Credit unions need regulation, but not at the cost of rural development

In the program “Sorainen’s frequency”, host Mario Sõrm, Sorainen’s lawyer Mari Agarmaa, Thomas Auvärt from the Ministry of Finance and host Oliver Ämarik discussed concerns related to savings and loan cooperatives.Photo: Business day

Despite the fact that the money stored in savings and loan cooperatives does not play a big role in maintaining the health of the Estonian economy, this sector needs restrictions, according to Äripää radio program “Sorainen frequency”.

There are 21 savings and loan cooperatives operating in Estonia (not including Eesti Arengu HLÜd). Things have turned sour with the two of them lately. In addition, if the savings and loan cooperatives have taken in deposits of nearly 100 million euros in total, excluding the deposits of the cooperative under dispute today, the volume of deposits taken in from Estonian companies and private individuals by the banks operating in Estonia is 23 billion euros. Looking at these figures, it can be said that the problem related to savings and loan associations is not excessively large from the point of view of financial stability and for society as a whole.

In addition, as a rule, savings and loan associations offer higher interest rates compared to banks. A better interest requires taking a greater risk, and we can ask whether the state must protect a person from taking a greater risk. Nevertheless, one cannot ignore the nearly one thousand depositors who have lost their savings due to the criminal activities of the board of some savings and loan cooperatives. It is clear that the state must intervene, but the question is to what extent and how.

How much should the state intervene?

Mari Agarmaa, head of insolvency law at the Sorainen law firm, lists the levers that the state must first implement in regulating the activities of cooperatives in the “Sorainen Frequency” program: “The advertising freedom of savings and loan cooperatives must be limited. It is also necessary to prohibit participation in the governing bodies of cooperative activities for persons convicted of criminal offenses and persons involved in bankruptcy proceedings. Technically, it is quite easy to arrange this through the application of a business ban. Loans related to management bodies must also be reviewed as part of the supervision. And fourthly, the possibilities of the members of the cooperative to delegate their rights must be limited.”

The savings and loan cooperatives themselves are also divided on whether or how much the state could interfere in their business – some advocate non-interference, while others expect the state to act. The Ministry of Finance has been looking for a compromise between the two extremes for years, and amendments to the law are currently being developed.

“One serious question for the state is how to motivate the members of the cooperative to participate more in the activities of the cooperative. A member of the cooperative must attend general meetings, ask questions and participate, and demand information from the board. The problem is that many people who become members of a savings and loan association immediately give up all their rights. They don’t even give themselves the opportunity to attend the general meeting and speak. It must change!” Thomas Auvärt, deputy head of the financial services policy department of the Ministry of Finance, points out the main concern that the amendments to the law must address.

HLÜ – promoter of local entrepreneurship

A savings and loan cooperative is one of the forms of business. In essence, it is not very different from a private limited company or a joint-stock company in the sense that it is associated with certain risks, rights and obligations, explains Agarmaa.

“Participation in business requires activity and, on the other hand, control over the governing bodies. In rural areas, a savings and loan cooperative can be one of the few, if not the only, way to get a loan and thereby promote local business, because it is an area with too high a risk for banks, which is why the capital requirements are also high,” Agarmaa points out the reason why there is still a need for a market of savings and loan cooperatives.

Basics to follow for asset protection

Thomas Auvärt warns against transferring all free money to a savings and loan association and lists the fundamentals that would help protect the deposited money. “Before you deposit in a savings and loan cooperative, do your preliminary work and find out who the cooperative’s managers are. Once you have become a member, actively participate in the cooperative’s activities and communicate with other members as well as with the governing bodies. Ask the board for information about the companies that receive a loan from the cooperative. Are these well-known businesses operating in the cooperative’s area, or instead companies related to the cooperative’s leaders? If you see that the cooperative’s leaders have not acted in the best interests of the cooperative, demand the replacement of the leaders, either through the court,” Auvärt urges the members of the cooperative.

In November’s “Sorainen Frequency” show, the hosts, attorney Mario Sõrm of the law firm Sorainen and lawyer Oliver Ämarik, discussed with the guests whether and to what extent the market of savings and loan cooperatives needs regulation in order to protect the interests of depositors.

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