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Canada’s Financial Services Sector

Canada’s Credit Unions and Caisses Populaires

January 2002

Overview

• Canada has a strong co-operative financial services sector, which consists of both credit unions and caisses populaires, the latter located predominantly in Quebec.

• As of the first quarter of 2001 Canada’s credit union sector consisted of 703 credit unions and 1,069 caisses populaires, with more than 3,600 locations and 3,900 automated teller machines.

• As in other financial services sectors, there is a trend to consolidation, with the total number of credit unions and caisses populaires declining from about 2,700 in 1990 to 1,772 in 2001. This has led to an increase in the average asset size of individual credit unions and caisses populaires.

• Canada has the world’s highest per capita membership in the credit union movement, with over 10 million members, or about one-third of the Canadian population.

• While the sector is active in all parts of the country, it is strongest in the western provinces and in Quebec. In Quebec and Saskatchewan over 60 per cent of the population belongs to a credit union or caisse populaire.

• In 2000 the sector accounted for about 10 per cent of the domestic assets of Canada’s deposit-taking financial institutions. Credit unions and caisses populaires have traditionally focused their efforts on such key service areas as residential mortgage financing, consumer credit and deposit services.

• Interest income continues to be the major source of revenue, accounting for 78 per cent of total revenue. However, the share of revenue from other sources is increasing, as credit unions and caisses populaires become more active in other financial service areas such as the sale of mutual funds and insurance.

• The return on equity for the sector averaged 8.2 per cent over the 1993-2000 period.

• This sector is almost exclusively regulated at the provincial level in Canada. However, the national central, Credit Union Central of Canada, is chartered and regulated by the federal government under the Cooperative Credit Associations Act. In addition, six provincial credit union centrals have chosen to register under federal legislation, in addition to being regulated provincially.

Introduction

Canada’s credit union movement occupies a unique economic and social niche in the country’s financial services sector. The first caisse populaire in North America was created in Lévis, Quebec, in December 1900 by Alphonse Desjardins, while outside Quebec Ottawa’s Civil Service Savings and Loan Society was established in 1908. In the Atlantic provinces credit unions sprang up in the 1930s and 1940s in response to the needs of fishers, farmers and miners. Credit unions subsequently spread to the Prairie provinces, where they developed largely in response to difficulties faced by farmers in obtaining financing during the Great Depression. Over the next three decades credit unions enjoyed significant growth due to strong demand for consumer financial services.

Today caisses populaires and credit unions have grown into a national co-operative movement that is one of the most active in the world. In Canada there are currently over 1,700 individual credit unions and caisses populaires. In fact, the Canadian movement has the world’s highest per capita membership.

Organizational Structure

Credit unions and caisses populaires are co-operative financial institutions owned and controlled by their members. Their ownership and corporate governance are based on co-operative principles, and their main purpose is to provide deposit and loan services to members. In most provinces each customer is required to become a member of the credit union or caisse populaire. Each member becomes a shareholder and has one vote, regardless of the size of deposit or share capital held. Members can vote for the board of directors, run for election, attend the annual meeting and vote on motions. As shareholders, members also receive dividends and profit sharing.

The minimum share capital contribution from each member joining a credit union or caisse populaire generally ranges from $5 to  $125. Eligibility for membership may include being part of a "common bond of association," such as an industry, trade union, club or community, or being a resident of a defined geographic area. One of the most important aspects of the co-operative structure of credit unions and caisses populaires is the general requirement to concentrate on the provision of services to members, which results in the "recycling" of membership funds. In this way, credit unions and caisses populaires play an integral role in local development by reinvesting their deposits and profits in the community through personal and business loans, mortgages and dividends paid on members’ shares.

The Mouvement des caisses Desjardins consists of a network of caisses populaires in Quebec, Manitoba, New Brunswick and Ontario, as well as the Desjardins-Laurentian Financial Corporation (DLFC). The DLFC is a holding company with a number of subsidiaries involved in the provision of various financial service products, including life and health insurance, property and casualty insurance, and securities and trust services, which are in turn distributed through the network of caisses populaires. Each caisse populaire is a member of the Fédération des caisses Desjardins du Québec, a co-operative whose mandate is to direct, plan, co-ordinate and supervise all activities of the Mouvement des caisses Desjardins. Caisses populaires are somewhat more centralized than credit unions and operate under a single name.

Outside Quebec the vast majority of credit unions are shareholders in one of the nine provincial centrals, which are responsible for ensuring liquidity at the provincial level and providing services as a trade association. Provincial centrals also provide wholesale lending and facilitate settlement of cheques and electronic payments for local credit unions. In turn, all nine provincial centrals are the primary shareholders of Credit Union Central of Canada (CUCC), which is responsible for establishing liquidity policy and overseeing liquidity maintenance at the national level. The CUCC also gives the credit union system a national voice on financial service issues and frequently facilitates the development of system technology. However, each individual credit union maintains a separate identity and may compete for eligible members with other credit unions.

Primarily because of their autonomous local structure, Canada’s credit unions and caisses populaires do not generally have subsidiaries or branches in foreign countries. However, the sector has made important contributions to the international credit union movement. The Mouvement des caisses Desjardins has been particularly active in developing the credit union sector internationally through Développement international Desjardins, which currently provides assistance to organizations in 27 different countries. Canada’s credit unions also make significant financial and in-kind contributions to the Canadian Co-operative Association’s (CCA’s) international development activities. For example, over the past 10 years the CCA has partnered with the Canadian International Development Agency and worked on credit union development in both Ghana and the Ukraine.

Present Status

As with other financial services sectors, there is a trend to consolidation in the credit union movement (see Chart 1). As of the first quarter of 2001 Canada’s credit union sector consisted of 703 credit unions and 1,069 caisses populaires for a total of 1,772. This is a significant decline from approximately 2,700 credit unions and caisses populaires only 10 years earlier. However, a significant number of "points of service" are being maintained in many communities: in the first quarter of 2001 there were more than 3,600 locations and 3,900 automated teller machines. Employment in the sector increased from almost 41,000 employees in 1991 to about 56,400 in 2000.

This amalgamation of credit unions has led to an increase in their average size, particularly in Ontario, British Columbia and the Prairie provinces. For example, in Ontario the number of credit unions has declined by almost 50 per cent in the last 10 years while average assets held by credit unions have more than doubled.

Credit unions and caisses populaires have also been active in purchasing bank branches, particularly in more isolated areas, helping to ensure that all Canadians have access to financial services. For example, in 2000 the Manitoba, Saskatchewan and Alberta credit union systems purchased 48 bank branches from the Bank of Montreal.

Credit union and caisse populaire membership has grown steadily over the last half century, from 1 million members in 1950 to over 10 million today, or about 33 per cent of Canada’s population. As shown in Chart 2, membership is highest in Saskatchewan and Quebec, where over 60 per cent of the population belongs to a credit union or caisse populaire.

Credit unions and caisses populaires have maintained strong market shares in such key service areas as residential mortgage financing (13 per cent), consumer credit (8 per cent) and deposit services (16 per cent) (see Chart 3). The market share of the credit union sector varies considerably by region. It is highest in Quebec and Saskatchewan, at roughly 40 per cent of the assets of deposit-taking institutions. Credit unions are also strong in British Columbia, where market share is about 20 per cent of the assets of deposit-taking institutions.

Assets and Revenue

In 2000 credit unions and caisses populaires reported combined assets of $120 billion, or about 10 per cent of the total domestic assets of Canada’s deposit-taking institutions. Based on asset size, the largest participants in the Canadian credit union movement rank among the largest financial institutions in Canada. For example, on a consolidated basis (i.e. including all affiliated caisses populaires and all subsidiaries), the Mouvement des caisses Desjardins is the 6th largest Canadian financial institution with $80 billion in assets. In British Columbia 4 credit unions have assets of between $1.6 billion and $6.1 billion (a list of the 10 largest credit unions in Canada appears in the Annex). Vancouver City Savings Credit Union is Canada’s largest credit union, with over $6 billion in assets and 39 branches (as of June 2001). It is also the owner of a virtual bank.

Reflecting their mandate, Canadian credit unions and caisses populaires have traditionally concentrated on providing mortgage and consumer financing to their members, with the vast majority of loans under $1 million. As shown in Chart 4, residential mortgages made up close to half of all assets in 2000, while personal loans accounted for about 14 per cent of assets.

Unlike the Canadian banks, which have seen strong growth in revenue from non-interest sources of income, interest income continues to be the major source of revenue for credit unions and caisses populaires (Chart 5). In 2000, 78 per cent of revenue came from net interest income. However, other sources of income are gaining in importance. For example, credit unions and caisses populaires are becoming more active in the sale and distribution of mutual funds, and in some provinces, such as British Columbia and Quebec, they are involved in the sale of insurance.

Profits in this sector are sensitive to economic growth and capital markets. For example, as shown in Chart 6, the sector was adversely affected during the economic downturn in the early 1990s, as well as in 1997, when capital markets weakened. Return on equity (ROE) tends to be lower than in the banking sector. The ROE for credit unions and caisses populaires combined averaged 8.2 per cent over the 1993-2000 period. Although ROE slipped in 1998 and 1999, it rebounded to 8.5 per cent in 2000 (see Chart 7).

Capitalization

Because the sector is made up of so many institutions, there are considerable differences in capitalization among them. Credit unions and caisses populaires have increasingly financed their growth out of retained earnings rather than from share capital (see Chart 8). In some cases this has led to imbalances within the credit union movement. While some institutions find it difficult to finance their rapid growth out of retained earnings, others find themselves with a surplus of capital. In some provinces credit unions and caisses populaires can raise capital by issuing preferred shares and non-voting shares.

Each credit union is required by provincial regulations to maintain liquidity ranging from 8 per cent to 10 per cent of total assets, most of which is maintained in a liquidity pool at the provincial central. To make excess liquidity available to other provincial credit union systems, each provincial central places 2 per cent of provincial system assets in a segregated fund under the control of a custodian. The custodian has access to the funds for national purposes on terms set by the CUCC.

Financial Service Innovation

Historically, Canada’s credit unions and caisses populaires have been an important source of innovation and product development. For example, they were the first in the financial services sector to offer consumer loans. The credit union movement in Saskatchewan introduced the first automated teller machines in Canada in 1976 and was the first in Canada to pilot the in-store direct debit system. The sector has also been a leader in the provision of direct payroll deposit services in Ontario, telephone banking in British Columbia and on-line banking in Quebec.

Regulation

All credit unions and caisses populaires are provincially incorporated as their activities do not extend beyond their respective provincial borders. Consequently, the sector is almost exclusively regulated at the provincial level for prudential soundness and market conduct. However, the legislative and regulatory framework for credit unions and caisses populaires generally parallels that of federal financial institutions, such as banks.

While the sector is primarily regulated at the provincial level, the federal government does play a regulatory role in the credit union movement outside of Quebec through the national and provincial centrals. The national central, the CUCC, is chartered and regulated by the federal government under the Cooperative Credit Associations Act. The federal government can provide the CUCC with liquidity support through the Bank of Canada or the Canada Deposit Insurance Corporation. In addition, all provincial centrals (except for those in New Brunswick, Prince Edward Island and Newfoundland and Labrador) are regulated at the federal level, as well as at the provincial level, under the Cooperative Credit Associations Act. Both the national and provincial centrals are inspected for prudential purposes by the federal Office of the Superintendent of Financial Institutions.

Deposit Insurance

Deposits of credit union members are protected by provincial stabilization funds and/or deposit insurance and guarantee corporations, with the amount of coverage varying by province. Deposits are fully guaranteed, with no limits on the amount of coverage provided, in Saskatchewan, Manitoba and Alberta. Deposits in Nova Scotia and Newfoundland and Labrador are insured to a maximum of $250,000, while Ontario and British Columbia guarantee deposits to a maximum of $100,000 per account. Quebec, New Brunswick and Prince Edward Island guarantee deposits to the same level as bank deposits – $60,000. In addition, Newfoundland and Labrador, Nova Scotia and Prince Edward Island offer protection for registered retirement savings plans and registered retirement income funds.

Legislative Reform

In June 2001 the Government of Canada passed legislation (Bill C-8) reforming the regulatory framework governing the financial services industry. During public consultations leading up to passage of this legislation, the credit union system outside Quebec identified structural fragmentation as a potential barrier to the future growth of the sector. It also cited the inability to provide services to members moving to other provinces, lack of co-ordination in areas such as products and services, and the duplication of backroom activities as key hurdles.

Bill C-8 seeks to address these barriers to growth by allowing credit unions to reorganize under a single national services entity to give them the benefit of a more national structure. This should help assist in strengthening the credit union sector and foster greater domestic competition in the financial services industry, a key objective of Bill C-8.

Recent Developments

Industry analysts expect the credit union movement to continue expanding in both scale and scope. The sector continues to consolidate as mergers between credit unions continue, and it is actively involved in the purchase of bank branches, particularly in the Prairie provinces. Credit unions and caisses populaires have also stepped up their services in non-traditional areas including full-service brokerage functions, mutual funds and commercial lending.

A number of recent proposals within the credit union movement are aimed at merging backroom operations in order to become more cost-efficient and reducing the level of structural fragmentation. For example, the Ontario and B.C. centrals have announced plans to merge their respective treasury and financial operations and to provide a broad range of financial services to local credit unions, including liquidity management, wholesale lending and settlement of cheques and electronic payments. In addition, the centrals in Manitoba, Saskatchewan and Alberta are exploring the possibility of merging their respective payment processing and information technology operations.

In Quebec, the Mouvement des caisses Desjardins recently consolidated the 11 regional federations of caisses and the Confédération des caisses populaires et d’économie Desjardins du Québec to form the Fédération des caisses Desjardins du Québec. The Mouvement des caisses Desjardins also announced the merger of The Imperial Life Assurance Company of Canada and Desjardins-Laurentian Life Assurance Company in 2001. The merged entity will rank seventh among Canada’s life and health insurance companies in terms of premium income.

Annex

Ten largest credit unions in Canada by assets, June 2001

Further information on legislation to reform the financial services sector can be obtained from the Department of Finance at www.fin.gc.ca. Additional information on the credit union sector is available from Credit Union Central of Canada at www.cucentral.ca and from the Mouvement des caisses Desjardins at www.desjardins.com.