Credit risk and profitability of short-term deposit at Savings and Credit Cooperatives. The case of Peru

Abstract

In times of record-low interest rates, Peruvian Saving and Credit Cooperatives seem to promise investors high rates with comparably low credit risk. Peru is one of the most developed countries in Latin America as far as the cooperative sector is concerned and an attractive one as those institutions are expected to repay very much above market rates. The value of this paper lies in evaluating whether high return rates are justified by a proportionally high credit risk, or otherwise. This research describes the characteristics of the Peruvian Saving and Credit Cooperative market and highlights the safeguarding tools used to protect their associates from credit risk. The paper uses official 2007-2018 data for all 143 Peruvian cooperatives supervised by the financial authority and applies several methodologies widely accepted by academics and practitioners to assess credit risk of the whole sector, namely a production of financial ratios, analysis of the financial statements, Beaver's model, Bathory model, Z-Score, Springate analysis, Logit analysis and H-Factor model. It finds that risk in the industry compares favourably to returns, so highlighting the existence of a market anomaly. Indeed, Peruvian Saving and Credit Cooperatives offer up to two-digit passive interest rates to depositors while the corresponding risk has been computed in this paper as being comparably low. The cooperatives do not display risk of bankrupt under any of the tools used for carrying out the analysis.