Our purpose is to introduce credit unions into Cuba, so we visited the country this week to take the first steps. We learned about their banking and financial services by engaging with Cuban economists and interviewing local Cuban entrepreneurs.
Cuba is a state planned economy, not a market economy. The financial system in Cuba to date is state-controlled and directed. Financial institutions are state-owned with specific sector directives set in the central plan. Interest rates and exchange rates are determined centrally.
In 2012, the Cuban government announced reforms to reduce the number of government employees. Cooperatives were established to spin off government activities and employees. Cooperatives were expanded in commerce and some cottage industrial areas beginning in 2013. This did not include savings and credit cooperatives, or credit unions. Yet, there was no systemic support strategy accompanying the reform to provide support systems for the cooperatives: training, access to inputs or linkages to purchasers. One of the greatest constraints reported by the new non-state sector is access to capital, investment or credit. “These are not a priority for the state,” several parties told us.
Post 2011 reforms allowed limited private sector operations. State policy also allowed some to set up their own businesses in the private sector. Many are individual or family-owned restaurants. Private entrepreneurs we visited demonstrated great energy and creativity in showing us what they have achieved. Registration and licensing restrictions limit the ability to start new enterprises. The most serious constraint is access to inputs. As production is centrally planned and directed to buyers, the greatest operational challenge is the ability to buy inputs needed for the private enterprise or the cooperative. Credit is the second greatest constraint faced by private enterprises or producers. Remittances have an important role in the Cuban economy.
Given the difficulty of accessing credit from the state financial sector, many private entrepreneurs borrow from family members or rely on remittances from family members in the U.S. This has worked for many family enterprises, while small, but they now bind up against capital constraints for further growth. Still, the state reliance on remittances for financing the private and cooperative sector favors those who have family outside of country.
Some policy advisors suggested that, given the difficulty of accessing credit from state enterprises, the demand for credit may be satisfied by other external sources, such as remittances and foreign investments or loans from foreign banks and external investments from international microfinance organizations.
There are roles for all types of financial institutions in a balanced economy we explained.
Foreign banks can channel investment into infrastructure and commercial investment or loans. In most other Latin American countries, such commercial bank loans target medium to large enterprises, where the operation and transaction costs are smaller relative to the loan amounts.
Credit unions offer an institutional vehicle that is community based. They mobilize savings from within the communities themselves, rather than importing external capital. The savings mobilized are reinvested in the community’s economic activities, rather than transferred to urban areas or larger borrowers. The return to the capital mobilized by credit unions goes to the credit union enterprise and its community owners, rather than to foreign private stockholders.
Micro-finance institutions offer more rapid and simpler credit access methodologies. Micro-finance organizations can introduce large amounts of external capital to lend to micro and small enterprises, albeit at a high cost.
Credit unions throughout Latin America offer similar enterprise lending methodologies based on streamlined repayment capacity and credit worthiness, while at much lower interest rate costs to the borrowers. One of the market economic advantages of credit unions is that they own their own capital in the form of retained earnings. The return on the credit union capital back to the institution itself allows credit unions to offer lower prices to borrowers, instead of a high return on capital owned by international investors.
Credit unions offer several advantages as a complementary part of a broad spectrum of financial intermediaries, serving a full range of non-government sectors. Credit unions provide a competitive alternative to shareholder value maximizing financial institutions. Credit unions offer a lower cost option to consumers. This allows consumers to retain greater consumer value, but also provides lower price option pressure on other financial institutions, such as banks or micro-finance institutions.
Cuba’s future regulatory framework may actively promote the generation of dynamic competition and increased production through a range of prudently managed entrepreneurial and consumer friendly financial institutions.
Credit unions can become vehicles to mobilize savings in Cuban communities. They can channel that funding back into local small and medium enterprises with greater depth than commercial banks, and with significantly lower rates than traditional micro lending programs or commercial banks. Credit unions can also become important consumption smoothing and asset accumulation means for citizens.
There is currently no legal framework for credit unions in Cuba, so step two requires policy dialog with the government to establish a legal framework.