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Home , Cooperative banking, Cooperative federation, Credit union

Market Survey

By: G. Jayalakshmi

Cooperative and unions: an overview

In a , a part of the yearly profit is allocated to constitute reserves, while credit unions are not-for-profit because they operate to serve their members rather than to maximise profits.

organisations (such as cooperative federations) to cooperative busi- nesses.

Rooted in local communities Cooperative banks are deeply rooted inside local areas and com- munities. These are involved in lo- cal development and contribute to the sustainable development of their communities, as their members and management board usually belong to the communities in which they exercise their activities. By increas- ing banking access in areas or mar- kets where other banks are less pre- sent—SMEs, farmers in rural areas, middle or low-income households in urban areas—cooperative banks re- duce banking exclusion and foster the economic ability of millions of ooperative banking is ing a common interest. people. They play an influential role retail and commercial Cooperative banks generally in the economic growth of the coun- banking organised on provide their members with a wide tries in which they work and increase a cooperative basis. range of banking and financial the efficiency of the international fi- services like , deposits and nancial system. Their specific form of Cinstitutions take deposits and lend banking accounts. These differ from enterprise, relying on the above-men- in most parts of the world. A stockholder banks in their organisa- tioned principles of organisation, has cooperative bank is a financial entity tion, goals, values and governance. proven successful both in developed which belongs to its members, who Cooperative banking includes re- and developing countries. are at the same time the owners and tail banking, as carried out by credit the customers of their bank. - unions, mutual savings and Structure and features erative banks are often created by associations, building societies and persons belonging to the same local , as well as commercial In most countries, cooperative or professional community or shar- banking services provided by mutual banks are supervised and controlled

March 2011 • FACTS FOR YOU 31 Market Survey

countries. Many credit unions exist The nations with the most activity are to aid or sustainable international develop- highly diverse. According to the WOCCU, nations with ment on a local level. Globally, credit the greatest number of credit union members included union systems vary significantly in terms of total system assets and av- the US (87 million), India (20 million), (11 erage institution asset size, yet cred- it unions are typically smaller than million), South Korea (4.7 million), Japan (3.6 million), banks; for example, the average US Mexico (3.6 million), Australia (3.5 million), Kenya credit union has $93 million in as- sets, while the average US bank has (3.3 million), Ireland (3.0 million), Thailand and Brazil $1.53 billion, as of 2007. (2.6 million each). World Council of Credit Unions by banking authorities and have to serves. A part of this profit can also respect prudential banking regula- be distributed to the cooperative World Council of Credit Unions tions, which put them at a level play- members, with legal or statutory (WOCCU), defines credit unions as ing field with stockholder banks. limitations in most cases. Profit is ‘not-for-profit cooperative institu- Depending on countries, this control usually allocated to members either tions.’ In any case, credit unions and supervision can be implemented through a patronage , which generally cannot accept donations directly by state entities or delegated is related to the use of the coopera- and must be able to prosper in a to a or central tive’s products and services by each competitive market economy. body. Even if organisational rules member, or through an interest or Larger institutions are often vary according to respective national a dividend, which is related to the called cooperative banks. Some of legislations, cooperative banks share number of shares subscribed by each these banks are tightly integrated common features: member. federations of credit unions, though Customer-owned entities. In these member credit unions may a cooperative bank, the needs of The role of credit unions not subscribe to all nine of the strict the customers meet the needs of principles of the WOCCU. the owners, as both are cooperative Credit unions have the purpose Like credit unions, cooperative bank members. As a consequence, of promoting thrift, providing cred- banks are owned by their customers the first aim of a cooperative bank it at reasonable rates and provid- and follow the cooperative princi- is not to maximise profit but to pro- ing other to their ples of one person, one vote. Unlike vide the best possible products and members. Credit union members are credit unions, cooperative banks are services to its members. Some co- usually required to share a common often regulated under both banking operative banks only operate with bond, such as locality, employer, reli- and cooperative legislation. They their members but most of them also gion or profession. Credit unions are provide services such as savings and admit non-member clients to benefit usually funded entirely by member loans to non-members as well as to from their banking and financial ser- deposits and avoid outside borrow- members and some also participate vices. ing. They are typically (though not in the wholesale markets for bonds, Democratic member control. exclusively) the smaller form of co- money and even equities. Many co- Cooperative banks are owned and operative banking institutions. In operative banks are traded on public controlled by their members who some countries, they are restricted markets, with the result that democratically elect the board of di- to providing only unsecured person- they are partly owned by non-mem- rectors. Members usually have equal al loans, whereas in others, they can bers. Member control is diluted by voting rights, according to the coop- provide loans to farmers these outside stakes, so they may be erative principle of ‘one person, one and mortgages. regarded as semi-cooperative. vote’. Worldwide, 54,000 credit unions Cooperative banking systems are Profit allocation. In a coopera- in 97 countries serve 186 million also usually more integrated than tive bank, a significant part of the people. In 2008, the World Council’s credit union systems. Local branches yearly profit, benefits or surplus is technical assistance programmes of cooperative banks elect their own usually allocated to constitute re- reached 6.5 million people in 16 boards of directors and manage their

32 FACTS FOR YOU • March 2011 Market Survey own operations, but most strategic decisions require approval from a Based on the data from WOCCU, by 2006 end, there were central office. Credit unions usually retain strategic decision-making at a 46,377 credit unions in 97 countries around the world. local level, though they share back- office functions, such as access to the Collectively they served 172 million retail members and global payments system, by federat- oversaw $1.1 trillion assets. ing. A cooperative bank that raises capital in public stock markets cre- ain’s Nationwide . ply with Islamic lending practices. ates a second class of shareholders who compete with the members for Mutual savings banks Differences from other control. In some circumstances, the financial institutions members may lose control. This ef- Mutual savings banks, mutual fectively means that the bank ceas- savings and loan associations were Credit unions differ from banks es to be a cooperative. Accepting very common in the 19th and 20th and other financial institutions as deposits from non-members may centuries, but declined in number the members who have accounts in also lead to a dilution of member and market share in the late 20th the credit union are the owners of control. century, becoming globally less sig- the credit union and they elect their nificant than cooperative banks, board of directors in a democratic Building societies building societies and credit unions. one-person, one-vote system regard- Trustee savings banks are similar less of the amount of money invested Building societies exist in Brit- to other savings banks, but they are in the credit union. A credit union’s ain, Ireland and several Common- not cooperatives, as they are con- policies governing interest rates and wealth countries. They are similar trolled by trustees, rather than their other matters are set by a volunteer to credit unions in organisation, depositors. board of directors elected by and though few enforce a common bond. from the membership itself. Credit However, rather than promoting Other nomenclatures unions offer many of the same finan- thrift and offering unsecured and cial services as banks, often using a business loans, their purpose is to In some places, credit unions are different terminology. Common ser- provide home mortgages for mem- called by other names; for example, vices include share accounts (savings bers. Borrowers and depositors are in many African countries they are accounts), share draft (checking) ac- society members, setting policies called Savings and Credit Coop- counts, credit cards, share-term cer- and appointing directors on a one- erative Organisations (SACCOs), to tificates (certificates of deposit) and member, one-vote basis. Building emphasise savings before credit. In . societies often provide other retail Spanish-speaking countries, they Normally, only a member of a banking services, such as current are often called Cooperativas de credit union may deposit money with accounts, credit cards and personal Ahorro y Crédito, but in Mexico they the credit union or borrow money loans. In the UK, regulations permit are typically called a Caja Popular. from it. As such, credit unions have to half of their lending to be fund- French terms for credit union in- historically marketed themselves ed by debt to non-members, allowing clude Caisse Populaire and Banque as providing superior member ser- societies to access wholesale bond Populaire. Afghan credit unions are vice and being committed to helping and money markets to fund mort- called Islamic Investment and Fi- members improve their financial gages. The world’s largest is Brit- nance Cooperatives (IIFCs) to com- health. In the context, credit unions provide a broader range of loan and savings products, at a In most countries, cooperative banks are supervised much cheaper cost to their members than most microfinance institutions. and controlled by banking authorities and have to respect prudential banking regulations, which put Global dispersion them at a level-playing field with stockholder banks. Based on the data from WOC- CU, by 2006 end, there were 46,377

March 2011 • FACTS FOR YOU 33 Market Survey credit unions in 97 countries Thailand and Brazil (2.6 million tering that persists today. WOCCU around the world. Collectively they each). Countries with the highest promotes sustainable development served 172 million retail members percentage of members in the eco- of credit unions and other financial and oversaw $1.1 trillion in assets. nomically active population were cooperatives around the world to Note that WOCCU does not include Dominica (147 per cent), Ireland empower people through access to data from cooperative banks; for ex- (110 per cent), Barbados (72 per high-quality and affordable finan- ample, some nations generally seen cent), Trinidad and Tobago (57 per cial services. as the pioneers of credit unionism, cent), Canada (48 per cent), the US Credit unions are not-for-profit such as Germany, , Holland (43 per cent), Benin (27 per cent), because they operate to serve their and Italy, are not included in their Australia (26 per cent), Senegal and members rather than to maximise data. The European Association of Mali (19 per cent each); numbers profits. But unlike non-profit organ- Cooperative Banks reported 34 mil- higher than 100 per cent are pos- isations, credit unions do not rely on lion members in those four coun- sible because the average person is donations and are financial institu- tries by 2005 end. a member of more than one credit tions that must register a small prof- The nations with the most credit union. it (that is, surplus) to be able to con- union activity are highly diverse. tinue to serve their members. Credit According to WOCCU, nations with Not-for-profit unions use excess earnings to offer the greatest number of credit union members more affordable loans, a members included the US (87 mil- Credit unions often form co- higher return on savings, lower fees lion), India (20 million), Canada (11 operatives among themselves to or new products and services. million), South Korea (4.7 million), provide services to members. This  Japan (3.6 million), Mexico (3.6 mil- legislation allowed credit unions to The author is a Ph.D research scholar lion), Australia (3.5 million), Kenya incorporate under either state or in the department of commerce, Periyar (3.3 million), Ireland (3.0 million), federal law—a system of dual char- University, Salem

34 FACTS FOR YOU • March 2011