Cooperative Banks and Credit Unions
Existing Financial Alternatives (3 of 4)
Even though Cooperative Banks and Credit Unions can be contemplated as values-based, there are very specific aspects of these institutions that make them worthy of creating a separate category. This distinction involves mainly two things: ownership structure and geography. Community Bank is also a term frequently used when discussing local finance institutions. But even though in some countries they can mean the same as Cooperative Banks, legal structures differ in others. For this reason, I will use Cooperative Banks (CBs) and Credit Unions (CUs) only.
As previously discussed, one of the main characteristics of business is the pressure to ensure short-term and high returns to its shareholders. This profit motive is what causes many companies, banks, and start-ups to make rushed and sometimes unethical decisions, leaving the mission and vision of the business aside, perhaps for just a moment or for good. What happens in the case of CBs and CUs, however, is that they are member-owned. Because of that, the priority becomes the maximisation of long-term customer value. In this sense, their main goal is to ensure the needs of their members are met, as well as fostering the local economy whilst keeping the interest of future generations in mind. In order to fulfil this purpose, profit is seen and treated as a means to an end, rather than an end in itself.
CUs are a type of non-profit financial cooperative and, just like CBs, they operate according to the Cooperative Principles: 1) Voluntary and Open Membership; 2) Democratic Member Control (one member, one vote); 3) Member Economic Participation; 4) Autonomy and Independence; 5) Education, Training, and Information; 6) Cooperation among Cooperatives; and 7) Concern for Community. Drawing on the sixth principle, CUs and CBs normally build “large formalised networks with central institutions that enable them to achieve economies of scale” (NEF, 2012:7). One achievement of their collective lobbying efforts, for instance, was guaranteeing deposit insurance schemes, which cover members’ capital in case a CU crashes.
In addition to being owned by their members, the other main characteristic of these alternative financial institutions is their connection to a geographical area. Unlike sustainable banks, which might aspire to be global, CBs and CUs are organisations commonly tied to a particular region. As such, they play a central role in strengthening local economies by supporting local families and business through financial inclusion and the provision of loans to small and medium-sized enterprises (SMEs). Instead of getting involved in intense derivative trading like commercial banks do, CBs and CUs focus on investing in real enterprises, from local farms and shops to craftsmen and start-ups — thus returning to the original responsibility of banks as intermediaries between households and firms. Referring to the reality in the United States, Michael Shuman observes:
“Even though local businesses comprise more than half the economy, almost all [our savings] and investment dollars go into big corporations on Wall Street (…) There is not a single mutual fund or investment broker in the country that gives retail investors the opportunity to invest in a portfolio of local businesses.”
In this light, CBs and CUs attempt to bridge the local investment gap by holding significantly larger shares of SME loans than their overall market share. In the U.S., for example, small and mid-sized banks account for 54% of small-business lending but control only 22% of all main assets. Similarly, in Canada, CUs have 17% of the SME lending market, despite holding only 5% of total banking assets. The reason why this is such a priority is because investing locally also promotes local economic development by preventing capital from leaking out from regions. More precisely, by lending and investing in local businesses, money is retained within the community for longer periods of time, generating more income wealth and job opportunities.
Through this brief overview, we can see that CUs and CBs benefit members and businesses alike. Without profit maximisation as their drive, stakeholders act more like stewards than owners, preferring long-term views over risky moves. In turn, profits made by these local financial institutions are reinvested in the cooperative itself and/or returned to its members via fee reductions, higher savings rates or better loan terms. Moreover, by increasing their knowledge around the communities they are inserted in, local banks can rely more on human relationships than solely on credit scoring when making loans. As a result, trust is created between bankers and community, which provides social and emotional returns that go beyond financial gains: “They [local investors] are not just creating income for retirement, they are also getting the pleasure of supporting their community” (Shuman, 2012:142).
Despite their proven positive impact, alternative banks are still largely held back by outdated regulations. In the UK, for example, the Co-operative and Community Benefit Society Act (2014) has only recently cleared the way for cooperative banks to offer full high-street banking services. South West Mutual[1] is one of the players which used this change of regulation as an opportunity to provide human-scale banking. Tony Greenham, one of the founders, explains the reasoning behind the bank he is helping create:
“Our purpose is to support a socially just transition to a zero carbon, regional economy that is fair for all and that respects the natural environment. It’s about honest, accessible, effective and local rooted banking systems, focused on nurturing social enterprises, SMEs, and cooperatives. We want to be the bankers of that.”
In an interview conceded for my masters thesis, Greenham raised the importance of diversification in the finance sector, as opposed to solely relying on big commercial banks. Other authors also note that revitalising “small-scale fair-enterprise root systems” is the best way of reversing the concentration of power given to large-scale banks. In countries like Germany, diversification is given due importance. The country has a three-pillars banking system composed of: State financial institutions (40% of market share of deposits); Commercial banks (36%); and Cooperative Banks, Credit Unions and Mutuals (24%), as reported by the New Economics Foundation.
On the subject of diversity, there is yet another category of alternative investing which has grown significantly in the last decade and thus cannot be overlooked: the financial technologies, or fintechs. Next, we will explore how they too are contributing to a more diverse financial landscape and offering new ways for us to align our money with our values.
[1] Mutuals are similar to cooperatives, but in this case, customers automatically become members without having to buy a share (NEF, 2012:7).
References used for this article:
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NEF (2012b) Cooperative banks: International evidence | Part of nef’s Stakeholder Banks series. [Online] Available from: https://neweconomics.org/uploads/files/051add837ec5b0ca02_s2m6bo0c0.pdf [Accessed 17/08/19].
WEBER, O. and REMER, S. (ed.) (2011) Social Banks and the Future of Sustainable Finance. [Ebook] New York: Routledge.
ICA — INTERNATIONAL CO-OPERATIVE ALLIANCE (n.d.) Cooperative identity, values & principles. [Online] Available from: https://www.ica.coop/en/cooperatives/cooperative-identity [Accessed 17/08/19].
GREENHAM, T. (2017) Everyone a banker? Welcome to the new co-operative banking movement. RSA. [Online] Available from: https://www.thersa.org/discover/publications-and-articles/rsa-blogs/2017/06/everyone-a-banker-welcome-to-the-new-co-operative-banking-movement [Accessed 14/08/19].
GREENHAM, T. (2019a) Talk at the Torbay’s Local Entrepreneur Forum Forum on 7th June 2019.
GREENHAM, T. (2019b) Interview on 22nd July 2019.
LORENZ-OLSON, J. (2018) Are credit unions better than big banks? [YouTube film] Available from: https://www.youtube.com/watch?v=GIMsbgIQiDE [Accessed 17/08/19].
RAWORTH, K. (2017) Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. London: Random House Business Books.
