By Gabriel Chen

CURBS are being placed on how credit cooperatives can invest their funds in order to protect members' savings, the Government said yesterday.

The Ministry of Community Development, Youth and Sports (MCYS) said in a statement that credit co-ops should focus on thrift and loan services as they are not banks or finance companies.

It argued that it would not be 'appropriate' for credit co-ops to expose their members' deposits to higher risk by placing a major proportion of total assets in risky financial instruments.

The ministry's comments come after a Straits Times report disclosed on Monday that credit co-ops will not be able to make certain investments, including buying shares, unit trusts and corporate bonds, from June 30. The new rules could mean reduced returns for members.

The changes were outlined to credit co-ops last month by the Registry of Cooperative Societies.

The registry said the co-ops will be able to buy only Singapore government securities and statutory board bonds, keep existing shares in co-ops such as FairPrice, or place Singapore dollar deposits in banks.

Co-ops will also have to pare their holdings of restricted investments to 10 per cent of their total assets over a period of five years.

There are 38 credit co-ops here with 200,000 to 250,000 members.

A MCYS spokesman was quoted in the Monday article as saying that the prudential requirements, which will be introduced gradually from this year, aim to help credit co-ops focus on their core social role of encouraging thrift and providing loans to members.

And as part of these requirements, some limits may be set on the amount of risky investing that credit co-ops can undertake, he had said.

The MCYS, which regulates credit co-ops via the Registry, further noted yesterday that prudence was vital for such entities and that their main source of income should be loans offered to members.

It said that members deposit their savings in credit co-ops and expect the money to be managed prudently. At the same time, members also expect to be able to withdraw their cash in full whenever they choose.

The ministry cited the financial crisis and noted that credit co-ops with substantial financial investments were the most affected, with potential losses of up to 33 per cent.

It also pointed to the World Council of Credit Unions' guidelines, which state that credit co-ops should not have more than 2 per cent of their total assets in financial investments.

'The credit co-op set-up is not the appropriate structure if the main source of income is to be derived from speculative investments,' MCYS said.

'If a credit co-op wishes to do so, it should consider reconstituting itself as a finance company or asset management company subject to regulation by the Monetary Authority of Singapore, given the higher risks involved.'

It added that the new regulations strike a balance between risk and return while strengthening protections for members.

In September 2008, Parliament passed amendments to the Cooperative Societies Act to provide a calibrated regulatory framework for cooperative societies.

Under this framework, the Registry exercises a higher level of regulatory supervision over credit co-ops as they take in deposits and make loans.

Mrs Dolly Goh, chief executive of the Singapore National Cooperative Federation, which promotes co-ops, said that while member returns could fall due to the restrictions, it does not mean credit co-ops will become less popular.

Credit co-ops offer various services to their members and generally pay interest above market rates, she argued.

This article was first published in The Straits Times.