The Role of Networks: The Experience of DGRV in Germany and in Developing Countries

1. The Role of Networks: The Experience of DGRV in Germany and in Developing Countries Paul Armbruster DGRV – Deutscher Genossenschafts- und Raiffeisen Verband e.V.Head of International Relations Department

2. Table of content • Introduction • Financial cooperatives • Cooperative Banks • Models of cooperative networks • Cooperative systems • Challenges • Key success factors of German cooperatives • Conclusions • The Cooperative Sector in Germany • The Cooperative Financial Network

3. Introduction I • The financial sector plays a vital role in economic development • Worldwide, Financial Cooperatives are an important part of the financial sector  as full-fledged banks  as ‘non-banks’-institutions / credit unions

4. Introduction II Organizational approaches of financial systems • Centralized systems • Decision-making process centralized • In many countries: urban bias, channeling of savings from rural to urban areas, no backflow of credits, development and growth only in urban areas • but: remittances from urban to rural areas • Decentralized systems • Decision-making process decentralized • Local knowledge about local economy • Local/regional savings/investment-circles

5. Financial Cooperatives • A cooperative is a group of persons following the principles of:  Self-help, Self-governance, Self-responsibility Focus on members – Member Value vs. Shareholder Value • Cooperative Banks: Legal form: cooperative Financial activities are based on general banking law  fully licensed banks (level playing field) • Credit and Savings cooperatives and Credit Unions: Legal form: cooperative/credit union Special legislation and special supervision Alternatives: under banking law or rules derived from banking law

6. Cooperative Banks Cooperative Banks in Europe – Financial Partners for Local Economy • Sustainablerelationship • Proximitywithmembers/clients • Decentralization as an asset • Best financial services • More stable than commercial banks • Theyinduceeconomic and social effects

7. Models of Cooperative Networks • Centralized and highly concentrated at national level • Centralized and concentrated at regional level • Federated and decentralized but integrated by law • Decentralized but integrated on a voluntary basis

8. Cooperative Systems I Evolution of CooperativeSystems • From scratch: starting with individual local cooperatives • Top-down: starting with one (central) unit opening new branches and new cooperatives • Simultaneous a. and b.  networking on different levels

9. Cooperative Systems II Weaknesses • Traditionalfinancialcooperatives are beingmarginalized or do not emerge • Otherfinancial institutions open access to financial services • Many coops/credit unions lackscale and adequatecapitalization • Legislationistoo restrictive in many countries

10. Cooperative Systems III Weaknesses (cont.) • Many coops are not part of networks  stand alone • Lack of professional staff and leadership • Lack of internal/external control and adequate supervision by finance sectorauthority • Lack of adapted services • only short-termdeposits • problem of maturity transformation • Liquidity "trap"   • No investmentopportunitieswithin the system • No long termcredit • No access to long term refinance

11. Challenges I Main Challenges for Cooperatives • Adaption to international rules • Transforminto full-fledged institutions or integrationinto a network within full-fledged Apex institutions • Adequatecapitalization (BasleRules) throughshares and other capital instruments

12. Challenges II Separation of OperationalStructures fromGovernance Structures • Operations member and marketoriented, and efficient • Governance structure within the coops and the system

13. Challenges III A Multi-tierCooperative Structure • Maintain the efficiency of the individualcooperative • Maintain the efficiency of the system • Economies of scalewithin the system • Beingcompetitive • Offer all services needed • Support of the local coops in theirrole as local financial institutions

14. Challenges VI Apex Institutions • Liquidity management and intermediationamong the local coops • Investment of liquidity and refinance for individual coops • Organisation of payment and remittancesystems • Support of marketingactivities • Organisation of internal control systems • Participation in public creditprograms • Participation in international programs

15. Challenges V Furtherchallenges • Regulation and supervision • Auditing • Depositinsurance • Institutional protection systems • Legislation • Training

16. Key Success Factors of Cooperatives • Legal mandate for promotion of members’ economy through joint business “cooperative as an enterprise” • Adequate legal basis • Structured as a decentralised, multilevel network system • Compulsory audit (by cooperative federations) • Regulation and supervision of coop. financial institutions (level-playing field) • Institutional protection scheme of cooperative banks (incl. savings guarantee system) • Well-structured Training / Qualification System

17. Conclusions External support of individual cooperatives • can limit the establishment of cooperative networks • can lead to institutional egoism • can lead to lack of solidarity among the cooperatives Possible way out: support to strengthen cooperative systems / multi level approach (macro/meso/mirco level)

18. The Cooperative Sector in Germany National level 24 specialised institution e.g. DZ Bank Regional level 6 regional audit federations 4 specialised regional institutions 6 specialised audit federations 17 Raiffeisen central coops 1 regional Coop. Central Bank 2 central industry commodity coops Local level 2,512 Raiffeisen coops incl. 811 agricult. production coops 1,121 Cooperative Banks with 13,350 outlets 1,921 buying and marketing groups and other service coops and 214 consumer coops 151 mixed cooperatives(bank / agric. commerce, service) per 31stDec. 2011

19. The Cooperative Financial Network National cooperative central bank Regional cooperative central bank 917 204 1,121 l o c a l c o o p e r a t i v e b a n k s, 13,350 o u t l e t s ( Volksbanks and Raiffeisenbanks, Sparda-Banken, Post-Spar- und Darlehensvereine ) 5 regional auditing federations (Bavaria, Hesse/Rhineland-Palatinate/Saarland/Saxony/Thuringia, North Germany, Rhineland/Westphalia, Weser-Ems, Baden Württemberg) Audit federation of the Sparda-Banken Audit federation of the Post-Spar-Darlehensvereine National Association of Volksbanks and Raiffeisenbanks

20. Thank you ! Dr. Paul Armbruster armbruster@dgrv.de international@dgrv.de www.dgrv.de www.dgrv.org