An analysis of Risk Management Strategies applied at the Police Credit Union for Investments
In Trinidad and Tobago, the Central Bank’s risk grounded supervision structurehas applied to the Credit Union sector (Katwaroo-Ragbir, 2013). Here, the research accomplished judgment founded, consequence focused, risk valuations and management on credit unions in Trinidad and Tobago, but mostly important the risk management strategies that the Police Credit Union cultivates for investments. As such, the paper considered risk valuations in Medium Low and Medium High risk impressionclasses. During the progression of these engagements with the union, the research became clear on its expectations of sensible governance, control standards, and comprehensive risk management strategies. Indeed, the framework of risk management strategies employed by the union and the impact of the strategies on the overall portfolio and growth of the union was a critical segment of the study. As such, the research addresses the question, An analysis of Risk Management Strategies applied at the Police Credit Union for Investments
The study scrutinized existing literatures together with a study on Police Credit Union with a comparative context of Eastern Credit Union. The study utilizeda case study premeditated based on mixed research, but with great insight into qualitative data through a successions of in depth interviews, questionnaires and reviews, which most researches have recognized as the best technique for a modern business exploration (Meyer and Gagné, 2008). Hence, the statistics analyses generated three fundamentalconsequences of stimulating finding, which include sound risk rating system and third party oversight, board policies and risk limits, timely reporting, and maintenance of comprehensive and accurate data. The researchdeliveredanenhancedunderstanding and intelligiblecontemplation of the improvement or improved management of risk within the credit union sector in Trinidad and Tobago.
Thomas Malcolm Milne is credited with introducing credit unions in Trinidad and Tobago in the year 1942 (Glen, 2008). At the time, Thomas had held several positions in the republic especially as the Inland Revenue Commissioner and solicitor.He saw the formation of the credit unions as abreakthrough towards solving financial problems and believed that the establishment of the credit unions in Trinidad and Tobago would protect citizenry from moneylenders whose unscrupulous style were legendary (Etukuru, 2011).The Central Bank of Trinidad and Tobago controls, administers, permits, registers, and establishes all the operations of credit unions in the country (Williams, 2013). The Police Union owns excellent human resource policies and critical investment processes in addition to continuous obedience to PEARL standards.
Asset/liability management (ALM) allows a credit union to manage risks associated to fluctuations in interest rates, balance sheet assets and liabilities mix, the stockpiling of foreign monies, and the usage of financial derivatives (Katwaroo-Ragbir, 2013; Wheelock and Wilson, 2011). In this regards, the Union manages these risks and others in a structure that contributes sufficiently to retributions and restricts risk to member equity and fiscal margin. The union facilitates proper management of risk through board sanctioned policy, which sets parameters on liability and asset mix, in addition to the level of the risk associated with interest rates and foreign exchangethat the credit union is prepared to expose itself. In fact, the union’s policy set out guidelines for thevaluing, duration and maturity of investments. The policy also controls theusage of financial derivatives, if any. Studies have found sound standards and developing good practices some credit unions across the world that unions in Trinidad and Tobago can actually utilize to their benefit. Regrettably, most credit unions need to make substantial improvements. The study established a baseline risk assessment to utilize and identified improvements needed to meet international standards. As aneffect, their panels and administration should manage to implement authority and risk management developmentprograms to position the organization to react to the stimulatingfunctioningsetting.
This paper grouped out criticaloutcomes on the existing conditions of control and risk administrationvalues and practices, drew consideration to noteworthymatters and set out the risk management strategies that the union cultivates.
Police Credit Union of Trinidad and Tobago was formed in 1956 with the aim that all followers of the police force would see the advantage of joining the union. The mode of management of credit unions is especially defined by the fact that they are not mainly oriented to profit making like commercial banks.
The foundation of credit union movement across the world has long defined its management approach in many countries (Katwaroo-Ragbir, 2013). Credit committees may comprise of between three and seven members usually meeting weekly. While in some credit unions, the credit committee approves loans, some have a loans officer to grant loans, but up to some limits. Supervisory committees are tasked with monitoring operations constituting three members, and they hold meetings from time to carry out spot checks on customer services, collection, and operations.
On the other hand, the operations and sustenance of credit unions could be greatly compromised by mismanagement and lack of risk management strategies (Wheelock and Wilson, 2011). Regulation of credit movement guides the setting of similar benchmarks in service delivery and brings harmony among credit unions especially now that the credit unions area is increasing rapidly across the world. By 2012, in Trinidad and Tobago, the credit union membership was over 500,000 cutting across the social and economic divides, the Police credit union being one of such cooperatives (Duffie and Singleton 2012).For the last 10 years, the central bank of Trinidad and Tobago has been actively preparing Policy Proposal Documents (PPD) aimed at regulating the operations of credit unions in line with international trends.
Although there existed resistance by credit unions, there was mutual agreement to adopt the policy in 2013 paving way for the act, which among other things removed the supervision of financial activities from commissioner for Co-operative development. A number of regulations have been proposed to further streamline the credit institution including regulation of the levels of qualifications for administrators and staff and the regulation of volunteering in credit unions. These regulations maintain the key objectives of credit unions of empowering members with no profit interest (Duffie and Singleton 2012).
The Unions CRR is assessed moderate, high, moderate, low or above average with the direction of change usually assessed as stable, decreasing or increasing for a specified period under several categories. This is highly dependent on the credit unions circumstances, economic environment, and the business (Beccalliet al., 2013).
Like any other organization the credit unions develops a credit management strategy. Organizations spend many resources to ensure that the potential risk is evaded. The initial stage in the management process is the development of the risk framework. The framework always gives the idea of the specific areas where the risks are and may occur (Duffie and Singleton 2012).
Risk management is an important aspect of any credit union and failure to react critically to the issues of risk and administration limits the growth of an organization. The research seeks to provide a context on the diverse strategies that the unions use to manage risk. In this regards, the study is an examination of how organizations manage risk; hence, attain high levels of development since the identification and management of risk allows organization to cut costs and streamline operations. The research presentspreciseprocedures and strategies that Credit Unions ought to promote in order to attain high levels of risk management. Critical or enhanced strategies of risk management recommend that organizations can streamline operations and cut costs through providing mechanisms that allow organizations to manage risks.
The study aims to deliver a context on the dissimilarseries that administrations use to manage risks. In this regards, the study is an examination of unions have or can manage risks effectively and reduce risk portfolio associated with investment. The study provides preciseprocedures and strategies that unions ought to nurture in order to attain high heights of risk management. Furthermore, the studyrecognizes the different levels of risk that credit unions experience especially those in Trinidad and Tobago. This research will provide a comprehensive examination of the strategies that have proved effective in mitigating risks. In addition, it will provide recommendations on how the unions should incorporate other strategies in a bid to ensure that they mitigate risks effectively. In this regards, the research aims to
Develop a contextual framework on the strategies that the Police Credit Union of Trinidad and Tobago employs to mitigate investment risks
Analyze the aforementioned strategies based on qualitative approach and develop a plan whether the strategies have allowed the union to mitigate risks
Compare the risks measures and aspects of the union with those of Eastern Credit Union
Recommend ways that the Union can enhance its strategies to align to changing dynamics
The studytries to describe how credit unions have managed to manage risks. However, the studyintegrates other facets of risks such as types or risks that the unions experience, the level of effectiveness, tolerance levels, scenario and sensitivity analysis, and implications of a sound Risk Management Strategy. The study draws out the significance of enhancing risk management by a credit union, by providing an impression of pilotedinvestigation and a case study. By utilizing theories and available literature, the study aims to draw out approaches that the unions can employ to mitigate risks and compare their performance to other periods or with other firms. As such, the research discusses strategies that unions in Trinidad and Tobago have used to manage risks such as compliance and oversight, third party oversight, sound rating system, and board policy and risk limits. The research, in essence, considers the following questions
How credit unions have managed risks?
What are the main features of risk portfolio and management?
What are the processes that credit unions disregard and which may be significant in managing risks?
What are the constructive impacts of sound Risk Management Strategies on business practices and performance of the unions?
How do credit unions manage their risk mitigating strategies?
Hypotheses of study
The study analyses the strategies that the Police Credit Union utilizes in the management of different risks for investment.
The Police Credit Union can mitigate risks and enhance its Business Success Factors by cultivating effective risk management strategies such as third party oversight, compliance, risk limits and board policies, and sound rating systems.
The studypronounces the existingapproachesengaged within most credit unionsuniversally; thus, the researchdelivers a completeexamination on the significance of sound Risk Management Strategies. In addition, it defines whether credit unions have managed to identify and manage risks effectively. The research provides a context through which credit unions can comprehend how the management of risks affects facets such as net worth of a union, performance, productivity, occupational soundness, and structured evaluations. In this regards, the consequence of the study implies that unions with sound Risk Management Strategies have high net value and high investment values. As such, credit unions can strategize on how they can manage risks effectively by having a knowledgeable and dedicated staff who understands the issues surrounding risks. The study identifies risk management as a key feature of a Credit Union; thus, the review on the strategies employed will help in advising credit unions on the best measures to cultivate.
Here, the paper offers the existing literature on the strategies that Credit Unions employ to mitigate risks. For clear description, the paper defines literature review as a set of scholarly articles that entail existing knowledge on the topic and substantive findings coupled with methodological and theoretical frameworks. On the other hand, risk management refers to the process and the structure that an organization cultivates to mitigate activities that permit outlays for the organization. The process includes approaches and premises used to identify, collaborate, diminish, mitigate, and prevent risks, or recommend approaches that will provide the desired implications to the organization.
The Police credit union of Trinidad and Tobago targets mainly members of the Police service (Kodilinye G and Kodilinye M, 2013). It has however diversified to include civilian members through suitable products and services that are designed officers and the members of their families. The union also works in close partnership with insurance companies and investment companies who provide it with insurance and investment options respectively (Bouteille and Coogan-Pushner, 2012).
The Police Union has made successful efforts to bring their ratios very close to those set by the World Council of trade unions (WCTO). The ratios classified into five categories written as PEARLS, which are; Protection, Effective financial structure, asset quality, rates of return and costs, liquidity and signs of growth (Annualized costs) (Goldberg and Palladini, 2010). The police union has over the years maintained its solvency at 160 percent, net loans over total assets of 75 percent. The limits set by WCTO are 70-80 percent. The union has net loans over total assets at 73 percent while the external credits over total assets are at 3 percent, which is within the WCTO of 0-5 percent. The union has also net loans of 73 percent (Police Credit Union, 2014).
Debt ratio= 0.892 (Police Credit Union, 2014)
|External Opportunities (O)
New markets for ventures
Introduction of new products
|External Threats (T)
Competition from other unions
Political and financial instabilities
Changes in clients tastes
|Internal Strengths (S)
Presence of unique investment
Good brand name
Sound investment and financial base
Retail brand name
Strong social responsibility programs
|SO (Maxi-Maxi strategy
Use of the y quality products to enter new markets
Use of variation strategy
Use of investment chains
|ST (Maxi-Mini strategy)
High differentiation of investment products
|Internal Weaknesses (W)
Lack of customer service for investment
The company lacks sound online platform and presence
Absence of widespread content for products
|WO (Mini-Maxi strategy)
Using new markets and products
|WT (Mini-Mini strategy)
Creating contents for products
With strong competences and potentials in its management, the union will experience standard work growth. The union will move to a service and client leaning structure with improved risk management measures. Financial limitations, consumer predispositions, and risk extenuation are likely to control the arrangement of the union; hence, clear management and sensitivity examinations (Kodilinye G and Kodilinye M, 2013).
|Intermediaries||Altering values among agencies
Legal constraints in picking agencies
|Markets and Customers||Standardized market
The CAMELS rating of the police credit union is two. This is due to the sound management practices it employs and a high operation efficiency. It has also sound risk management policies and strategies, which sustain its profitability and growing asses and loan portfolios. The union has a bright future and this rating is indicative of its growing strength among the credit unions in Trinidad and Tobago (Duffie and Singleton 2012).
The police credit union has seen an increased asset growth of 6.2 percent up to December 2013, which was driven by increase in loans and advances. The loans and advances was TT $225.3 million as of December 2013 up from TT $194.8 million as at December 2012. The non-performing loans (NPLs) to gross loans ratio remained relatively low at 2 percent in comparison to that of commercial banks in Trinidad and Tobago of 4.6percent. The delinquency levels have remained relatively low due to adoption of Credit Risk Management policies, which evaluates the borrowing limits as outlined in the credit policy (Williams, 2013; Police Credit Union, 2014).
Hansen (2012) defines credit unions as depository institutions that make loans and accept deposits. Although they have small capital bases, market capitalization, and assets, they provide a significant financial aspect to numerous clients. In recent years, Hansen (2012) asserts that credit unions have expanded and grown in numbers to offer financial products and services. Today, studies suggest that a number of credit unions allow loan applications over the internet and offer investment options. However, Hansen (2012) contends that credit unions differ greatly from thrifts and banks as they are member owned cooperatives, in most cases each member has one vote irrespective of deposit, they do not issue capital stock, and they serve an identifiable group of clients.
Risk management is an important aspect in any organization as it identifies the risk that an organization faces, the evaluation of these risks, and mitigation processes applied to reduce, avoid, or manage risk. In this regards, it is important to understand the main forms of risks that credit unions across the world experiences. Credit unions engage in various forms of investment options like other financial institutions, which makes them experience investment risks. Benes and Kumhof (2011) and Fischer (2013) define investment risk as the possibility of manifestation of losses comparative to the anticipated return on any precise investment made. Here, an investment risk measure the magnitude or level of uncertainty of attaining the yields as per the prospects of the investor. In this regards, most credit unions consider the less risk investments as the most favorable forms of investment, but such forms do not have high yields. Fischer (2013) contends that most unions choose forms of investment with low risk as a way of avoiding risk, but such a scenario does not mean that they will realize less risk.
Studies by Miller and Waller (2003) and Benes and Kumhof (2011) reveal that an investment risk depends on factors such as business, interest rates, inflation, market, exchange rates, and taxes. In this regards, investment risk develops as a risk with appendages; thus, credit unions should consider the form of investment, current and future market prices, government policies, reinvestment options, and liquidity aspect of an investment. In fact, Benes and Kumhof (2011) and Fischer (2013) state that an investment risk comprises of business risk, liquidity risk, market risk, reinvestment risk, interest rate risk, call risk, inflationary risk, taxability risk, and legislative risk. On the other hand, credit unions experience gaps in forms of lending or credit risk, which involves the risk that a borrower will evade or default on a credit by failing to make payments. Credit unions make loans to members, which means that a certain may fail to make payments, but based on the mode and forms of loans disbursed, the portfolio of such loans, the requirements for loans, and membership aspect, most credit unions do not experience high credit risks. However, the risk is real considering the principle on profits and commitment to clients. Boyd and Smith (2012) assert that credit risk among credit unions include credit default risk and concentration risk where concentration risk refers to a risk related with any exposure with the probability to generate large enough losses to threaten a union’s operations while default risk refers to risk arising from non-payment of a loan obligation.
The Police Credit Union of Trinidad and Tobago faces various types of risks in the course of conducting its business, chief among the risks is operation risk. This type of risk emanates from major activities of the business that the credit union conducts. It is with this consideration that the management has developed a mechanism of identifying risks, which happen to be interlinked with the procedures, processes and policies (Lee and Kelly, 2004).
In the recent past, the credit union has been grappling with the problem of poor computer technology. This made it difficult to realize the effects of operation risks (Ghosh, 2012).The other types of risks, which the union is facing, are the market and liquidity risks. These two types of risks can be combined because they happened to share similar aspects. There is a satisfactory manner with regard to the manner in which the union is carrying out the legal requirements. However, the investment policy of the Police Credit Union of Trinidad and Tobago is wanting Ghosh, (2012).This is because the management tends to overly rely on advice from external quarters rather than establishing its own risk management system, which is sound and efficient (Byron, 2002). The competence of investment management and abilities of the credit union need to be improved so at to minimize the risks associated with market and liquidity. The appetite for the risk and limit has been articulated in accordance with material risk activities (Bouteille and Coogan-Pushner, 2012). Generally, the management of liquidity of the credit union is good. It is expected that the assets of the credit union coupled with the approach of liability management will show on the requisite risk associated with liquidity. This would initiate buffers, which exceeds the minimum requirements of the regulatory framework (Byron, 2002).
Goldberg and Palladini (2010) assert that in relation to credit unions, a risk management system refers to the sum of mechanisms that provide grounds (entailing organization preparations) for planning, employing, monitoring, appraising, and continually refining risk management process throughout the credit union. Here, controls and systems refer to a set of engagements intended to provide rational assurance regarding the attainment of purposes in regards to the efficiency and effectiveness of processes, dependability of financial reporting, and acquiescence with all permissible and regulatory requirements. As such, a credit union should design, apply, document, and maintain risk management structure with governance engagements and controls and systems to allow the union to recognize, assess, quantify, observe, report, and manage investment and lending risks.
A credit union system should incorporate processes, policies, and controls that offer passable, continuous, and timely identification, evaluation, quantification, management, reporting, and monitoring of risks. In addition, the union should document its lending and investment risk acceptance statement, setting out the enumerated level of risk that the union is willing to accept. Copestake (2007) asserts that aligning the goals of a risk management with its risk acceptance statement helps it to remain consistent in sound operations, financial strength, and strategic objectives. In this regards, a risk management system should cover the risk management policies and processes, risk register, controls and systems, and reviews from the board of directors. On the other hand, Boyd and Smith (2012) contend that as suggested in all guidelines for financial institutions, a credit union requires a policy, which is very significant in laying out the direction that a union should execute in managing risk. In fact, all employees must adhere to the guidelines laid down in a policy paper to ensure compliance and effective management.
Copestake (2007) contend that an effective policy is one which is well understood and adhered to by all employees of a credit union. In this regards, a policy that employees do not understand cannot become an effective policy plan for any organization. Ketterer et al., (2011) assert that most credit unions have developed comprehensive policies for risk management. However, these policies do not necessarily means effective risk management, as the process also depends on the effectiveness of risk systems, controls, and processes. In this regards, a research by Ketterer et al., (2011) reveals that credit unions in Trinidad and Tobago especially Police Credit Union and Eastern Union have developed policies aimed at improving their risk management. However, Ogawa et al., (2013) argues that most credit unions in Trinidad and Tobago have failed to institute effective polices for the management of risk, which have resulted to gaps in lending and investing.
Miller and Waller (2003) and Williams (2013) assert that credit unions cannot manage risks effectively if they fail to have performance systems that monitor the performance of a credit union’s risk management process. In this regards, credit unions should first categorize their risk appetite to have clear performance systems. Williams (2013) says that risk appetite includes zero risk appetite where a union does not have an appetite for risk exposure, low risk where the union has a desire for low levels of risk exposure and apply controls to manage risk, moderate risk appetite and high risk appetite. However, Williams (2013) suggest that credit unions do not have high risk appetite because of prudential responsibility to clients i.e. they do not participate in actions that sustain a high level of exposure to risk.
Performance systems allow a credit union to monitor its performance by engaging in effective measure and control systems. Fischer (2013) and Goldberg and Palladini (2010)assert that for credit unions to manage risks effectively, they need a policy guideline that lays out the issues for compliance, acceptance levels, management, and monitoring of risks. In fact, studies suggest that handbooks that document a risk management system and update such systems periodically or in occurrences of risk changes allows credit unions to devise appropriate mechanisms for managing risk. On the other hand, Hansen (2012) asserts that a handbook should contain risk audit, risk scoring, and training, breach of policy, and response or preparation in regards to risks. Here, Hansen (2012) argues that a risk audit allows a credit union to conduct audit that takes into account all prevailing risks using lending and investment measures. In addition, a risk audit allows a credit union to measure the residual and gross risk for investment and lending, assesses the effectiveness of related controls, and highpoints any internal control weaknesses or gaps.
On the other hand, a credit union should analyze risk in adherence to various scoring methodology if it wants to achieve the highest levels of risk management. Caouette et al., (2011) assert that credit unions and other financial institutions must measure the probability of a risk prevalence and the impact of the risk prevalence to an organization when analyzing risk. Caouette et al., (2011) assert that such measurements of the components allow a credit union to analyze a risk and understand how to manage such a risk. Here, the credit union must determine how likely a risk will occur and assign the occurrence a certain score. Saunders and Allen (2010) contend that the score should be between one and five based with a higher score representing a higher occurrence. On the other hand, the impact of the risk to an organization is the most significant aspect of risk management. Here, Saunders and Allen (2010) contend that the score of the impact should compare to the score of the risk prevalence.
On the hand, Butler (2012) assert that a control system for any risk management component must have a risk register, which takes into account all predominant risks that surpass the gross risk acceptance or tolerance of the union. Here, the union should also avail a score for gross and residual risk and make the score and the register available to the board for review and implementation. As such, the risk auditing and scoring allows a credit union to apply effective assessment controls that evaluate all controls designed to manage risk. Apart from an assessment control, it allows an auditors to report on their findings in regards to the impacts and prevalence of risks.
Like other credit unions, Police union often takes credit, market, operation, and corporate risks. Operations cannot be effective without risk but failure to manage risk in a union can often lead to losses. Risk management requires the institution of a risk management system, which includes the risk policy, risk register, risk management process, systems, and control. A risk management officer evaluates the risk issues and reports accordingly to the management and the board with adequate strategies of risk avoidance (Duffie and Singleton 2012).
Compliance with the laid down procedures is an important aspect of risk management. The union has a compliance program, which includes the compliance policy and compliance plan. A compliance committee is in charge of compliance issues of the credit union ensures compliance of the credit union to all statutory and regulatory requirements. The committee also monitors such compliance to ensure there is no conflict of interest, fosters the spirit of compliance in the union, and updates the board on the legal and statutory developments. The compliance plan includes the plan, processes of monitoring, reporting, and process timeline for update, approval, and reviews of compliance policy (Ghosh, 2012). The committee focuses on issues of risk management, which includes concentration risk, interest rate risk, credit risk, liquidity risk, and financial decisions. The management demonstrates strict compliance with the laid down policy limits associated with risk through reporting to the board (Etukuru 2011).
Hudson (2014) contend that changing economic conditions on quality of assets net worth and earning of the union require the Trinidad and Tobago police union to routinely perform scenario and sensitivity tests. This presents the union with the outlook by modelling future possibilities given an event or a series of events (Duffie and Singleton 2012).In sensitivity analysis, parameters of a model a tested without relating the changes identified to a real world event with an aim of determining which assumptions with most influences results of the model. The credit union continuously evaluates the susceptibility of portfolio segments faced by similar risk characteristics which may include the types of investments, types of loans, collateral, geographic area, individuals, businesses or borrowers in in a group. Hudson (2014) assert that a scenario analysis, for example, is concentration risk is when the impact on earnings when the union offers HELOC mortgage and then the levels of unemployment rise by 50 percent while the market value of houses reduces by 25 percent combined with the lik