COLOMBIA: Strengthening the Financial Sector Safety Net for Cooperatives
Colombia has a broad range of cooperatives that offer different levels of financial services. These cooperatives are accredited deposit-taking institutions of two types: those that serve only their members, and those that offer financial services to nonmembers, which are called cooperativas financieras or financial cooperatives.
To serve all of Colombia’s financial institutions, there are two deposit insurance schemes: the Guarantee Fund for Financial Institutions (FOGAFIN), and the Guarantee Fund for Cooperatives (FOGACOOP). FOGAFIN charges a premium of 30 basis points and covers up to $6,500 (Col$20 million) per person per institution. It covers 45 entities, all of which are supervised by the Superfinancieria. FOGACOOP is the deposit insurance scheme for all deposit-taking institutions. It covers 187 cooperatives, charges a premium between 50 and 55 basis points, and covers up to $2,600 (Col$8 million) per person, with coinsurance of 25 percent. Therefore, the financial sector safety net is not evenly applied across banks and cooperatives.
Cooperatives serve a large number of people with access to formal financial services in Colombia. Although small in terms of their assets, cooperatives serve a disproportionate share of those with access to financial services. It is estimated that although they account for only 5 percent of assets, cooperatives serve between 15 and 25 percent of those with access to financial services, or approximately just under 6 million members. The typical cooperative members can be defined as the poor and the almost-poor.
FOGACOOP had requested the assistance of the World Bank through the FIRST Initiative for international expertise to validate its approach to funding, in order to forecast its future financing needs more accurately. Specifically, it requested assistance in reviewing its reserve target fund size, its use of coinsurance for depositors, and whether the introduction of risk-based premiums was feasible or recommended. FOGACOOP acknowledged that the financial cooperative sector may be more vulnerable, as it is not as well regulated or supervised as the banking or insurance sectors.
FIRST provided a small, targeted TA project, Strengthening Deposit Insurance for Cooperatives, worth $72,000; it was implemented from March 2014 to March 2015. Together with FOGACOOP, the World Bank team conducted stress tests on the cooperative sector in order to understand FOGACOOP’s balance sheet risks so as to inform the parameters for determining the target fund size, its use of coinsurance, and the range of sustainable premiums. Using the historical parameters (nonperforming loans, provisioning, speed of resolution, and an additional margin) from the cooperative sector crisis in 1996–1997, a contiguous two-year scenario was calibrated in order to gauge the strengthening of the insurance scheme.
The stress tests determined that the current deposit insurance fund size at FOGACOOP was likely larger than it needed to be. Benchmarking countries using the World Bank’s 2014 database of worldwide deposit insurance suggested the same recommendation. Furthermore, because cooperative membership requires an equity contribution, the effective coinsurance in the event of a cooperative failure would sometimes be in excess of 40 percent. Research also showed that coinsurance had become less common around the world today than it was in 2003. The main recommendations were, therefore, to eliminate coinsurance and increase the coverage level. This would serve to strengthen the financial sector safety net so that the poorer cooperative members were receiving more equitable coverage. This would prevent regulatory arbitrage—cooperatives migrating to become financial cooperatives for more favorable terms.
The project team’s findings and recommendations were well received by the FOGACOOP Board. In July 2015, FOGACOOP’s Board adopted the recommendations, specifically:
- Eliminating coinsurance
- Increasing the deposit coverage of financial cooperatives from Col$8 million to Col$20 million (Colombian pesos)
- Increasing the deposit coverage of members-only cooperatives from Col$8 million to Col$12 million
As most cooperative members in Colombia are from the lower socioeconomic strata, eliminating coinsurance and increasing the coverage limit will have significant positive impact on the poor in the event of a crisis. Increasing the insurance coverage for both types of cooperatives enables a higher percentage of depositors to be fully protected in the event of a failure. This would make the savings in cooperatives more attractive and thus increase savings in the financial system. The increased protection would also prevent the savers from withdrawing money in the event of crisis and thus promoting financial stability, and strengthen the financial sector safety net.
Currently, there are 1,600 cooperatives, which accept deposits without having deposit insurance, and thus pose risks to the stability of the financial system. Looking ahead, the team recommended focusing on expanding the number of institutions with deposit insurance subject to minimum eligibility criteria. This is important for expanding the financial system safety net in the long run.