The recent financial crisis has shone a bright light on the differences between the banking sector and the credit union system.
As we look at the future of the credit union system, we should re-examine the cooperative principles upon which the system was founded to understand how these principles contrast with the basic tenets of banks structured as stock entities.
We must also ask whether these cooperative principles remain relevant and valid as the foundation of the credit union system today, and how well the system has embraced those principles.
The International Cooperative Alliance defines a cooperative entity in terms of the seven cooperative principles:
1. Voluntary, open membership;
2. Democratic member control;
3. Member economic participation;
4. Autonomy and independence;
5. Education, training, and information;
6. Cooperation among cooperatives; and
7. Concern for the community.
One can immediately identify key differences between stock banks and the credit union model by comparing the second, third, and fourth principles against the typical stock bank structure.
While the equity ownership interest in a stock bank is held by shareholders whose relative voting power depends upon the number of shares owned, a cooperative is owned and controlled by its members, each having one vote.
In fact, most large banks have significant institutional ownership, meaning the equity ownership is concentrated in the hands of a limited number of shareholders.
While the typical stock bank seeks to generate a profit for its shareholders—whose interests may not ultimately be aligned with interests of the bank’s customers—the cooperative entity returns any economic benefits to its members by reinvesting in the cooperative, paying member dividends, or offering enhanced services.
The autonomy and independence cooperatives enjoy can also be contrasted with the loss of control often associated with a stock bank taking on major shareholders.
One key difference to emphasize: For a credit union, the member is the customer and the owner. For a typical stock bank, the retail customer is not the owner.
So the differences, at least in principle, seem clear. But are the cooperative principles, which were originally developed in 1844 by the Rochdale Society of Equitable Pioneers in England, still relevant and viable today?
Does the cooperative model offer real advantages when compared with the stock bank model?
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