Credit Unions as Cooperative Institutions: Distinctiveness, Performance and Prospects

Abstract

Credit unions are not for profit cooperative financial institutions which provide financial services to a membership defined on the basis of a common bond. In 2013, there were 56,904 credit unions across 103 countries with 207.9 million members. There is a great diversity within the credit union movement across these countries. This reflects the various economic, historic and cultural contexts within which credit unions operate. This paper traces the historical development of credit unions in different parts of the world. We investigate what sets credit unions apart from other financial services organisations, placing a particular focus on the role they play in building social capital and community relations and empowering members. We also discuss the challenges to the future development of credit unions. These include increased regulatory burdens, capital constraints, declining membership involvement, and tensions between social and economic objectives.

Notes

1 The importance of banks in mobilising savings and allocating resources to investment projects is highlighted in a seminal contribution by Gurley and Shaw (1955). They argue that financial intermediation increases available investment funds by providing credit through banks and other financial intermediaries. Empirical research suggests that financial development stimulates economic growth. However, disentangling the effects of the extent to which financial intermediation determines the volume of available investment funds from how efficiently these investment funds are used is difficult. Levine (2005) provides an analysis of the links between financial development and growth. Recent evidence suggests that there is a threshold beyond which financial development has a negative effect on output growth (Arcand, Berkes, and Panizza 2012; Cecchetti and Kharroubi 2012).

2 The neoclassical theory of the firm, based on an assumption of profit maximisation, is inadequate for understanding the economic behaviour of cooperative organisations, which embody multiple values and objectives. Defining a credit union's objective function is an issue that has exercised researchers since the early 1970s (Smith, Cargill, and Meyer 1981; Smith 1984).

3 Henry Wolff was the Founder of the International Cooperative Alliance. Charles Gide was a French economist and held professorships at the universities of Bordeaux, Montpellier, and Paris. Gide was an expert on international monetary problems.

4 Today in Canada there are 450 Desjardins-affiliated caisse populaires, and a further 427 credit unions outside the Desjardins system. The total Canadian movement has $256 billion in assets and serves 11.1 million members.

5 The UK government has invested £137 million in GB credit unions through the Financial Inclusion Growth Fund. This scheme aids individual credit unions invest in infrastructure as well as subsidising lending to those on low incomes.

6 Davis (2013) examines three recent cases of Australian credit union demutualisation. He notes that in Australia there have been relatively few cases of credit union demutualisation which contrasts with other parts of the financial sector such as insurance and building societies where mutuality was common but where widespread demutualisation has taken place in recent times.

7 Johanisova and Wolf (2012) provide a detailed and thoughtful overview and discussion of economic democracy.

8 Credit unions in GB have failed to achieve a broad income and wealth mix of borrowing and saving members. As a consequence, they have acquired the label of a poor persons’ bank, which has in turn hindered the development of the movement (McKillop, Ward, and Wilson 2011).

9 Although most British and Irish credit unions are engaged in some form of financial education in the community, the majority are restricted to low-commitment activities with marginal impact (Byrne et al. 2010).

10 French and McKillop (2014) state that credit unions are in a position to structure effective intervention programmes targeted at their members in financial difficulties by promoting awareness of their financial situation, by encouraging them to manage bills more effectively and by improving budgeting skills. They argue that such a programme could potentially utilise behaviourally informed personal financial management software to provide a simple and cost-effective intervention.

11 Unlike other retail financial institutions, credit unions are not permitted to raise capital by issuing new equity. Over time, capital accumulates through the retention of (tax exempt) earnings that are not distributed to members, in the form of dividends on share accounts, or favourable rates paid on deposit accounts, or subsidised rates charged on loans.

12 Corporate credit unions provide services for (retail) credit unions, including deposit of excess funds, payment services and access to liquid funds if required.

13 There are also a significant number of small credit unions in the USA. There are 739 (10.9%) credit unions with less than $2 million in assets. They primarily offer their members shares and loans. The average membership for these credit unions is 469; the average savings per member is $2595 and the average size of a loan outstanding is $4172. There are a further 697 (10.3%) with assets between $2 million and $5 million and 815 (12.0%) with assets between $5 million and $10 million.

14 Reschovsky (2010) contends that the core issue concerning continued tax exemption for credit unions relate to whether credit unions fulfil a public purpose, such as providing access to credit markets for families, individuals and businesses that commercial banks do not lend to.

15 In 2013, legislative amendments were proposed to allow US credit unions to manage their balance sheets more effectively. H.R. 2572, the ‘Regulatory Relief for Credit Unions Act of 2013', calls for the introduction of a risk-based regulatory system, which effectively reduces the level of required capital.