Jan Cienski in Warsaw -

Poland’s credit unions were a form of community banking imported from the US, and just like US savings and loans institutions, the concept is beginning to run into trouble in Poland, with a large credit union going under because of dodgy loans and allegations of criminal activity.

The Polish Financial Supervision Authority (KNF) in December requested that the Wolomin SKOK (the abbreviation for Polish credit unions) be declared bankrupt. Paying out client deposits will cost as much as PLN2.3bn  (€523m), or about a fifth of the assets held by the government-run Banking Guarantee Fund. The fund takes in 0.1% of banks’ risk weighted assets annually.

In July, the fund had to pay out PLN815m to cover the deposits of clients of SKOK Wspolnota, which failed earlier this year. By contrast, Poland’s banks, which finance the guarantee fund, are solid and well-financed and have no need of emergency aid.

The Wolomin problems  were probably the result of illegal activity, Lukasz Dajnowicz, a KNF spokesman, told Polish radio. “As of 2009, we have been dealing with a procedure which we can describe as a probable crime,” he said. The credit union’s outstanding loans are being investigated.

The problems in the sector have been brewing for a long time. Although credit unions only account for about 1% of the assets of the Polish banking system, they have been very loosely regulated for most of the past two decades. The KNF only assumed the right to control them in 2013, as they had jealously guarded their independence.

Grzegorz Bierecki, one of the founders of the credit union movement in Poland and for many years the sector’s most powerful executive, is a senator from the rightwing Law and Justice party. The credit unions were particularly attractive to conservative politicians, who touted their Polish origins, contrasting them with the formal banking sector, where 70% of assets are held by foreign banks.

The banking regulator has found disarray in the credit unions’ accounts. Dajnowicz estimated that the unions need an injection of PLN1.5bn to meet minimum capital adequacy standards. As well, about half of outstanding loans are past due. In the first half of 2014, about a third of the country’s 53 credit unions posted a loss, and the biggest problems affect the largest and most ambitious credit unions. Dajnowicz said the smaller union, ones with closer ties among clients, tend to have better control of risks and fewer dodgy loans.

When the KNF took over supervision of credit unions, their customers then got access to the guarantee fund. As a result, the fund is likely to close 2014 with less assets than it had at the beginning of the year for the first time in many years.

The two bankruptcies are just the start of the sector’s problems. The KNF pushed two other ailing credit unions into being sold to formal banks, but the guarantee fund is still on the hook for past problems at those two institutions. 

“The situation with SKOKs is complicated,” said Dajnowicz. “For 53 active credit unions, 43 have rescue programmes.”