, Ternopil region
1 January 22nd Str., Kopychyntsi, Ternopil region
‘The First Farmers’ Credit Union of Podillia’
23 M. Hrushevskoho Str., Kamianets-Podilskiy, Khmelnytsk region
9 M. Ostrovskoho Str., Shepetivka, Khmelnytsk region