The Case of the Central Cooperative Financial System (CCFS)

The Case of the Central Cooperative Financial System (CCFS)

The CCFS started out as an idea articulated by former Bulacan Governor Roberto M. Pagdanganan. Bulacan takes pride in having many operational cooperatives. Mr. Pagdanganan’s faith in the cooperative idea was strengthened by his exposure to the Raiffeisen system in Germany. He became president of the National Cooperative Movement (NCM), a group of co-op leaders and some government officials who underwent exposure in Germany under the sponsorship of the Hanns Seidel Foundation.

As representative of NCM, he was elected chairman of the Philippine Cooperative Center (PCC), which is composed of national cooperative organizations including NATCCO and some primary co-ops as well. His initial proposal was for the cooperative rural banks to form the core of a centralized financial system to be known as the National Consolidated Cooperative Bank (NCCB). Later on, he included the national cooperative federations in the NCCB concept to form the common shareholders together with the co-op banks, with government financial institutions as contributors of preferred equity shares.

Mr. Pagdangnan again revised his proposal, believing that co-ops are not yet ready to operate such a network. He proposed that the Land Bank of the Philippines should become the temporary apex bank for co-ops to manage the Centralized Cooperative Financial System (CCFS), with the coop banks, the coop federations, and primary coops as depositing members and as capital contributors. Co-ops would maintain their independence and autonomy but have to abide by operating and financial standards, including auditing systems to be established as part of the services of the system. Qualified coops would benefit from credit guarantee system, deposit insurance, liquidity pooling, investment services, and as conduit for loans. The idea was for co-ops under the CCFS to take advantage of the resources, technical services and facilities of LBP under some form of apprenticeship in operating a financial system. The Pagdanganan’s concept of the CCFS was contained in the second edition of his book ‘An Urgent Call for Cooperative Revolution.’

However, NATCCO was already pursuing a different track to cooperative financial integration, believing that regulations by central monetary authorities in the country impose limitation on the prospects of cooperative banks. Thus, instead of establishing a cooperative bank, NATCCO promoted the concept of a centralized financial organization among savings and credit co-ops. NATCCO has launched the NATCCO Central Liquidity Fund (NCLF), a facility funded from investments of cooperatives and which member cooperatives can draw from to cover liquidity requirements.

Others pinned their hopes on the MSCB, which were then already and recruiting into its membership and deposit base all types of co-ops, including other coop banks. Some even proposed that later on that co-ops banks that are members of MSCB can later on serve as branches of the MSCB after its conversion into a national coop bank.

PCC entered into an agreement of understanding with Land Bank and other government agencies for the establishment of the CCFS. As a center composed of national cooperative organizations, PCC was seen as the body to coordinate the effort to form the CCFS. A Technical Working Group chaired by Land Bank was established composed of several government agencies (LBP, CDA, Quedancor, PDIC) and national cooperative organizations including NATCCO, PFCCO, Bangkoop and others.

Along the way, national organizations finally concluded that the envisioned CCFS was not consistent with their existing plans. PFCCO leaders were of the view that supporting CCFS is not consistent with efforts to strengthen the MSCB as the future Bangko Kooperatiba ng Pilipinas. NATCCO was particularly concerned about the bundling of liquidity pooling, investment management, deposit and credit guarantees and other functions under the CCFS as common roof. It proposed that the CCFS should not include functions that are already being performed by the existing federations. Liquidity pooling and investment management are already being performed by NATCCO through its regional federations and at the national level through the NCLF. PFCCO is also operating central fund projects at the regional level. Some co-op networks such as Bangkoop was warm to the CCFS concept because they did not have liquidity pooling as a major network activity in the first place.

Another source of reservation about the CCFS is the role of government. Under the proposed scheme CCFS will not be a legal cooperative entity but will merely be a program managed by Land Bank. In the proposed governance structure, Land Bank will hold the chairmanship of the Management Council. The autonomy of cooperatives, according to the opposing view, will thus be sacrificed in exchange for the efficiency and leverage the Land Bank can supposedly deliver in behalf of cooperatives that will contribute funds to the CCFS liquidity and investment pool. According to the opposing view, the CCFS concept prepared by the Land Bank-led Technical Working Group skirt the process of horizontal trust and confidence-building among cooperatives and relies instead on the vertical authority of government through the Land Bank.

Because of these reservations, PCC decided not to sign the final memorandum of agreement with Land Bank regarding the CCFS. Some of PCC member organizations however have signed the agreement. The PCC Board instead issued a resolution ‘lauding the efforts that went into the formation of the CCFS’ and ‘to work for the improvement of the CCFS through its members’ who are CCFS members.

While co-op networks such as NATCCO and MSCB were already growing, the CCFS bogged down in debates about its legal personality (whether it should be registered as a co-op or as remain as a program or department of Land Bank). Even with Land Bank’s support, and even as it eventually registered itself as a cooperative (and therefore technically as a federation) it was able to mobilize only a small fraction of the financial contributions that NATCCO’s Central Liquidity Fund and MSCB had mobilized from their respective membership. There were those who express optimism that a convergence between NATCCO, MSCB, and the CCFS project is foreseeable. Co-ops would probably continue to belong to separate financial systems catering to the same market.

By that time, popular protests had ousted President Joseph Estrada and installed Gloria Macapagal-Arroyo as President. Mr. Pagdanganan, an ally of President Arroyo, was appointed Presidential Adviser on Cooperatives and later as Acting Chairman of the Cooperative Development Authority.

He was later transferred as Secretary of Agrarian Reform and then as President of the Philippine International Trading Corporation, now supervising the distribution of medicines for the poor. By this time, the Land Bank was already mulling over the transfer of management of the CCFS to a co-op network.

Building trust and the role of history and tradition

The national organizations did not reject the CCFS idea. In fact, they sought to revise some features of the proposed system to harmonize it with their existing activities. However, they found the final design inconsistent with their goals.

There is another dimension to the different attitudes of the co-op networks to the CCFS. Historically, some networks are most comfortable with government intervention. Others could not reconcile themselves to the idea of developing a network that pin its success on the support of the government or its instrumentalities (the Land Bank as manager of the system and other government financial institutions as capital contributors). This attitude historically evolved from their self-reliant development as networks in the face of failures of government cooperative development programs.

Cooperatives face the problem of rationally optimizing the efficiency of the distribution system they have set up. Succeeding in this regard means cooperatives must integrate or organize themselves as a network. If we believe that co-op members and their leaders are rational, then forming or joining networks would require just explaining and demonstrating its advantages. In the Philippines, this would not be as straightforward.

Co-ops performing mainly savings and credit activities in the Philippines come from different historical traditions. One significant tradition is spawned by the cooperative development programs of the 1970s, mainly in the agricultural sector. These co-ops are integrated into cooperative rural banks (CRBs).

On the other hand we have the savings and credit co-ops spawned by more or less independent initiatives. They have proved to be more viable and today co-ops with net worth of over 100 million pesos belong to this group. They oppose government attempts to marshal the formation of co-op networks and structures.

Both tendencies value their respective historical traditions. Despite the failures of government-led cooperative development in the 1970s, leaders developed during that period look back to that period as a time when government was coming in an appropriate way, only that some officials and bureaucrats and leaders spoiled the entire scheme through inefficiency and corruption.

Leaders of the “private” co-ops see a fundamental flaw in an approach that pin success on government intervention support, which in the context of a political culture marked by patronage would mean an erosion of co-op independence and autonomy. They also tend to acquire an ideologically purist attitude that view business innovations in co-ops with suspicion.

It is not enough to approach co-ops, as potential network participants, on the basis of rational economic interest. And although divisions according to historical traditions are important since they relate to the very rationale of the co-op existence, they must be overcome eventually. Yet it is important to recognize that trust and common values with other co-op traditions can be built by affirming each other’s identity and roots. Economic rationality of networks must be translated (or packaged if you will) as a set of common values and ideology because that is an important dimension of the language and outlook of co-ops or of their leaders. Co-op network building must ALSO be recognized as a process of social movement building based on common values and ideology, and not just as a rational economic process.