Credit Union

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= cooperative financial institution that is owned and controlled by its members, and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services to its members.


Description

From the Wikipedia:

"A credit union is a cooperative financial institution that is owned and controlled by its members, and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services to its members. Many credit unions exist to further community development or sustainable international development on a local level. Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size since credit unions exist in a wide range of sizes, ranging from volunteer operations with a handful of members to institutions with several billion dollars in assets and hundreds of thousands of members. Yet Credit unions are typically smaller than banks; for example, the average U.S. credit union has $93 million in assets, while the average U.S. bank has $1.53 billion, as of 2007.

The World Council of Credit Unions (WOCCU) defines credit unions as "not-for-profit cooperative institutions." In practice however, legal arrangements vary by jurisdiction. For example in Canada credit unions are regulated as for-profit institutions, and view their mandate as earning a reasonable profit to enhance services to members and ensure stable growth. This difference in viewpoints reflects credit unions' unusual organizational structure, which attempts to solve the principal-agent problem by ensuring that the owners and the users of the institution are the same people. In any case, credit unions generally cannot accept donations and must be able to prosper in a competitive market economy.

Credit unions differ from banks and other financial institutions in that the members who have accounts in the credit union are the owners of the credit union and they elect their board of directors in a democratic one person-one vote system regardless of the amount of money invested in the credit union. A credit union's policies governing interest rates and other matters are set by a volunteer Board of Directors elected by and from the membership itself. Credit unions offer many of the same financial services as banks, often using a different terminology; common services include: share accounts (savings accounts), share draft (checking) accounts, credit cards, share term certificates (certificates of deposit), and online banking.Normally, only a member of a credit union may deposit money with the credit union, or borrow money from it. As such, credit unions have historically marketed themselves as providing superior member service and being committed to helping members improve their financial health. In the microfinance context, "[c]redit unions provide a broader range of loan and savings products at a much cheaper cost [to their members] than do most microfinance institutions."

In some places, credit unions are called by other names; for example, in many African countries they are called "savings and credit cooperative organizations" (SACCOs), "to emphasize savings before credit." in Spanish-speaking countries, they are often called cooperativas de ahorro y crédito, but in Mexico they are typically called a caja popular. French terms for "credit union" include caisse populaire and banque populaire. Afghani credit unions are called "Islamic investment and finance cooperatives" (IIFCs) to comply with Islamic lending practices." (http://en.wikipedia.org/wiki/Credit_union)


Discussion

Why Credit Unions Avoided the Meltdown

Ralph Nader:

"Credit Unions have no shareholders nor stock nor stock options; they are responsible to their owner-members who are their customers.

There are even some special low-income credit unions—thought not nearly enough—to stimulate economic activities in these communities and to provide “banking” services in areas where poor people can’t afford or are not provided services by commercial banks.

According to Mike Schenk, an economist with the Credit Union National Association, there is another reason why credit unions avoided the mortgage debacle that is consuming the big banks.

Credit Unions, he says, are “portfolio lenders. That means they hold in their portfolios most of the loans they originate instead of selling them to investors….so they care about the financial performance of those loans.”

Mr. Schenk allowed that with the deepening recession, credit unions are not making as much surplus and “their asset quality has deteriorated a bit. But that’s the beauty of the credit union model. Credit unions can live with those conditions without suffering dire consequences,” he asserted.

His use of the word “model” is instructive. In recent decades, credit unions sometimes leaned toward commercial bank practices instead of strict cooperative principles. They developed a penchant for mergers into larger and larger credit unions. Some even toyed with converting out of the cooperative model into the shareholder model the way insurance and bank mutuals have done. The cooperative model—whether in finance, food, housing or any other sector of the economy—does best when the owner-cooperators are active in the general operations and directions of their co-op. Passive owners allow managers to stray or contemplate straying from cooperative practices.

The one area that is now spelling some trouble for retail cooperatives comes from the so-called “corporate credit unions”—a terrible nomenclature—which were established to provide liquidity for the retail credit unions. These large wholesale credit unions are not exactly infused with the cooperative philosophy. Some of them gravitate toward the corporate banking model. They invested in those risky mortgage securities with the money from the retail credit unions. These “toxic assets” have fallen $14 billion among the 28 corporate credit unions involved.

So the National Credit Union Administration is expanding its lending programs to these corporate credit unions to a maximum capacity of $41.5 billion. NCUA also wants to have retail credit unions qualified for the TARP rescue program just to provide a level playing field with the commercial banks.

Becoming more like investment banks the wholesale credit unions wanted to attract, with ever higher riskier yields, more of the retail credit union deposits. This set the stage for the one major blemish of imprudence on the credit union subeconomy.

There are very contemporary lessons to be learned from the successes of the credit union model such as being responsive to consumer loan needs and down to earth with their portfolios. Yet in all the massive media coverage of the Wall Street barons and their lethal financial escapades, crimes and frauds, little is being written about how the regulation, philosophy and behavior of the credit unions largely escaped this catastrophe.

There is, moreover, a lesson for retail credit unions. Beware and avoid the seepage or supremacy of the corporate financial model which, in its present degraded overly complex and abstract form, has become what one prosecutor called “lying, cheating and stealing” in fancy clothing." (http://www.onthecommons.org/content.php?id=2391)


More Information

  1. Credit Commons
  2. Status report, Summer 2009 by Yes magazine, at http://www.yesmagazine.org/article.asp?ID=3505