A credit union must, at all times, maintain capital in an amount of at least 5% of its assets (Ontario Regulation 76/95 section 12). A new credit union will anticipate growth which will increase the statutory capital requirement, and should also plan for operating losses which can be expected to occur until it reaches an operationally viable performance level. For this reason, a new credit union should plan on opening with adequate capital reserves to meet these developments.
The capital of an Ontario credit union may consist of three components:
- Membership shares required to be held by every member
- Special investment shares issued through an Offering Statement
- Retained earnings from operational profits.
Every member of a credit union is required to purchase a membership or shares for an amount set by the credit unions bylaws. The required membership share amount varies from credit union to credit union, but most fall into a range of $10 - $25 per member. Some credit unions require as much as $250, but high membership share amounts present a barrier to entry, while low amounts do not provide a useful contribution to capital.
Because a new credit union is unlikely to be able to develop sufficient capital through sale of membership shares, the use of special shares issued under an offering statement is appropriate.
An offering statement is a comparatively costly document, and offerings have a six month term during which shares may be sold. Accordingly, it is necessary that sufficient capital be raised at the outset to allow for both the planned growth, and for diminution of capital caused by losses in the early months or years. For this reason, in determining whether the business plan is sound, we require the credit union to start with an opening capital of between 80% and l00% of the amount required to support its planned asset size after five years. For example, a credit union which is planned to grow to $6 million after 5 years would be required to open with capital of between $240,000 and $300,000. The exact amount required would depend on the rate of growth in the early years and the start up costs which would contribute to probable losses in the early years.
A new credit union will have no retained earnings and, in its early years, is likely to experience losses on operations which must be netted off the other components in calculating regulatory capital.
Under this process the credit union prepares, and has approved, an offering statement ready for issuance upon incorporation. Immediately after the credit union is incorporated by the Minister, an order is issued by the Superintendent restricting it from accepting deposits (or making loans) until it has raised the minimum capital required in the plan.
As soon as the credit union is incorporated and the offering statement is issued it can start issuing membership shares and selling special shares under the offering. Once the minimum amount of capital required in the approved business plan has been raised, the order is lifted and the credit union may commence its full operations including taking deposits and making loans.
Provided that member investors are supportive, the time between incorporation and the credit union being able to operate normally can be a matter of days.