PEOPLE who stash their savings in credit unions may be putting them in more danger than if they used a conventional bank, warns a top expert in financial risk.

Credit unions often don’t have the systems or management skills to tell whether the institution is on a sound foundation or not, said Wayne Dass, CEO of CariCRIS, the region’s only credit rating agency.

“Some credit unions are huge, bigger than banks, and growing at a rapid rate,” he told Sunday Finance during the Jamaica Stock Exchange Regional Conference on Investment and Capital Markets last week at the Pegasus hotel in New Kingston.

Credit unions are popular with many customers who don’t like the formality of banks. “They feel more at ease,” said Dass.

Plus, credit unions often charge lower interest rates on borrowings than the banks do.

“But customers’ money could be more at risk than in a bank,” he said. “Credit unions need to have stronger oversight put in place.

“Some credit unions are overinvested in one sector, with 60 to 80 per cent in real estate, for example.” A more appropriate share would be 20 to 30 per cent, he said.

His company has developed a model that helps credit unions to assess how well they’re doing.

It looks at how much capital they have, whether their funding from shares and deposits are growing, how well their assets are performing, the qualifications of managers, their profitability and their liquidity, how quickly they could raise cash in an emergency.

CariCRIS is working with the Caribbean Confederation of Credit Unions to apply the model to 50 of the region’s biggest institutions in a US$500,000-programme.

“We’re working out the funding from development agencies,” he said.

“No one has gone in to credit unions and done this kind of research before,” he said.

Credit unions have traditionally argued that they should have a lighter regulatory environment because, unlike banks, they’re not seeking profits. “They have social objectives.”

But Dass argued that since they use a similar business model, taking in deposits and handing out loans, they present similar risks to their customers.

Having social objectives won’t protect them if they’re hit by a major external shock. “If you don’t make sure that you’re financially sound, you will not be able to fulfil that social mandate,” he said.

Many credit unions use a system called Pearls — which, like the Basel system used by banks, sets key figures such as capital ratios — to determine how financially healthy they are.

However, Dass said that it is not explicit enough, noting that there have been notable credit union collapses in the region.

Trinidad and Tobago’s Hindu Credit Union crashed in 2008 with liabilities of US$776 million ($66.5 billion at today’s rate), leaving some 160,000 customers out of pocket and 9,000 staff out of work, he said.

“The Bank of Jamaica is in the process of bringing credit unions closer under its regulations,” Dass said, adding that other jurisdictions are also looking at tighter rules.