Market Survey
By: G. Jayalakshmi
Cooperative banks and
Credit unions: an overview
In a cooperative bank, 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 businesses.
Rooted in local
communities
C
ooperative banking is
retail and commercial
banking organised on
a cooperative basis.
Cooperative banking
institutions take deposits and lend
money in most parts of the world. A
cooperative bank is a financial entity
which belongs to its members, who
are at the same time the owners and
the customers of their bank. Cooperative banks are often created by
persons belonging to the same local
or professional community or shar-
ing a common interest.
Cooperative banks generally
provide their members with a wide
range of banking and financial
services like loans, deposits and
banking accounts. These differ from
stockholder banks in their organisation, goals, values and governance.
Cooperative banking includes retail banking, as carried out by credit
unions, mutual savings and loan
associations, building societies and
cooperatives, as well as commercial
banking services provided by mutual
Cooperative banks are deeply
rooted inside local areas and communities. These are involved in local 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 increasing banking access in areas or markets where other banks are less present—SMEs, farmers in rural areas,
middle or low-income households in
urban areas—cooperative banks reduce banking exclusion and foster
the economic ability of millions of
people. They play an influential role
in the economic growth of the countries in which they work and increase
the efficiency of the international financial system. Their specific form of
enterprise, relying on the above-mentioned principles of organisation, has
proven successful both in developed
and developing countries.
Structure and features
In most countries, cooperative
banks are supervised and controlled
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Market Survey
The nations with the most credit union activity are
highly diverse. According to the WOCCU, nations with
the greatest number of credit union members included
the US (87 million), India (20 million), Canada (11
million), South Korea (4.7 million), Japan (3.6 million),
Mexico (3.6 million), Australia (3.5 million), Kenya
(3.3 million), Ireland (3.0 million), Thailand and Brazil
(2.6 million each).
by banking authorities and have to
respect prudential banking regulations, which put them at a level playing field with stockholder banks.
Depending on countries, this control
and supervision can be implemented
directly by state entities or delegated
to a cooperative federation or central
body. Even if organisational rules
vary according to respective national
legislations, cooperative banks share
common features:
Customer-owned entities. In
a cooperative bank, the needs of
the customers meet the needs of
the owners, as both are cooperative
bank members. As a consequence,
the first aim of a cooperative bank
is not to maximise profit but to provide the best possible products and
services to its members. Some cooperative banks only operate with
their members but most of them also
admit non-member clients to benefit
from their banking and financial services.
Democratic member control.
Cooperative banks are owned and
controlled by their members who
democratically elect the board of directors. Members usually have equal
voting rights, according to the cooperative principle of ‘one person, one
vote’.
Profit allocation. In a cooperative bank, a significant part of the
yearly profit, benefits or surplus is
usually allocated to constitute re32
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March 2011
serves. A part of this profit can also
be distributed to the cooperative
members, with legal or statutory
limitations in most cases. Profit is
usually allocated to members either
through a patronage dividend, which
is related to the use of the cooperative’s products and services by each
member, or through an interest or
a dividend, which is related to the
number of shares subscribed by each
member.
The role of credit unions
Credit unions have the purpose
of promoting thrift, providing credit at reasonable rates and providing other financial services to their
members. Credit union members are
usually required to share a common
bond, such as locality, employer, religion or profession. Credit unions are
usually funded entirely by member
deposits and avoid outside borrowing. They are typically (though not
exclusively) the smaller form of cooperative banking institutions. In
some countries, they are restricted
to providing only unsecured personal loans, whereas in others, they can
provide business loans to farmers
and mortgages.
Worldwide, 54,000 credit unions
in 97 countries serve 186 million
people. In 2008, the World Council’s
technical assistance programmes
reached 6.5 million people in 16
countries. Many credit unions exist
to aid community development or
sustainable international development on a local level. Globally, credit
union systems vary significantly in
terms of total system assets and average institution asset size, yet credit unions are typically smaller than
banks; for example, the average US
credit union has $93 million in assets, while the average US bank has
$1.53 billion, as of 2007.
World Council of
Credit Unions
World Council of Credit Unions
(WOCCU), defines credit unions as
‘not-for-profit cooperative institutions.’ In any case, credit unions
generally cannot accept donations
and must be able to prosper in a
competitive market economy.
Larger institutions are often
called cooperative banks. Some of
these banks are tightly integrated
federations of credit unions, though
these member credit unions may
not subscribe to all nine of the strict
principles of the WOCCU.
Like credit unions, cooperative
banks are owned by their customers
and follow the cooperative principles of one person, one vote. Unlike
credit unions, cooperative banks are
often regulated under both banking
and cooperative legislation. They
provide services such as savings and
loans to non-members as well as to
members and some also participate
in the wholesale markets for bonds,
money and even equities. Many cooperative banks are traded on public
stock markets, with the result that
they are partly owned by non-members. Member control is diluted by
these outside stakes, so they may be
regarded as semi-cooperative.
Cooperative banking systems are
also usually more integrated than
credit union systems. Local branches
of cooperative banks elect their own
boards of directors and manage their
Market Survey
own operations, but most strategic
decisions require approval from a
central office. Credit unions usually
retain strategic decision-making at a
local level, though they share backoffice functions, such as access to the
global payments system, by federating.
A cooperative bank that raises
capital in public stock markets creates a second class of shareholders
who compete with the members for
control. In some circumstances, the
members may lose control. This effectively means that the bank ceases to be a cooperative. Accepting
deposits from non-members may
also lead to a dilution of member
control.
Building societies
Building societies exist in Britain, Ireland and several Commonwealth countries. They are similar
to credit unions in organisation,
though few enforce a common bond.
However, rather than promoting
thrift and offering unsecured and
business loans, their purpose is to
provide home mortgages for members. Borrowers and depositors are
society members, setting policies
and appointing directors on a onemember, one-vote basis. Building
societies often provide other retail
banking services, such as current
accounts, credit cards and personal
loans. In the UK, regulations permit
up to half of their lending to be funded by debt to non-members, allowing
societies to access wholesale bond
and money markets to fund mortgages. The world’s largest is Brit-
Based on the data from WOCCU, by 2006 end, there were
46,377 credit unions in 97 countries around the world.
Collectively they served 172 million retail members and
oversaw $1.1 trillion assets.
ain’s Nationwide Building Society.
Mutual savings banks
Mutual savings banks, mutual
savings and loan associations were
very common in the 19th and 20th
centuries, but declined in number
and market share in the late 20th
century, becoming globally less significant than cooperative banks,
building societies and credit unions.
Trustee savings banks are similar
to other savings banks, but they are
not cooperatives, as they are controlled by trustees, rather than their
depositors.
Other nomenclatures
In some places, credit unions are
called by other names; for example,
in many African countries they are
called Savings and Credit Cooperative Organisations (SACCOs), to
emphasise 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. Afghan credit unions are
called Islamic Investment and Finance Cooperatives (IIFCs) to com-
In most countries, cooperative banks are supervised
and controlled by banking authorities and have to
respect prudential banking regulations, which put
them at a level-playing field with stockholder banks.
ply with Islamic lending practices.
Differences from other
financial institutions
Credit unions differ from banks
and other financial institutions as
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,
credit unions provide a broader range
of loan and savings products, at a
much cheaper cost to their members
than most microfinance institutions.
Global dispersion
Based on the data from WOCCU, by 2006 end, there were 46,377
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Market Survey
credit unions in 97 countries
around the world. Collectively they
served 172 million retail members
and oversaw $1.1 trillion in assets.
Note that WOCCU does not include
data from cooperative banks; for example, some nations generally seen
as the pioneers of credit unionism,
such as Germany, France, Holland
and Italy, are not included in their
data. The European Association of
Cooperative Banks reported 34 million members in those four countries by 2005 end.
The nations with the most credit
union activity are highly diverse.
According to WOCCU, nations with
the greatest number of credit union
members included the US (87 million), India (20 million), Canada (11
million), South Korea (4.7 million),
Japan (3.6 million), Mexico (3.6 million), Australia (3.5 million), Kenya
(3.3 million), Ireland (3.0 million),
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Thailand and Brazil (2.6 million
each). Countries with the highest
percentage of members in the economically active population were
Dominica (147 per cent), Ireland
(110 per cent), Barbados (72 per
cent), Trinidad and Tobago (57 per
cent), Canada (48 per cent), the US
(43 per cent), Benin (27 per cent),
Australia (26 per cent), Senegal and
Mali (19 per cent each); numbers
higher than 100 per cent are possible because the average person is
a member of more than one credit
union.
Not-for-profit
Credit unions often form cooperatives among themselves to
provide services to members. This
legislation allowed credit unions to
incorporate under either state or
federal law—a system of dual char-
tering that persists today. WOCCU
promotes sustainable development
of credit unions and other financial
cooperatives around the world to
empower people through access to
high-quality and affordable financial services.
Credit unions are not-for-profit
because they operate to serve their
members rather than to maximise
profits. But unlike non-profit organisations, credit unions do not rely on
donations and are financial institutions that must register a small profit (that is, surplus) to be able to continue to serve their members. Credit
unions use excess earnings to offer
members more affordable loans, a
higher return on savings, lower fees
or new products and services.

The author is a Ph.D research scholar
in the department of commerce, Periyar
University, Salem