NEW PRODUCT DEVELOPMENT SUPPORT - U.S. Agency for International

NEW PRODUCT DEVELOPMENT SUPPORT

INITIAL CONSULTANCY TO SUPPORT ST. JOHN’S COOPERATIVE CREDIT UNION

October 2007 This publication was produced for review by the United States Agency for International Development. It was prepared by Chemonics International Inc.

NEW PRODUCT DEVELOPMENT SUPPORT

INITIAL CONSULTANCY TO SUPPORT ST. JOHN’S COOPERATIVE CREDIT UNION Indefinite Quantity Contract No. AFP-I-00-04-00002-01 Task Order No. AFP-I-02-04-00002-00 Prepared for USAID/J-CAR Michael Taylor, Cognizant Technical Officer

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

CONTENTS Acronyms............................................................................................................................. i Executive Summary .............................................................................................................1 Section I: Overview of St. John’s Cooperative Credit Union..............................................6

Credit Unions in Antigua and Barbuda....................................................................6 St. John’s Co-Operative Credit Union .....................................................................6 SJCCU Swot Analysis .............................................................................................7 Strategic Goals .........................................................................................................8 Supervision and Regulation .....................................................................................9 Governance ............................................................................................................10 Credit Union Management.....................................................................................10 Summary of Recommendations for Institutional Strengthening ...........................12

Section II: SJCCU New Product Development .................................................................13

Credit Operations ...................................................................................................14 Delinquency Management .....................................................................................18 Credit Policies and Procedures ..............................................................................20 New Product Development ....................................................................................22 Key Findings..........................................................................................................24 Summary of Recommendations for New Product Development...........................25 Recommended Resources ......................................................................................28 Recommended Sequencing of Actions for SJCCU ...............................................29 Areas of Potential COTS Support..........................................................................30

Annex A: SJCCU New Products .......................................................................................32

ACRONYMS A&B Antigua and Barbuda ABCCUL Antigua & Barbuda Co-operative Credit Union League Limited AGM Annual General Meeting CCCU Caribbean Confederation of Credit Unions CU credit union MSMEs Micro, Small and Medium Enterprises OECS Organization of the Eastern Caribbean States PEARLS Performance Monitoring System for Credit Unions: Protection; Effective

Financial Structure; Asset Quality; Rates of Return and Costs; Liquidity; and Signs of Growth

RO recoveries officer SJCCU St. John’s Co-operative Credit Union WOCCU World Council of Credit Unions

NEW PRODUCT DEVELOPMENT SUPPORT: INITIAL CONSULTANCY TO SUPPORT SJCCU i

EXECUTIVE SUMMARY The objective of this consultancy was to review the feasibility study conducted by St. John’s Co-operative Credit Union (SJCCU) and provide feedback on the design of the new products that the credit union planned to launch. While the scope of work for this assignment was to review the feasibility study that SJCCU had prepared for the development of its new products and services, in actuality the consultancy included a document review both in preparation and on-site, as well as a number of interviews with management and staff. In order to provide context for the planned launch of the new products, a brief institutional assessment was completed as part of the consultancy, with findings and recommendations related to institutional strengthening provided in Section I. This report also includes an analysis of SJCCU’s current credit operations, a review of planned new products where information was available, and recommended sequenced action steps for SJCCU to consider as it moves forward with its new product launch and rollout process. Findings and recommendations related to SJCCU new product development are found in Section II. Based on the findings of this consultancy, the conclusion is that SJCCU has a number of institutional weaknesses that should be addressed in advance of the launch of any new products, including the need for a full-time, dedicated, and incentivized general manager; and the need to contain a significant non-performing loans figure. Given that a number of the planned products are already underway, this report provides a number of recommendations to better prepare SJCCU for a successful rollout of those products, and others they are considering, such as credit cards. Key findings and recommendations related to SJCCU institutional strengthening include: • SJCCU should address the outstanding items from its last examination report by the

A&B Department of Co-operatives, and prepare for its next examination in a systematic manner. This includes, but is not limited to, the preparation of a comprehensive strategic plan for the institution as well as a business plan with realistic, achievable targets for growth.

• SJCCU has been without a general manager for more than a year, with the loans manager serving as acting general manager. This is an untenable situation, particularly if SJCCU’s anticipated growth is going to come from credit operations. SJCCU must recruit and hire a general manager as soon as possible to provide strong leadership in all aspects of the credit union’s operations, as well as direction for its desired growth.

• PEARLS (Protection, Effective Financial Structure, Asset Quality, Rates of Return and Costs, Liquidity, and Signs of Growth) is the financial performance monitoring system designed by the World Council of Credit Unions (WOCCU). While management does use PEARLS as a reference point for certain ratios, such as

NEW PRODUCT DEVELOPMENT SUPPORT: INITIAL CONSULTANCY TO SUPPORT SJCCU 1

institutional capital, it is not being used actively as a management tool. The PEARLS performance management tool, with possible adaptations sanctioned by WOCCU, should be fully adopted by SJCCU to better monitor the progress of the institution towards its stated goals.

• SJCCU’s Credit Committee is not performing its duties as required under the Co-operative Act of 1997. This shortcoming is contributing to delays in loan disbursements and higher-than-recommended delinquency figures. The Credit Committee’s role must be clarified, and the board must ensure that all parties are clear regarding the roles and responsibilities of the Credit Committee vis-à-vis the loans department.

• Delinquency management continues to be a significant problem for SJCCU. A delinquency rate of 19% was cited in SJCCU’s April 2006 examination report, and at the time of this assessment, approximately 17.49% of the outstanding principal balance on the total loan portfolio was in arrears, which is significantly higher than the best practice maximum of 5%. Delinquency must be brought under control through institutionalizing and/or reinvigorating the loan monitoring function and enforcing stricter credit criteria in order to prevent the exacerbation of this problem with the launch of any new products. SJCCU must improve its asset quality through an intensive and concerted effort to improve its collections and delinquency management strategy before the rollout of new products.

• Currently, SJCCU does not have a framework for systematically identifying, measuring, and managing different types of risks, including financial risk, operational risk, strategic risk, and credit risk. As a medium-term to longer-term goal, SJCCU should develop a comprehensive risk management framework to permeate its operations.

• SJCCU has no consistent strategy for placing excess liquidity to earn the best return for the institution while managing needed cash outflows for loans. It is important to strengthen the institution’s treasury management function to prepare for an increase in loan growth, and it is recommended that SJCCU invest in targeted capacity building for the comptroller and any other relevant staff in this area.

Key findings and recommendations related to SJCCU new product development include: • SJCCU’s new product development and existing product refinement has not followed

a systematic process or best practice sequencing, nor does it follow the strategic vision of management (as documented in the PowerPoint presentation). This new product development process should include a market study using existing primary and secondary market research, a proper costing and pricing analysis for each potential product and service, and financial projections linked to overall financial projections of the institution.


• The new products and services are being offered to current clients, and potentially new clients, without being fully developed and/or integrated into SJCCU policies and procedures or the credit administration process. This presents higher than normal risk to the institution of increased delinquencies from an already high percentage of 17.49% of outstanding principal balance in arrears. Until this new product planning process has been completed, it is recommended that no additional new product lines be developed or launched, including credit cards.

• It is difficult to piece together information about the success or failure of SJCCU’s current products, given that data is not being segmented to allow holistic analysis of portfolio performance. What is known about the performance of particular products is not being consistently addressed and fed into the design of new products. Existing loan portfolio reports should be re-categorized to reflect the product lines to facilitate tracking trends of existing products.

• SJCCU does not have a costing and pricing model from which it can project whether existing or new products and/or services are profitable. No financial projections using a consistent methodology have been completed for the new products or refined existing products. A costing and pricing model needs to be developed so that SJCCU can properly assess whether interest rates on existing and planned products will be profitable.

• The credit union’s loan policy (April 2007) is lacking sufficient details regarding

terms and conditions of each product, policies, procedures, processes, approval authorities, benchmark financial ratios, and roles and responsibilities. There are significant discrepancies between the loan policy and products, policies, and procedures being implemented in practice. Communication about the status of the loan policy is inconsistent and not documented. Communication about the new product lines is inconsistent across the credit union. Credit policies and procedures need to be substantially and substantively augmented and updated to reflect correct terms, conditions, policies, procedures, and actors in credit administration for all new product lines. The board needs to approve the final version of the Credit Policies and Procedures manual, and a dated memorandum to that effect should be placed at the front of the manual.

• In addition to the SJCCU Credit Committee being out of compliance with the regulations presented in The Co-operatives Act of 1997, the authorities of the Credit Committee vis-à-vis the loans manager and loan officers must be clarified immediately, and the final decision should be documented in the revised Credit Policies and Procedures manual. The board must enforce that the newly elected Credit Committee perform its duties sufficiently to bring SJCCU in compliance with regulation and to strengthen credit operations.

• Product terms and conditions need to be harmonized across all sources, including the RBA software program; they must be documented in the SJCCU’s Credit Policies and


• SJCCU has built its existing business on consumer finance and personal loans. There is some expertise in mortgage lending, but almost none in best practice MSME lending. The current credit team staffing structure does not support MSME lending, which requires different credit analysis techniques, marketing, and intensive loan monitoring. If after the planning process SJCCU decides to go forward with its business suite of loans, intensive training needs to be provided on microenterprise lending and SME lending to existing and any newly hired loan officers that will be marketing, analyzing, and underwriting these loans.

COTS support is limited to demand-driven interventions that will support sales growth, and any specific support COTS could offer SJCCU would have to be defined within the context of the results of the feasibility assessment for the planned and launched products. After the feasibility assessment has been prepared, COTS may consider the sales growth potential that could be created through program investment in technical assistance to support particular aspects of new product development. For example, a future COTS technical assistance investment, after a review of the SJCCU feasibility study, might include strengthening the credit analysis and credit techniques required for micro and small enterprise lending. In addition, SJCCU management and the board of directors need to devote attention and internal resources to addressing critical management and operational functions that could have significant positive implications for SJCCU’s credit operations and other business functions, but are outside of the COTS program mandate. Particularly important for the buy-in and adoption of any recommendations and assistance provided, and any advancements on new product and service development, is the hiring a full-time, incentivized general manager. While limited to a sales growth focus for direct COTS investments, COTS can assist SJCCU in identifying, but not funding, technical assistance resources to assist the credit union with these efforts. Sources where SJCCU may seek expertise and technical assistance include Dominican credit unions and consultants, and the World Council of Credit Unions in Wisconsin. COTS may later wish to provide assistance to help the credit union in pilot testing or launching one or more of its products, given that safely disbursing and collecting on more loans would increase SJCCU’s interest income. Specific interventions might include: • Reviewing and providing feedback on the findings of the feasibility study, and the

shortlist of products selected by SJCCU to explore.

• Refining the cost and pricing model that is developed for the shortlist of products SJCCU will be developing and launching.


• Training (including on the job training) loan officers and loan managers on appropriate credit analysis and lending techniques for microenterprises, SMEs, mortgages, etc.

• Establishing product pilot test parameters, monitoring the pilot, and analyzing the results of the pilot.

• Refining the prototype based on pilot results and launching a more successful product.

• Assisting SJCCU in setting realistic loan disbursement targets for each of the products it is launching, and integrating them with the financial projections for the loan book and SJCCU overall.

• Helping SJCCU identify other distribution channels outside of its headquarters branch office, from which they can be disbursing more loans, improving collections on outstanding loans, and better serving clients’ other needs.


SECTION I: OVERVIEW OF ST. JOHN’S COOPERATIVE CREDIT UNION CREDIT UNIONS IN ANTIGUA AND BARBUDA In order to provide some context for SJCCU’s operations within its peer group of similar institutions in neighboring countries, this consultancy included a review of the USAID-funded Caribbean Financial Sector Assessment from 2004. According to this regional financial sector assessment, Antigua and Barbuda (A&B) had a penetration rate of 24% (defined as the percentage of the economically active population belonging to a credit union), which was the lowest of all the assessed countries. As a comparison, Dominica’s was the highest at 152%, representing membership in multiple credit unions1. The study also stated, “Significant investment and training will be needed to better implement PEARLS, and to make the credit unions more active and competitive. As elsewhere in the region, this may require some consolidation of credit unions, or at least their back office operations. Tougher discipline will also be needed at some credit unions to bring delinquencies down.” Additionally, the study provided a snapshot of credit unions in A&B. “Many credit unions are likely insolvent,” it states. “Reserves are low relative to problem loans. Credit Unions in A&B need significant investment in systems for modernization. To date, their penetration rate in A&B has been low by OECS [Organization of the Eastern Caribbean States] standards.” The Caribbean Confederation of Credit Unions (CCCU) is a member of the World Council of Credit Unions. The CCCU represents Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Guyana, Jamaica, Montserrat, Netherlands Antilles, St. Kitts and Nevis, St. Lucia, St.Vincent and the Grenadines, Suriname, and Tortola. According to the AB CCU League’s website (http://www.caribccu.coop/cms/), as of December 31, 2006, the statistics for the confederation were as follows. Number of Credit Unions 5 Members 21,990 Shares & Deposits USD $24 million (EC$ 62,400,00) Loans USD $24 million (EC$ 62,400,000) Total Assets USD $36 million (EC$ 93,600,000) ST. JOHN’S CO-OPERATIVE CREDIT UNION SJCCU was formed in 1982 and is regulated by The Co-operative Societies Act of 1997 and supervised by the Antigua and Barbuda Department of Co-operatives. SJCCU currently has a total of 16,523 members, which are classified as active and inactive. The total number of active members is 9,028, with the remaining 7,495 considered inactive. 1 Caribbean Financial Sector Assessment, Deloitte Touche Tohmatsu Emerging Markets, Ltd., USAID, March 2004.


http://www.caribccu.coop/cms/

The only other classification is that approximately 5% of members are Hispanic. SJCCU has only one branch location in downtown St. Johns. SJCCU sees its primary competition as Community First Co-operative Credit Union (formerly Teachers Credit Union) and commercial banks. SJCCU’s current outstanding loan portfolio is EC$ 21,295,470 and as of September 30, 2007, approximately 17.49% of loans in value terms were non-performing. SJCCU does not have a strategic plan or a business plan. However, a summary of the direction of the institution was included in a PowerPoint presentation entitled Mission, Vision, and Strategic Direction: A three-year plan for a stronger Credit Union (est. 2005), which was developed by the chairman. In this presentation, the vision of SJCCU was articulated as, “The St. John’s Cooperative Credit Union will be its member’s primary provider of innovative, safe and convenient financial services and products and will be recognized as the Credit Union of choice for small entrepreneurs.” The mission is “To provide a cost-effective, affordable, convenient and comprehensive set of financial services and products to our members generally and particularly to our small business owners, in accordance with Cooperative Principles.” It was identified during interviews that the orientation toward small entrepreneurs is promoted heavily by the chairman but may not have yet permeated the organization. SJCCU SWOT ANALYSIS As part of the same presentation, SJCCU presented findings from a self-conducted strengths, weaknesses, opportunities, threats (SWOT) analysis. See Table 1 below. Table 1: SJCCU Self-SWOT Analysis

SWOT CATEGORY FACTORS

Strengths • Committed Workforce • Solvent and Liquid • Continued Customer Confidence

Weaknesses • Interest Expense to Interest Income Ratio was 45% for 2003 and 2004. (High cost of funds)

• PEARLS not fully integrated in as a Performance Monitoring tool. • Delinquency rate is 17.49% • Not as well known as all the commercial banks • Location

Opportunities • Remittances and Money Transfers (CSME) • Small Business Financing (Govt. to guarantee small loans) • Severance Packages to Public Sector workers (potential for Small

Business) • Changing customer attitudes to financial services

Threats • Community First competing for the same clients locally • Regional competition expected with CSME • Employee dissatisfaction with emoluments (remuneration package) • Banks mimicking the services and conveniences of CUs


STRATEGIC GOALS Listed in the same presentation are the credit union’s key strategies to help achieve its mission. The strategies include: • Immediately bring HR systems and performance evaluations inline with best

practices. • Incorporate ICT tools as a means to improve marketing, process execution,

productivity and cost efficiencies. • Develop Criteria to proactively and systematically manage Fix Deposit interest rates

inline with the needs of the CU. • Encourage the investment in Permanent Shares as a long term source of income. • Increase CU’s value to its members thru non-financial benefits. • Decentralize access to products and services by going into the communities. • Leverage partnership with ABI to instantly offer 24 hour “banking” and other

conveniences. • Set new standards in reducing customer wait. • Encourage the development of small business by providing technical assistance and

training (our value proposition) as part of the requirement to access loans. • Promote Good Governance Initiatives. • Re-brand the St. John’s Cooperative. • Effectively manage our credit portfolio to bring it inline with acceptable PEARLS

limits. • Pursue means of securing low cost funds for onward lending. SJCCU organizes its goals under “Strategies that CARE”: Control, Compliance & Collections; Aggressive Marketing & Promotion; Revenue Growth; and Education and Ease of Doing Business. Its specific goals and targets at the date of the presentation (2005) included: • Accumulated deficit will be erased by December 31, 2007. • Dividends of 3 to 4 % should be declared at AGM 2009 (financial year 2008). • Delinquency will be 5% or less by Dec, 31 2008. • Revenue growth shall be at least 30% annually to 2008. Achieve an Interest Expense

to Income Interest Ratio of 25% or less by 2007. • Loan to Total Asset Ratio will be at least 70% by the end of 2006. • Remove unrecoverable loans from collections portfolio by 2nd Qtr of 2006. • Introduce a revised loans policy by 1Qtr 2006. • Introduce Staff Compensation and Appraisal system based on performance by the

1Qtr 2006. • Remittance and Money Transfer systems in place by 1Qtr of 2007. • Partner with ABI to provide 24 hour access to cash savings by the end of 2006. • Re-brand CU by 3Qtr of 2006. • Increase active membership by 1200 by end of 2006.


According to SJCCU’s annual report for 2006, as well as some of the interviews conducted with staff for this consultancy, SJCCU made progress toward some of its 2005 goals. The status of the goals is presented in Table 2 below. Table 2: SJCCU Progress on 2005 Strategic Goals

STRATEGIC GOAL STATUS

Accumulated Deficit to be erased by December 31, 2007 On track

Delinquency to be 5% or less by December 31, 2008 On track

Loans to Total Asset Ratio will be at least 70% by December 2006 64%

Introduction of New Loans Policy Done*

Remittance and Money Transfer Systems in Place Partial

Introduction of New Staff Compensation and Appraisal System Partial

Introduction of 24-hour ATM Conveniences Partial

*Read more on the status of the New Loans Policy below in Section X: SJCCU New Product Development The annual report also included a review of personnel and compensation, and salaries of some of the staff were adjusted. In particular, the goal for delinquency (set to be achieved by 2008) will require the credit union to undertake a significant amount of work, in order to strengthen its credit analysis and administration functions. SJCCU has not distributed dividends to members in more than seven years, which was a topic discussed at the Annual General Meeting (AGM) on October 3, 2007. Performance highlights for 2006 that were cited by the Board of Directors in the 2006 annual report included: • Income generated from loans increased by 15% to a total of EC $2.3 million • Loans portfolio grew by 14% to EC $22.0 million • Assets grew by 19% to EC $32.3 million • Member Savings grew by 28% to EC $21.6 million • Permanent Shares grew by 14% to EC $839,605 • Accumulated deficit fell by 81% to EC $121,122 SUPERVISION AND REGULATION SJCCU’s most recent examination was in April 2006, and the following critical areas were cited as requiring “immediate attention.” • The disconnection between the credit committee and the loans department.


• The loan target for the first quarter, which has been below the budget amount. • The printing of General Ledger on monthly basis. • The establishment of Strategic Plan; as the present one is incomplete. • The commitment to the Action Plan. The examination stated, “It is critical that credit

union officials and management demonstrate greater commitment to the Action Plan so that deficiencies can be corrected in a timely manner.”

As mentioned above, SJCCU still has not prepared a Strategic Plan, and it continues to use a PowerPoint presentation that does not have the typical level of description or detail. and the institution also does not have a more practical Business Plan which would outline the tactics and work plan to achieve the strategy outlined in the Strategic Plan. Additional areas cited for review in the April 2006 examination report related to credit operations are presented below in Section II. GOVERNANCE SJCCU’s Board of Directors is composed of 10 members, including the president. The board meets monthly and members may serve for two years. During the week of this consultancy (October 1-5, 2007), SJCCU held its Annual General Meeting to elect new board members and a new chair. A Supervisory Committee, composed of five members, is trained by the registrar’s office through two weeks of evening training. The Supervisory Committee appears to be relatively inactive, based on the interviews conducted for this consultancy. SJCCU has a Credit Committee composed of seven members. Interviews completed for this consultancy showed that the Credit Committee was meeting infrequently, if at all, and was not performing its duties as required under the Cooperative Act of 1997. Aside from the obvious non-compliance issue, the Credit Committee’s informal approach to its role is contributing to delays in loan disbursements and affecting the quality of the loans being issued. This in turn is contributing to the higher-than-recommended delinquency figures seen by SJCCU. Additional information regarding SJCCU’s Credit Committee is presented in Section II. CREDIT UNION MANAGEMENT general manager SJCCU has been without a general manager for more than a year, with the loans manager serving as acting general manager. This is an untenable situation, particularly if SJCCU’s anticipated growth is going to come from credit operations. The board should review existing CVs and make decision as to whether to interview candidates or not at the next board meeting. If the pool of candidates does not include a wide enough range of skill sets, then an additional recruitment effort should be launched immediately. Recommendations for broadening the manager search outside of the Antiguan newspapers include advertising on the CCCU website, checking the WOCCU website to determine whether it has an area to post jobs, advertising in Antiguan diaspora websites


and periodicals, and/or posting the position on the Consultative Group to Assist the Poorest (CGAP) microfinance gateway, which many qualified financial services professionals check regularly. PEARLS Management uses the PEARLS financial performance monitoring system as a reference point for certain ratios (such as institutional capital), but the system is not being actively used as a management tool. When PEARLS was discussed with the current president, he stated that he felt that the system did not place enough of an emphasis on institutional capital. As of the 2006 annual report, SJCCU’s institutional capital was at 2%, which is below the rate of 10% recommended in PEARLS. It would be worthwhile for SJCCU to explore with WOCCU whether it has adapted PEARLS models from other Caribbean CUs or CUs of a similar size and structure in other countries. Risk Management Risk management is an essential element of sound financial institution management. Currently, SJCCU does not have a framework for systematically identifying, measuring, and managing financial, operational, or strategic risk. During this consultancy, the credit union did complete the installation of its “Risk-Based Assessor” credit scoring tool as part of its plan to shift to risk-based pricing. However, credit risk is only one aspect; SJCCU also faces which include operational risk and liquidity risk. SJCCU management should consider development of a comprehensive risk management framework in the future, after it has achieved the remainder of its stated 2006 and 2007 goals. Treasury Management The credit union has no consistent strategy for placing excess liquidity to earn the best return for the institution while managing needed cash outflows for loans. It is important to strengthen the institution’s treasury management function in order to prepare for an increase in loan growth, and it is recommended that SJCCU invest in targeted capacity building for the comptroller and any other relevant staff. SJCCU staff may wish to review the Treasury Management Toolkit by Bankacademie in Germany (http://www.microfinancegateway.org/content/article/detail/18516). The toolkit was developed for microfinance institutions, but would be applicable to a credit union of SJCCU’s size. Delinquency Management Delinquency management continues to be a significant problem for SJCCU. Delinquency of 19% was cited in SJCCU’s April 2006 examination report, and at the time of this assessment, approximately 17.49% of the outstanding principal balance on the total loan portfolio was in arrears. Delinquency must be brought under control through institutionalizing and/or reinvigorating the loan monitoring function and enforcing stricter credit criteria (i.e. a moratorium on loans for a prescribed period of time for non-payers). If delinquency is not brought closer to the benchmark maximum of 5%, it is likely that the launch of new products will exacerbate this problem and portfolio quality will further deteriorate. Additional discussion of issues related to SJCCU’s delinquency management is presented in Section II.


http://www.microfinancegateway.org/content/article/detail/18516

Personnel/Human Resources This assessment did not include a review of current Personnel policies, or the findings of a consultancy SJCCU contracted more than a year ago to restructure human resources and compensation schemes. For SJCCU to grow its loan book and bring delinquency closer to recommended levels, compensation may need to be reconfigured to provide appropriate incentives for the institution to reach its desired targets. Management Information Systems SJCCU is using a moderately stable credit portfolio management system called CUMME developed by Brian Morris of Trinidad and Tobago. But compared to other financial institution MIS packages, CUMME is not as flexible in manipulation of data and is not as easily used for creating reports with actionable information — particularly credit portfolio quality reports, which were the focus of this assignment. One area of concern is that SJCCU does not have an intranet, and employees are sending CU information, including client information, on unsecured or non-firewalled email provided by Google, Yahoo, etc. SJCCU management should consider upgrading its internet systems after it has achieved its established goals. The principal contact for this assignment said that the institution has a backup tape or process for all data in the MIS; however, investigating this further was beyond this scope of work of the assessment. SUMMARY OF RECOMMENDATIONS FOR INSTITUTIONAL STRENGTHENING In order to continue advancing on the achievement of its stated strategic goals, and to strengthen the institutional foundation for the successful launch of new products as described in Section II, it is recommended that SJCCU undertake the following actions:

• SJCCU should address the outstanding items from its last examination report by the A&B Department of Co-operatives, and prepare for its next examination in a systematic manner. Among those preparations would be the development of a proper strategic plan for the institution as well as a business plan with realistic, achievable targets for growth.

• SJCCU must recruit and hire a general manager as soon as possible to provide strong leadership in all aspects of the credit union’s operations, as well as direction for its desired growth.

• The PEARLS performance management tool, with possible adaptations sanctioned by WOCCU, should be fully adopted by SJCCU’s Board of Directors, the new general manager, and SJCCU staff to better monitor the progress of the institution towards its stated goals.

• The Credit Committee’s role must be clarified, and the board must ensure that all parties are clear on the roles and responsibilities of the Credit Committee vis-à-vis the Loans Department.

• Before the broad roll-out of new products, SJCCU must raise its asset quality through an intensive, concerted effort to improve its collections and delinquency management strategy.


SECTION II: SJCCU NEW PRODUCT DEVELOPMENT During a prior COTS consultancy in June 2007, when the program was considering St. John’s Co-operative Credit Union as a potential client, the following challenges facing SJCCU were identified: 1. Slowing down of sales 2. Limited financial products 3. Meeting compliance needs of new oversight regulatory authority 4. High loan delinquency levels 5. Unutilized money transfer infrastructure The objective of this consultancy was to assist SJCCU in prioritizing and establish the feasibility of new financial products that the credit union plans to offer. As originally envisioned, the consultancy entailed: 1. Conducting a review and assessing the philosophy behind the decision and the work

done by the client in establishing the feasibility of the planned new financial products.

2. Meeting with the client’s management and other relevant officials and individuals in Antigua and Barbuda to complete the assessment.

3. Arising out of the assessment and the specialist’s own research and knowledge, identify a list of priority financial products to be considered by the client.

4. Identifying any additional work to be undertaken by the client to establish the feasibility of the priority list of financial products.

5. Preparing a report to include recommendations arising out of the tasks above.

The scope of work had to be modified and adapted on the first day, given the advanced status of the development and launch of some of the planned new products and the very limited information available on these products. While focusing on new product development, this consultancy also examined the basic elements of the institution as a whole, to provide context for any credit and/or new product related findings and recommendations. Because the planned new products have been launched (in some cases) or will be launched within the existing SJCCU systems, processes, and staffing structure, this section of the report provides an assessment of critical aspects of SJCCU credit. The subsections below describe SJCCU’s credit operations, current asset quality and delinquency management techniques, loan policy, and new product development process. This section also provides a brief analysis of each of the planned new products in the cases in which sufficient information was available to review.


The assessment of the new products is based on interviews conducted with SJCCU employees during the week of this consultancy, and a review of all documentation available on each of the planned new products. Interviews were conducted with: • Mr. Ephraim, president / chairman of the board • Mr. Weston, financial comptroller • Ms. Henry, loans manager, currently acting general manager • Ms. Bramble, loans officer • Ms. Clarke-Carr, treasury officer • Mrs. Richardson, member services officer • Mrs. Malone, recoveries officer • Mr. Peter Adrian, consultant for risk-based assessor credit scoring software The reviewed documentation that specifically focuses on products and services included: • SJCCU loan policy, April 2007 • Loans fact sheet (existing products) provided in new member packets and used by

loan officers • Brochure of new products provided at the branch • June 9, 2007 email summarizing notes from loan retreat for the board meeting and

that provides descriptions of new products proposed • Marketing plan prepared by BB&B Advertising, September 2007 • Sample loan contracts for “ordinary” loan and mortgage loan • Loan summary report as at September 30, 2007 • Delinquency report as at September 30, 2007 • Accounting Manual • Money Transfer Agency Agreement (unexecuted) between ABCCUL and SJCCU CREDIT OPERATIONS Loan application Applications are taken at the retail branch office only, and only paper applications are taken and processed. The credit union has no electronic banking and no roving loan officers to take applications, disburse loans, or receive loan repayments. These limitations somewhat hinder SJCCU’s ability to service existing loans and to process and disburse new loans. Clients walking into the retail branch office check in with the receptionist and make an appointment to return to discuss their loan request and to complete the loan application with a loans officer at another time. SJCCU’s application forms for ordinary loans and all other types contain the majority of data required, and the mortgage application has just been revised. Beginning in late 2007, certain application data will be input into a credit scoring system to produce a risk score and a corresponding interest rate that the applicant should be charged.


RECOMMENDATION SJCCU should consider automating its application process and forms to streamline the credit administration process, and to more effectively interface with the newly installed “Risk-Based Assessor” credit scoring application. Related to other recommendations below, ideally SJCCU should hire additional staff for the credit department in order to increase its new loan disbursements and concurrently improve its collections and recoveries of existing loans. Loan disbursement According to the consultancy counterpart, loan targets are set by the SJCCU accountant annually as he determines how to achieve the institution’s overall financial targets, without consultation with the Credit Department or Credit Committee. As cited in the April 2006 examination report, SJCCU did not achieve its loan disbursement target for the first quarter of 2006, and this continued through the remainder of 2006. SJCCU also has not been achieving its loan disbursement targets for 2007, which are presented below in Table 3. For the months of January through August 2007 combined, SJCCU underperformed on its established disbursement targets by almost 50%. This is due to a number of factors, but principally because the targets were not based on any type of quantitative market data on demand by clients or on potential clients, therefore the targets are not necessarily realistic or achievable with SJCCU’s current staffing organization and infrastructure. Table 3: SJCCU Loan Disbursement Targets and Actuals 2007 (in EC$)

MONTH TARGET ACTUAL DIFFERENCE %

January $1,100,000 $842,466 ($257,534) -23%

February $1,100,000 $601,882 ($498,118) -45%

March $1,200,000 $842,446 ($357,554) -30%

April $1,200,000 $558,568 ($641,432) -53%

May $1,200,000 $591,852 ($608,148) -51%

June $1,500,000 $480,084 ($1,019,916) -68%

July $1,500,000 $351,055 ($1,148,945) -77%

August $1,300,000 $789,288 ($510,712) -39%

TOTAL $10,100,000 $5,057,641 ($5,042,359) -50% *

*48.25% if calculated as a straight average. RECOMMENDATION After SJCCU has determined which products on which it is going to focus its efforts and resources for the next year, it should establish realistic targets for disbursements based on market potential. Targets should be set through a participatory process to ensure ownership and buy-in, involving the loans manager, loans officers, general manager, and the accountant to feed the number into financial projections. Concurrent targets should be


set for collections of outstanding loans and reducing the delinquency rate (see page 18). Considering that none of the 2007 monthly targets have been achieved, it may be worthwhile to base targets for the remaining months in 2007 on both monthly trends and the general upswing in credit requests during the holiday season beginning in December. Staffing Currently, SJCCU has two loan officers and one loan manager who is currently serving as acting general manager. This is an insufficient level of staff for a credit department with a portfolio of EC$ 21,295,469 in outstanding loans, and particularly since SJCCU is depending on expanding its credit products and other services as its main income generators. During this consultancy, one loan officer was out of the office at a week-long training, and the loan manager/acting general manager was leaving for a 3-4 week training in Israel. While there may be areas in which the staff can improve their efficiency, this small number of credit staff is insufficient even for the application through disbursement portion of the loan cycle. As described on page 18, SJCCU is conducting no loan monitoring, which also needs to be addressed. RECOMMENDATION A general manager must be identified so that the loans manager may return full time to her position. SJCCU should consider hiring additional junior loan officers to process applications, and perhaps structure the workload to have the more senior existing loan officers conduct credit analysis and evaluation and handle processing of approvals. SJCCU conducted a personnel review exercise in late 2006, and some staff salary increases were included in the recommendations and implemented. SJCCU may also wish to consider bonuses for credit staff based on both achieving loan disbursement targets and, as described on pages 18-19, improving loan collections.

Credit analysis and evaluation Based on interviews with the loan officers, the description of the credit evaluation process appears to be relatively standard, although it is not well documented in the Credit Policies and Procedures manual as described in the subsection below focused on this topic. The loan officer reviews the application and confirms the income of the applicant with the person, although there was no mention of providing payroll documentation with the exception of the mortgage product. Due to the financial structure of the credit union, mandatory savings up to a particular percentage of loan value is required for each product. There is no site visit to micro-enterprises, or “self-employed” persons requesting “ordinary” loans. Since A&B does not have a credit bureau, often the loan officers call personal contacts at either the other credit unions or the commercial banks to determine whether the client has any outstanding debt at other local institutions before submitting the loan for approval. During this consultancy, there was no evidence found of standardized ratios calculated to better inform the decision of the loan officer as to whether the borrower had the capacity to repay a loan. The newly developed and installed risk-based credit scoring system will improve credit decision making and remove subjectivity, but it is not adapted to the mandatory savings element of the credit union’s products.


When asked specifically whether clients that were in arrears and/or that had defaulted on prior loans were considered for new credit disbursements, the loan officers said that they understood that situations arose whereby clients could not repay their loans. Clients who had defaulted on a prior loan would not be precluded from receiving future loans, and clients in arrears were able to take out concurrent loans — for instance, one “dollar barrel” loan and one ordinary loan. RECOMMENDATION As described below, SJCCU’s Credit Policies and Procedures must be significantly enhanced to be useful to the credit staff at a practical level, and to serve as a benchmark for compliance to auditors and regulators. This should include establishing basic ratios and parameters for debt leverage for each type of credit product. For any type of lending to micro, small, or medium-sized enterprises, it is imperative that SJCCU loan officers make site visits to document the borrower’s assets, evaluate the business proposition, and make an informed decision about the borrower’s capacity to repay. Loan approvals and disbursements It was unclear from a review of the Credit Policies and Procedures manual and from interviews conducted with the staff what the specific process is for loan approvals at SJCCU. Additionally, no threshold approval limits are documented in the manual. As described below, there is general confusion about the role of Credit Committee, and the general understanding is that the loans manager/acting general manager is making the majority of the loan approval decisions. RECOMMENDATION As described below, clarity must be established around the role of the Credit Committee and SJCCU’s Credit Policies and Procedures must be significantly enhanced and augmented. One of the most important elements of this augmentation is to define the specific loan approval limits and approval process. Credit Committee Per the April 2006 examination report, one of the then-members of Credit Committee cited concerns in the following areas: “Loans were disbursed before being checked by the committee; the committee was sometimes unable to identify who approved the loans; and they are also unable to identify who disbursed the loans.” As described above under Governance, the inactivity of the Credit Committee is causing SJCCU to not be in compliance with their regulations and is contributing to inefficiencies in the credit disbursement process and the high level of delinquency. According to The Co-operative Societies Act of 1997 No. 59, the Credit Committee shall: a) Meet at least once every month b) Keep minutes of its meetings c) Submit a report to the Board stating

• the number of loan applications received • the number and categories of loans granted


• the security obtained for such loans granted • applications denied and delinquent loans

d) Submit a report to the Board on the matters referred to in paragraph c to the annual meeting of the credit union. It was noted during this consultancy that the disconnect between the credit committee and the loans department that was cited in SJCCU’s April 2006 examination report still exists. Additionally, the role of the Credit Committee is unclear across the institution. Some staff and board members felt that the role of the Credit Committee should be to provide oversight of the credit policies and procedures at a very high level, rather than getting into specific loan decisions. RECOMMENDATION The authorities of the Credit Committee vis-à-vis the loans manager and loan officers must be clarified immediately, and the final decision about the roles and responsibilities should be documented in the revised Credit Policies and Procedures manual. The board must enforce that the newly elected Credit Committee perform its duties sufficiently to bring SJCCU in compliance with regulation and to strengthen credit operations. Loan and Loan Portfolio Monitoring Loan monitoring is a crucial function in a best practice credit process for any type of financial institution to ensure that potential repayment problems are identified and addressed early into the loan cycle, and that the institution can avoid costly loan losses and write-downs. Loan monitoring of the current portfolio is conspicuously absent from SJCCU’s credit cycle and is contributing to its high delinquency rates. Disbursements are not followed up with regular client relationship management for business clients or individuals taking out personal loans. Rather, loans are disbursed by the loan officers then handed to the recoveries officer after they have already missed payments. While there is a portfolio summary report and a delinquency management report, it is difficult to ascertain which products are performing better over others because they are not clearly identified as data fields. RECOMMENDATION Strong loan monitoring is essential particularly for business lending to micro and small entrepreneurs according to best practices for all types of financial institutions. SJCCU should establish and institutionalize a rigorous loan monitoring function to prevent additional delinquencies, and to prepare for new loan products targeting small entrepreneurs. Sufficient time for appropriate loan monitoring needs to be built into the loan officers’ daily activities, and SJCCU will likely need to hire additional loan officers to backfill and to help market and service the new product lines. DELINQUENCY MANAGEMENT The April 2006 examination report noted that SJCCU’s delinquency rate was too high at approximately 19%. The report also noted that there was “no indication that credit committee is receiving monthly delinquency reports from management.” Given that the quality of a financial institution’s existing loan portfolio is a strong indicator of the


potential success of new credit products, this consultancy examined current delinquency management processes to assess the impact the launch of new products may create. Based on the delinquency report for the end of September 2007, compared with the September 30 loan summary, approximately 17.49% of outstanding principal balance for all loans are in arrears. SJCCU’s delinquency report is organized by different categories of short and long term loans, and by purpose which unfortunately does not allow a product-by-product comparison. The only product breakout was for “dollar barrel” loans, 34% of which are in arrears. This is significant for one product line, but when queried, SJCCU credit staff did not seem concerned with this extremely high figure. A contributor to the delinquency problem is that payments must all be made manually at the branch, which has limited hours of operation. SJCCU has extended its hours on certain days to accommodate the many people who are not able to make it into the branch before 3 p.m. The recoveries officer monitors loans that are past due on a daily basis. SJCCU gives a 5-day grace period for each payment before it officially goes into arrears so the RO begins following up on Day 6 of a missed payment with a phone call and a written notice. If the payment has still not been made at 60 days the RO sends a default notice, and at 90 days a final notice is sent to the client, the amount of compulsory savings the client had put in is deducted from his/her account, and the loan is given over to the collections agent. SJCCU currently uses three external collections agents. The recoveries officers stated that previously SJCCU had at least one collections officer, but she had left and not been replaced, so now it outsources the collections function. Of the three collections agents, one is kept on a retainer of $300/month and earns 10% of the outstanding balance on the defaulted loans collected. The remaining two collections agents are not kept on retainer but earn 15% of the outstanding balance collected. The collections agents are able to visit clients directly, whereas there are no internal SJCCU staff resources to do perform this function, since the recovery officer’s time is spent on phone calls and preparing preliminary notices. Despite the efforts of the recovery officer and the contracted collections agents, SJCCU still has difficulty getting delinquent clients to repay. Very few cases go to court, but in some cases, SJCCU has successfully repossessed and liquidated property. The recoveries officer noted that the underwriting process has deficiencies, and that basic client data such as phone number and address is not updated systematically, which makes the job of recoveries even more difficult. She mentioned that she would have less delinquent loans to follow up on if loan monitoring were improved; currently, loans are disbursed and then they move to recoveries if not paid on time. The credit union tries to restructure loans wherever possible. “Self-employed” business people (microenterprise) loans tend to go into arrears most frequently. Customers will say that business is not good this month, or that someone in the family has a health problem.


Others say that they are waiting their turn from the “box,” which is a ROSCA-type arrangement. Clients who default on one or even multiple loans are not banned from taking out new loans, and in fact the delinquency report showed clients with multiple delinquent loans outstanding. According to the consultancy counterpart, if a client has a delinquent payment, a red flag pops up in the system to alert staff. The recoveries officer said that she did not know what her targets were for improving collections and reducing delinquency. RECOMMENDATIONS Targets for reducing delinquencies must be established and communicated across SJCCU so that all staff are aware of the importance of this goal and their roles and responsibilities for achieving it. The recoveries officer in particular should have clear targets for collections that should be monitored on a monthly basis. Loan monitoring and stronger enforcement of loan covenants must be established to prevent delinquencies in the first place, and underwriting procedures must be strengthened to facilitate collections when required. SJCCU should consider reducing its tolerance for clients with repeat delinquencies and/or defaults by prohibiting them from taking out loans for a certain period of time, rather than consistently restructuring their loans. Data in the delinquency report should be re-categorized by specific product line, rather than short term and long term, in order to better examine which products are profitable and which are not. Additionally, the report should mirror the actual collections process in terms of number of days (30 days late, 60 days late, etc.) and the specific steps taken. The Credit Committee should receive and be mandated to respond to the delinquency reports at its regular meetings. Utilizing improved reporting procedures, delinquency trends for each product line should be analyzed, and an action plan with specific targets for reducing delinquency on existing loans should be developed and implemented. Additionally, a comprehensive delinquency report should be produced, showing current non-performing loans against current amounts outstanding. CREDIT POLICIES AND PROCEDURES The April 2006 examination report noted that the revised loan policy is still under review. According to the majority of interviewees, another revision to SJCCU’s loan policy, prepared in April 2007, has not been approved by the Board of Directors. Therefore credit staff are essentially engaged in accepting credit applications, conducting underwriting, and disbursing and collecting loans without approved policies and procedures in place. The review of this document found that the loan policy, once approved, can serve as a theoretical framework for credit offered by SJCCU, but the policy is lacking in specificity


common to most credit policies and procedures manuals. Due to its generic content and repeated emphasis of the “Risk-Based Assessor” software program throughout the document, it reads as if it were written by the service company that has installed and will support the program, rather than by SJCCU’s credit and management teams. Critically, there are many discrepancies between the loan policy and other material circulating at SJCCU regarding the new products in particular. There is a section on page 14 describing the policy for extending lines of credit but credit lines are not one of the products offered in Section III: Loan Menu. Additionally, there is guidance provided in the loan policy that is not being enforced and/or has been modified in practice. For instance, page 13 identifies that “The loan officer shall be responsible for processing loan applications, maintaining credit files, verifying loan security, analyzing and approving loan applications within his/her limit, submitting appropriate loan applications for the Manager’s approval, maintaining loan documentation, monitoring loan performance, undertaking delinquency control and collections.” The loan policy does not but should provide the loan approval limits for all credit staff. Currently, no loan monitoring is being carried out by the loan officer or any other staff and collections are handled by the recoveries officer rather than the credit officer, so the credit union is already operating out of compliance with its loan policy. As another example of practical non-compliance, the description of “The Family Protector” (mortgage), states: “Because the interest rate is fixed over the life of the loan, currency and price volatility could seriously reduce profit margins. That is why the fixed-rate mortgage loan has a longer duration, attracts a higher interest rate…” In actuality, the current mortgage product being offered is at a fixed (non-risk based) interest rate of 8.5%, which is at least 1.5% below the rate of any other loan products. Section I - The Business Environment contains subsections on the domestic business outlook, and the re-branding initiative of the institution including the articulated vision, mission, and key strategies for the credit union. The majority of this section is typically included in an institutional strategic plan rather than in the loan policy, with the exception of the last five paragraphs. Section II - The Loan Underwriting Guidelines does not include any mention of the Credit Committee nor does it provide the loan approval authorities for different levels of credit staff. The subsection on Delinquency Control: Quality Control is a generic list of “delinquency signals” and the collections procedure does not delineate procedures tailored to the collections process in practice according to the recoveries officer. Additionally, this section indicates that there is no loan loss provisioning until the loan has been found to be unrecoverable, which contradicts both the provisioning policy in the accounting manual and best practice. It also does not assign responsibility or accountability to staff performing these actions and the time periods for different levels of recourse.


Section III - The Loan Menu describes a number of products that are not being offered, nor were they mentioned during any interviews. They include the Commercial Mortgage, the Business Accelerator, and the Microfinance Window. Page 18 describes a required “character element,” which is a mandatory cash collateral contribution. Under the traditional 5Cs of credit, this is considered the borrower’s Capital contribution. This section also refers to the importance of portfolio diversification, but it does not present any required or recommended concentrations by sector, market, or product line. While each product description includes some of the terms, they are not complete. For instance, no loan size ranges for the mortgages are included, and there are no minimum guiding ratios for the business loan suite. The terms for the motor vehicle loans do not match other product descriptions circulating at SJCCU. The Education Advantage loan described here appears to be a university tuition loan for up to USD $100,000, but other education loan product descriptions are geared for primary and secondary school. RECOMMENDATIONS The loan policy should be revised and expanded to become a comprehensive credit policies and procedures manual that will serve as guidance for underwriting, the basis for making credit decisions, training material for existing and new loan officers, and as an internal control check. The newly elected Credit Committee should be involved in updating and expanding this document and the Supervisory Committee/Board of Directors will need to approve the document. Some recommended additions to provide specificity include: • Harmonize and rationalize the set of Loan Policies embedded within the Accounting

Manual with the revised Credit Policies and Procedures manual.

• Harmonize and rationalize all terms and conditions for all products with the revised Credit Policies and Procedures manual.

• Document roles and responsibilities of all parties involved in credit operations.

• Develop step-by-step procedures with numbers of hours/days for each step of the process for each credit product with clearly assigned roles and responsibilities.

• Include specific steps for using the RBA software to conduct credit scoring for each product.

• Include a sample application and sample contract template attached for reference for each product.

NEW PRODUCT DEVELOPMENT Prior to the commencement of this consultancy, SJCCU had begun to offer its new products and services as well as refined versions of existing products. Therefore, this subsection of the report provides a summary of key findings related to new product


development and recommendations for next steps, considering the state of SJCCU’s advancement. The first portion of this subsection describes the planned new products and services based on the limited information available. Loan Products Annex A presents the list of planned or launched credit products with the basic terms for each, as well as the status of each product as captured through document review and interviews during this consultancy. These products include brand new products as well as modifications to existing products. Because SJCCU is unable to segment data by product line, the performance of existing products cannot be measured, and no data could be fed into the design of new or modified products. The interest rates for all the products are quite similar, given that the credit union has no interest rate pricing model that correlates risk by product or client with an appropriate rate to recover base costs (funds, administrative expenses), and provide a sufficient return to continue expansion of services. Non-loan Products A brief analysis of other non-loan products that SJCCU is interested in offering to their members is presented below. • Credit card: During this consultancy, there was no information or documentation

available for review describing research and/or plans for launching a credit card product. Considering SJCCU’s very high delinquency rates on its current loan portfolio, and its lack of actionable client data, it is recommended that SJCCU hold off on trying to launch a credit card product until a comprehensive feasibility assessment including demand information has been undertaken, and its current products are performing at a more sustainable level.

• ATM partnership: According to the “SJCCU Mission, Vision, and Strategic Direction” PowerPoint presentation, there was a plan to partner with ABI by the end of 2006 to allow SJCCU members 24-hour access to their funds. During this consultancy, there was no information or documentation available to review summarizing research and/or potential partners for this service. It is recommended that a complete feasibility study be undertaken, to include demand and fee structure information, before this product is launched.

• Money transfer: One of the major goals covered in the PowerPoint presentation was to have remittance and money transfer systems in place by the first quarter of 2007. According to the 2004 USAID financial sector assessment, remittance figures for the OECS are approximately $211 per capita and 4% of GDP. Figures for A&B were not available, but likely there is unmet demand that will be served by SJCCU’s new money transfer product. There was some discussion about SJCCU’s new money transfer product during this consultancy, and it was mentioned at the AGM as one of the new products that would be rolled out to members on October 18, 2007. This product is being overseen by the Antigua & Barbuda Co-operative Credit Union


League Limited (ABCCUL) and will be offered by both SJCCU and Community First CU, its most significant competitor.

• A draft agreement between ABCCUL and SJCCU has been prepared, but had not been executed as of the end of this consultancy. The key component missing from the version of the draft agreement reviewed was the fee and commission schedules, which were referred to within the document but were not attached. There was some discussion about whether this money transfer product would be available for international use outside of Jamaica, and this draft agreement does not go into much detail about which countries outside A&B this is applicable to.

• More importantly, there was no basic product description available to be shared with SJCCU staff or members, nor was there any evidence that the board had approved this product for launch. There was no documentation in the Credit Policies and Procedures manual or elsewhere regarding the mechanics of the product or the back office procedures that would be necessary to roll out this product, nor was there an opinion letter or similar document from the A&B Department of Co-operatives approving the roll out of this product, although perhaps such a document is available from ABCCUL.

KEY FINDINGS • SJCCU’s new product development and existing product refinement has not followed

a systematic process or best-practice sequencing.

• SJCCU has not undertaken a feasibility assessment or financial projections for any of its new products and services. Interviews indicate that new products and services were developed based on complaints of current members and from looking at competitor credit unions and commercial banks.

• It is difficult to piece together information about the success or failure of SJCCU’s current products because data is not being segmented to allow holistic analysis of portfolio performance. What is known about the performance of particular products is not being consistently addressed and fed into the design of new products.

• SJCCU does not have costing and pricing models from which it can project whether existing or new products and/or services are profitable. No financial projections using a consistent methodology have been completed for the new products/refined existing products.

• New product development has not followed the strategic vision presented by the

current (as of the date of this consultancy) chair of the board to become the financial institution of choice for small businesses. There are no existing financial products or services for businesses, and only one microenterprise product was listed under the new products.


• SJCCU’s current credit team staffing structure does not support MSME lending, which requires different credit analysis techniques, marketing, and intensive loan monitoring.

• The loan policy (April 2007) is lacking sufficient details regarding terms and conditions of each product, policies, procedures, processes, approval authorities, benchmark financial ratios, roles and responsibilities. — There are significant discrepancies between the loan policy and products, policies,

and procedures being implemented in practice. Communication about the status of the loan policy is inconsistent and not documented.

— Communication about the new product lines is inconsistent between the loan policy, the email documenting the June 9 Loans Department retreat, and the different marketing materials available.

• The new products and services are being offered to its current clients, and potential new clients, without being fully developed and/or integrated into SJCCU policies and procedures or the credit administration process. This presents higher than normal risk to the institution of increased delinquencies from an already high percentage of 17.49% of outstanding principal balance in arrears.

• SJCCU’s Credit Committee is not functioning and is out of compliance with the regulations presented in The Co-operatives Act of 1997.

SUMMARY OF RECOMMENDATIONS FOR NEW PRODUCT DEVELOPMENT A comprehensive feasibility study and planning process for all new products, including those that have already been launched, should be undertaken. This process should include a market study and a proper costing and pricing analysis. This process can be organized per the MBP New Product Development Guide (an in-depth planning manual that provides tools for each step in the process to aid decision making) or a similar guide. For all types of financial institutions, new product development and existing product refinement should be undertaken through a systematic and sequenced product development process to ensure that the products and services are meeting the clients’ needs and are manageable by the financial institution. A typical product development process includes the following steps in sequence, with a feedback loop.

• Evaluation and preparation • Market research • Design • Pilot test • Refinements after performance information is analyzed • Launch • Feedback information from the launch into the evaluation of product performance During each of these steps, the institution needs to consider client needs, its institutional strengths, and competitive positioning against other institutions. Additionally, a significant amount of thought and effort should go into the costing and pricing analysis of


each product. Once the institution has determined that it wants to diversify its products and services, it must assess the practical issues and resources required, including2: 1. Staffing: Specialized expertise or a more highly educated credit officer may be

needed, depending on the complexity of the product. An institution must assess whether its current credit officers can be trained to deliver the new product and if has enough staff overall to handle increased volume.

2. Delivery channels: The institution must have sufficient capacity within its delivery

channels to market and distribute the new product. These delivery channels include the physical infrastructure and/or technology to reach the target market area and provide easy access to clients.

3. Systems: The institution’s management information system (including both

accounting and portfolio monitoring) needs to track, manage, and in some cases disburse the new product. A new product will require separate bookkeeping systems at first to track demand and analyze profitability. Back-office systems might need to be versatile if the new product has nonstandard payment terms or other unique characteristics that differentiate it from existing products.

4. Risk management: While diversification usually reduces portfolio risk, new products

can create liquidity problems if they are not managed carefully. If an institution introduces longer-term credit facilities, such as mortgages for longer terms, it must ensure that it has other sources of short-term capital to meet its interim cash needs. In addition to this “term” matching between assets and liabilities, the institution must measure inherent risks in certain loan instruments. For example, issuing lines of credit, especially those considered “evergreen,” in which the loan is continually rolled over (rather than the balance being paid in full and a new loan issued) are riskier than fixed-asset or term loans. Robust management information and accounting systems, in addition to skilled, responsible staff, are needed for periodic portfolio monitoring.

5. Training procedures: Training is a staff-intensive but critical part of new product development to which an institution must devote resources. Staff need to be trained on the specifics of the product, how to promote it to customers, and how to track it. Manuals need to be developed and courses designed in order to ensure quality implementation. Training may also include dedicated mentors, floating specialists, or rotations offering on-the-job training to credit officers.

Comprehensive client-oriented market research was not undertaken before SJCCU launched its new products. However, in response to a number of questions about why the products were selected and how they were structured, staff responded that the competition was offering a product with certain terms. SJCCU has information about existing members is classified as “active” or “inactive.” The CU’s uses the following data

2 Adapted based on concepts presented in New Product Development for Microfinance: Evaluation and Preparation by Monica Brand, ACCION International, September 1998


fields that can be manipulated to provide better current client data to feed into product design: • Date of birth • Date Joined • Marital Status • Sex • Location • Occupation • Employer SJCCU should engage in more systematic primary and secondary market research for a shortlist of the new products. Sources for secondary market research include SJCCU reports on the performance of current products, such as loan distribution summaries and delinquency reports by product (see Delinquency Management section); industry data and market studies available on the Internet, such as the description of the tourism industry found in SJCCU’s loan policy; or government census reports showing demographic trends. Sources and techniques for primary market research may include surveys to provide quantitative and qualitative data; one-on-one interviews with both existing and potential clients; or focus group discussions with clients, non-clients, and dropouts. • Until this new product planning process has been completed, no additional new

product lines should be developed or launched, including credit cards.

• Products and services that are not being offered in reality but have been placed in marketing materials (i.e. financial counseling) should be removed from promotional materials. If this process is too costly, these products and services should not be actively promoted by branch staff.

• Product terms and conditions need to be harmonized across all sources including the RBA software program, they must be documented in the SJCCU’s Credit Policies and Procedures manual, and staff must be trained on them.

• A costing and pricing model needs to be developed so that SJCCU can properly assess whether interest rates on existing and planned products will be profitable.

• Existing loan portfolio reports should be re-categorized to reflect the product lines to make it easier to track trends of existing products.

• Credit policies and procedures need to be substantively augmented and updated to reflect correct terms, conditions, policies, procedures, and actors in credit administration for all new product lines. The board needs to approve the final version of the Credit Policies and Procedures manual, and a dated memorandum to that effect should be placed at the front of the manual.


• The authorities of the Credit Committee vis-à-vis the loans manager and loan officers must be clarified immediately, and the final decision should be documented in the revised Credit Policies and Procedures manual. The board must enforce that the newly elected Credit Committee perform its duties sufficiently, in order to bring SJCCU into compliance with regulation and to strengthen credit operations.

• SJCCU has built its existing business on consumer finance and personal loans. There is some expertise in mortgage lending, but almost none in best practice MSME lending. After the planning process, if SJCCU decides to go forward with its business suite of loans, intensive training needs to be provided on microenterprise lending and SME lending to existing and any newly hired loan officers that will be marketing, analyzing, and underwriting these loans.

RECOMMENDED RESOURCES The list below is composed of resources that may be useful to SJCCU as it considers the recommendations provided within this report. While some of the resources were prepared for use by microfinance institutions, they provide strong fundamentals in each topic area that will be applicable to a credit union of SJCCU’s size. MicroSave Briefing Note #9: Key Questions That Should Precede New Product Development by Graham A.N. Wright, et. al. found at www.microfinancegateway.org New Product Development for Microfinance: Evaluation and Preparation by Monica Brand, ACCION International, September 1998. The MBP Guide to New Product Development by Monica Brand, ACCION International, August 2001. Occasional Paper No. 1: Microcredit Interest Rates by Richard Rosenberg, found at www.microfinancegateway.org. A Technical Guide to Mainstreaming: The Credit Union Perspective, WOCCU. A Technical Guide to Remittances: The Credit Union Experience, WOCCU.


http://www.microfinancegateway.org/

http://www.microfinancegateway.org/

SECTION III: CONCLUSIONS As revealed through this consultancy, SJCCU has a number of institutional weaknesses that should be addressed in advance of the launch of any new products. The most significant issues are the need for a general manager and the need to contain a significant non-performing loans figure. Considering that a number of the planned products are already underway, this report provides a number of recommendations to better prepare SJCCU for a successful rollout of those products and others that it is considering. RECOMMENDED SEQUENCING OF ACTIONS FOR SJCCU Based on SJCCU’s stated goals for new product development as well as institutional strengthening needs identified during this consultancy, it is recommended that SJCCU consider taking the action steps in Table 4, in sequence, to achieve those goals. Table 4: Recommended Sequencing for SJCCU Actions

ACTION STEP

MO

NTH

1

MO

NTH

2

MO

NTH

3

MO

NTH

4

MO

NTH

5

MO

NTH

6

MO

NTH

7

MO

NTH

8

MO

NTH

9

MO

NTH

10

MO

NTH

11

MO

NTH

12

Institutional Strengthening

1. Hire general manager X

2. Prepare Strategic Plan X X

3. Prepare Business Plan X X

4. Discuss adapting PEARLS with WOCCU and implement as management tool

X

5. Develop risk management framework

X

6. Strengthen treasury management function

X

7. Improve delinquency management X X X X X X X X X X X X

8. Clarify and document role of Credit Committee

X

New Product Development

9. Revise loan disbursement targets for the remainder of 2007

X

10. Establish loan monitoring as key function within credit process

X X

11. Revise portfolio and delinquency reports to provide actionable product specific data

X X

12. Develop costing and pricing model X X


13. Conduct comprehensive feasibility assessment for all launched / planned new products

X X X X

14. Design, test, and launch up to two new products

X X X

15. Revise, augment, and refine loan policy to include all basic policies and procedures, and as needed for each new product

X X X X X X X X X X X X

16. Harmonize all product terms and conditions across SJCCU

X X X X X X X X X X X X

17. Hire additional credit staff X X X

18. Train existing and additional credit staff on new products

X X X

AREAS OF POTENTIAL COTS SUPPORT COTS support is limited to demand-driven interventions that will support sales growth, and any specific support that COTS could offer SJCCU would have to be defined within the context of the results of the feasibility assessment for the planned and launched products. SJCCU has considerable work to do in preparing a comprehensive feasibility assessment for the new products and services it wishes to launch, which is the first step in a best practices systematic product development process. After the feasibility assessment has been prepared, COTS may consider the sales growth potential that could be created through program investment in technical assistance to support particular aspects of new product development. For example, a future COTS technical assistance investment after a review of the SJCCU feasibility study might include strengthening the credit analysis and credit techniques required for micro and small enterprise lending. In addition, SJCCU management and the Board of Directors need to devote attention and internal resources to addressing critical management and operational functions that could have significant positive implications for SJCCU’s credit operations and other business functions, but are outside of the COTS program mandate. Particularly important for the buy-in and adoption of any recommendations and assistance provided, and any advancements on new product and service development, is the hiring of a full-time, incentivized general manager. Although limited to a sales growth focus for direct COTS investments, COTS can assist SJCCU in identifying, but not funding, technical assistance resources to assist the credit union with these efforts. Credit unions are significantly more evolved and sophisticated in Dominica, and a Dominican consultant or a staff swap with a Dominican credit union might be a good source of technical assistance for SJCCU. This would present a lower cost model in providing SJCCU with regionally specialized expertise. SJCCU’s chair had recently been in Arizona and had proposed a staff swap through the Arizona Credit Union League, but



the status of this activity was unclear. Source Dominican expertise may be more beneficial for SJCCU, given the more similar context. An additional source of expertise and skills that SJCCU could consider is the World Council of Credit Unions, based out of Wisconsin. WOCCU typically provides guidance and assistance through national apex institutions, in this case the ABCCUL, but they also offer assistance to individual credit unions and might have some grant funds that could be tapped by SJCCU. Once the preparatory work has been undertaken by SJCCU to complete the feasibility study and address some of its institutional and credit administration weaknesses, COTS may wish to provide assistance to help the credit union in pilot testing or launching one or more of its products. Since COTS’ emphasis is on helping businesses increase their sales, working with SJCCU to safely disburse and collect on more loans would be the natural focus of this assistance, since it would increase SJCCU’s interest income. Specific interventions might include: • Reviewing and providing feedback on the findings of the feasibility study, and the

shortlist of products selected by SJCCU to explore

• Refining the cost and pricing model that is developed for the shortlist of products SJCCU will be developing and launching

• Training (including on the job training) loan officers and loan managers on appropriate credit analysis and lending techniques for microenterprises, SMEs, mortgages, etc.

• Establishing product pilot test parameters, monitoring the pilot, and analyzing the results of the pilot

• Refining the prototype based on pilot results and launching a more successful product

• Assisting SJCCU is setting realistic loan disbursement targets for each of the products it is launching, and integrating them with the financial projections for the loan book and SJCCU overall

• Helping SJCCU identify other distribution channels outside its headquarters branch office, from which they can be disbursing more loans, improving collections on outstanding loans, and better serving clients’ other needs

ANNEX A SJCCU NEW PRODUCTS

Planned or Launched New Credit Products

Loan Purpose Target Clients Loan SizeEC$

Tenor (Months)

Repayment schedule

Nominal Interest Rate

Cash Collateral / Down Deposit

Other Collateral Fees Documentation RequiredStatus Notes and Recommendations

Celebrating 50 Event Loan

Working CapitalMicroenterprises in retail sector Up to $5,000 3 N/A 10.00% 10% of loan value

Vendors license/business registrationFood handling certificateFinancial recordsShopping list for inventoryBank statement from savings institution for inactive/new members Not being offered b/c

Board has not approved

Recommend at least bi-weekly payments or weekly rather than monthlyMany target clients will be in the informal sector and may not have proper licenses, etc. Doubtful these clients will have financial records.How will mobile collection service work? Who will collect and how frequently?

Celebrating 25 Years with Education in the Forefront

School fees and school supplies purchase

Parents and guardians of students in all forms Up to $10,000 12 N/A 10.00% 10% of loan value

Quotation from institutionJob letter (of parent)Salary deduction (authorization)

Not being offered b/c Board has not approved School fee cheques written directly to school

Hurricane AH COME

Purchase of hurricane shutters and home repairs Home owners Up to $25,000 36 N/A 10-15% 15% of loan value

Estimate/QuotationContract for repairsJob letter / source of incomeSalary deduction as applicable

Not being offered b/c Board has not approved

This seems like a substantial amount of money. Confirm prices of hurricane shutters and repairs.

Christmas AH COME/Dollar Barrel Consumer finance Up to $5,000 12 N/A 10.00% 10% of loan value

Job letterSalary deduction as applicable

Will be offered starting October 15 - food and cosmetic/toiletries

Clients should not need a 12 month repayment period if this loan is linked to the Christmas savings product

Be Secure Insurance Loan Insurance

Property and vehicle owners 12 N/A 10.00% 25% of loan value

Insurance noticeJob letterSalary deduction as applicable

Not being offered b/c Board has not approved

Recommend that insurance financing be built into the mortgage and vehicle loan productsAre there particular insurance companies with which SJCCU could form an alliance to cross sell?

Mortgage 25 Mortgage / home construction 120-300

3 o t g aceperiod on principal after construction completionAllowed to pay off half way through original term 8.50% 5% of home value

Engineer fees, insurance fees, and legal fees all bundled into loan amount

Standard documentation for mortgages presented aboveQuotation for planned furniture purchase

None have been disbursed yet but 3 have been applied for and expect one disbursed next week and remaining two later

a t e s p t a ga Ce t e o e g ee g a dsupplies at discounted ratesHave risks for construction been properly measured and factored in to pricing?Why include furniture? Furniture should be financed using a consumer product or a HELOC once there is equity in the home.

Internet Vehicle Loan5+ year old car purchase

Existing Active Members only

Up to $50,000 - loan amount will include customs duties on arrival at port and insurance 36 N/A 15.00%

25% of loan value if salary deduction or 50% down payment Bill of sale on vehicle

Standard vehicle documentation +Salary deductionInvoice for vehicleConfirmation of shipping insuranceComprehensive insurance quotation from partner insurance agency

Not yet-insurance companies do not offer comprehensive insurance on vehicles over 10 years. Partnership not formalized yet.

*Potential partnership with State Insurance, ABI insurance, British American insurance to offer comprehensive insurance for up to 3 years.

Pay Day LoansConsumer Finance for Emergency Use Up to $5,000 1 N/A 12.00% 10% of loan value

Job letterQuotation where available

Yes - offered it before but not much marketing. Will revitalize

Interest rate should be higher for quick disbursement and quick turnaround loan

Ordinary Loan 1 - proposed changes

Consumer Finance $1 - $4,000 up to 60 Monthly with 5 days grace per

month

12.00% 33% of loan value Job letter/source of incomeInvoice/letter from seller, bills, estimates where applicable

Not approved by Board

Is any cash collateral required in addition to other savings with SJCCU?Why require invoice, etc. - is this a microenterprise loan?


Consumer Finance

$4001 - $15,000 up to 60

Monthly with 5 days grace per

month12.00% 50% of loan value

Job letter/source of incomeInvoice/letter from seller, bills, estimates where applicable


cash collateral in addition to other savings or total on hand at CU?why require invoice, etc. - is this a microenterprise loan or a personal loan?


Consumer Finance

$15,001 - $20,000 up to 60

Monthly with 5 days grace per

month

12.00% 60% of loan value

Job letter/source of incomeInvoice/letter from seller, bills, estimates where applicable


cash collateral in addition to other savings or total on hand at CU?why require invoice, etc. - is this a microenterprise loan or a personal loan?


NEW PRODUCT DEVELOPMENT SUPPORT - U.S. Agency for International

Documents

Transcript of NEW PRODUCT DEVELOPMENT SUPPORT - U.S. Agency for International