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Credit union

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Financial market participants
Organisations
Terms

A credit union is a cooperative financial institution that is owned and controlled by its members. 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.

Credit union policies governing interest rates and other matters are set by a volunteer Board of Directors elected by and from the membership itself. 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.

Credit unions may be viewed as profit organizations, or alternatively as for-profit enterprises charged with making a profit for their members (who receive any profits earned by the cooperative in the form of dividends paid on savings, which are taxed as ordinary income, or reduced interest rates on loans).

This debate reflects credit unions' unusual organizational structure, which attempts to solve the principal-agent problem by ensuring 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.

In the United States, credit unions typically pay higher dividend (interest) rates on shares (deposits) and charge lower interest on loans than banks.[1] Credit union revenues (from loans and investments) do, however, need to exceed operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency. Often credit unions have a lower cost of funds due to a higher proportion of non/low interest bearing deposits, than typical commercial banks.

Credit unions offer many of the same financial services as banks, often using a different terminology; including share accounts (savings accounts), share draft (checking) accounts, credit cards, and share term certificates (certificates of deposit) and online banking.

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.

Global dispersion

Based on data from the World Council of Credit Unions, at the end of 2006 there were 46,377 credit unions in 97 countries around the world. Collectively they served 172 million retail members and controlled US $1.1 trillion in assets.[2] Note that the World Council does not include data from co-operative banks, so that for example some nations generally seen as the pioneers of credit unionism (including Germany, France, Holland and Italy) are not included in their data. The European Association of Co-operative Banks reported 34 million members in these four countries at the end of 2005 [3]

The nations with the greatest credit union activity are highly diverse. According to the World Council, nations with the greatest number of credit union members included the United States (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). Countries with the highest percentage of members in the economically active population were Dominica (147% -- that is, the average person is a member of more than one credit union), Ireland (110%), Barbados (72%), Trinidad & Tobago (57%), Canada (48%), the United States (43%), Benin (27%), Australia (26%), Senegal and Mali (19% each).

Membership restrictions

Governmental regulatory agencies require that credit unions restrict their membership to defined segments of the population, such as people who live, work, worship, or attend school in a well-defined geographic area; employees of specific companies or trades; members of specific non-profit groups (alumni associations, conservation or other advocacy organizations, lodges, churches, or the like); or a particular occupational group (teachers, doctors, etc.) In the U.S., this is referred to as a credit union's "field of membership." Internationally it is referred to as the 'common bond' or 'bond of association'.

Mergers of smaller credit unions with disparate membership bases often result in a credit union with a wide variety of ways to qualify to join; thus, a credit union may have a much broader "field of membership" than that credit union's name would imply.

Credit unions generally follow the principle of "once a member, always a member," which allows current credit union membership to continue even if the individual would no longer qualify to be a member (such as having changed professions or moved outside the area). However, if the member closes his/her account, they may or may not be eligible to rejoin, depending on the credit union's policies and government regulations.

Credit Unions may be chartered to serve a specific employee group (often called a Select Employee Group or SEG), but may, for example in the USA, be allowed to change their charter to a "Community Charter". Such a charter allows them to not only serve the original employee group, but now anyone who lives, works, worships, or attends school within a geographical field of membership. In the US, this field of membership can then be expanded with the approval of the National Credit Union Administration or state regulator, and similar options are available in some other countries.

Credit Union Leagues and Associations

Credit unions in the United States have traditionally employed a state/national trade association relationship that aligns credit unions with state “Credit Union Leagues” followed by national affiliation with the Credit Union National Association (CUNA) of Madison, Wisconsin. Federal credit unions may also be members of the National Association of Federal Credit Unions (NAFCU).

The biggest UK Credit Union trade association is the Association of British Credit Unions Limited, more commonly known as Association of British Credit Unions, ABCUL. Some Scottish Credit Unions are represented by the much smaller Scottish League of Credit Unions (SLCU) which has headquarters in Glasgow however the overall majority of Credit Unions choose the main British Association.

Corporate credit unions

The majority of credit unions are known as natural-person credit unions, and provide service to individual consumers. Corporate credit unions (also known as central credit unions in Canada) also exist, but instead serve the needs of credit unions with operational support, funds clearing tasks as well as product and service delivery. In effect, they serve as a credit union's credit union. The largest corporate credit union in the United States is U.S. Central Credit Union of Lenexa, Kansas, which serves as a central clearing house for corporate credit unions. The two largest corporate credit unions that serve only natural-person credit unions are Western Corporate Federal Credit Union (WesCorp) in San Dimas, California and Southwest Corporate Federal Credit Union in Plano, Texas.

History

Main article: credit union history

Modern credit union history dates to 1852, when Franz Hermann Schulze-Delitzsch consolidated the learning from two pilot projects, one in Eilenburg and the other in Delitzsch in Germany into what are generally recognized as the first credit unions in the world. He went on to develop a highly successful urban credit union system.[4]

F.W. Raiffeisen

In 1864 Friedrich Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf (currently known as Neuwied) in Germany.[5] Although Schulze-Delitzsch can claim chronological precedence, Raiffeisen is often viewed as more important today. Rural communities in Germany faced a far more severe shortage of financial institutions than the cities. They were viewed as unbankable because of very small, seasonal flows of cash and very limited human resources. The organizational methods Raiffeisen refined there, which levered what is today called social capital, have become a hallmark of the global credit union identity.

By the time of Raiffeisen's death in 1888 credit unions had spread to Italy, France, the Netherlands, England and Austria, among other nations. The Raiffeisen name is still used by Raiffeisenbank, the largest banking group in Austria (with subsidiaries throughout Central and Eastern Europe), Rabobank (Netherlands) and similarly-named agricultural credit unions in Germany.

The first credit union in North America, the Caisse populaire de Lévis in Quebec, Canada, began operations on Jan. 23rd, 1901 with a ten cent deposit. Founder Alphonse Desjardins, a reporter in the Canadian parliament, was moved to take up his mission in 1897 when he learned of a Montrealer who had been ordered by the court to pay nearly $5,000 in interest on a loan of $150 from a moneylender. Drawing extensively on European precedents, Desjardins developed a unique parish-based model for Quebec: the caisse populaire.

In the United States, St. Mary's Bank Credit Union of Manchester, NH holds the distinction as the first credit union. Assisted by a personal visit from Alphone Desjardins, St. Mary's was founded by French-speaking immigrants to Manchester from Quebec in November 1908.

Pierre Jay, then Massachusetts Commissioner of Banks and Edward Filene, a Bostonian merchant, were central in establishing enabling legislation in Massachusetts in 1909.

Filene also created the Credit Union National Extension Bureau, the forerunner of the Credit Union National Association, which was formed as a confederation of state leagues at a meeting in Estes Park, Colorado in 1934. Attendees at the meeting included Dora Maxwell who would go on to help establish hundreds of credit unions and programs for the poor and Louise Herring, whose work to form credit unions and ensure their safe operation earned the title of “Mother of Credit Unions” in the United States.

In the same year, Congress passed the Federal Credit Union Act, which permitted credit unions to be organized anywhere in the United States. The legislation allowed credit unions to incorporate under either state or federal law, a system of dual chartering that persists today.

United Kingdom

In the United Kingdom Credit Unions are regulated by the Financial Services Authority, or FSA. UK credit unions are classified under two types, type 1 are the smaller CUs while type 2 are larger. From November 2006 many type 2 CUs will be offering their members debit card accounts. For the first time this will enable CU members to obtain funds from any Link ATM. UK CUs will not be offering cheques as these are generally being phased out for many UK financial transactions. Many CUs are offering most of the services available from other financial institutions such as direct debits and standing orders.

Credit Unions in the UK now offer a huge range of services to their members. From standing orders to payroll deductions, from being able to send standing orders from their accounts to pay members bills to cheaper insurance facilities.

There are many benefits of joining a Credit Union, and one of these is the free life insurance CU's provide their members free of charge. For example, if a member was to die then their loan value is wiped out with no further charge to member or their family and their savings with the CU is doubled and passed to the next of kin. And as recent history shows us, with Fairfax, the Christmas savings club going bust and hundreds of their customers losing all their savings, the CU is a real alternative providing cheap and affordable savings and loans, knowing that you are protected if the worst happens.

Currently there is a government financial initiative mainly being operated by Credit Unions to bring financial services to the disadvantaged of society. One aim is to significantly reduce the influence of door step lenders where a £300 loan over 30 weeks involves paying back around £450. A credit union loan would require paying back around £325.

North American statistics

File:CaissePopulaireShediac.jpg
Credit unions are called caisses populaires in French speaking communities of Canada. This one is located in Shediac, New Brunswick.

Canada has the highest per capita use of credit unions in North America, with more than a third of the population enrolled in one. (ref: World Council of Credit Unions) They are concentrated in Quebec, where they are known as caisses populaires (people's banks), and on the Western prairies. As of Dec. 31 2006 there were 549 member caisses and 5.8 million retail members in the Caisses Populaires Desjardins federation. According to data from Credit Union Central of Canada on the same date there were 10.8 million retail members controlling CAD $193 billion in assets across all of Canada.

In the United States, credit unions have 86 million members, which is 43.47% of the economically active population[6]. In the US, federal credit unions may apply to the National Credit Union Administration for Low-Income Credit Union or LICU status. To qualify for LICU status, the majority of the credit union's membership meet specific requirements in order to be considered "low-income". This LICU status allows the credit unions to benefit from certain NCUA programs to enhance its capacity to serve underserved populations who may otherwise lack access to credit or other financial services. In addition, some state regulators also provide for similar low-income designations.

Unlike banks, which were caught redlining underserved areas in the 1970s, credit unions are not subject to federal "community reinvestment" requirements -- essentially because credit unions, by their nature and mission of "people helping people," already meet the financial needs of a broad spectrum of people that fall within their fields of membership, and play an active role in community development and growth. Because of that, credit unions have successfully lobbied to exempt themselves from the (U.S. federal) Community Reinvestment Act, the law that forces banks to provide services in low-income areas.

As of the end of 2005, the National Credit Union Administration insured more than $515 billion in deposits at 8,695 nonprofit cooperative US credit unions. For comparison, the Federal Deposit Insurance Corporation insured more than $3,000 billion in deposits at 8,900 banks and thrift institutions. The NCUA and the FDIC are both independent federal agencies backed by the full faith and credit of the US government.

Credit Unions and Banks in the United States

Tension has always existed between credit unions and banks. When credit unions were first organizing in the United States in the early twentieth century, the banking industry was opposed, remaining so ever since. These tensions have only been exacerbated as many credit unions have grown, expanded their fields of membership to include large communities and whole states, and in the eyes of some, are indistinguishable from banks[7].

Due to their status as for-profit financial institutions, credit unions in the United States are exempt from federal and state income taxes (but, not from employment or property taxes, among others). Additionally, credit union members pay income taxes on dividends earned through financial participation in the credit union; this is similar to the taxation structure enjoyed by many banks incorporated under Chapter S.

Bank holding companies and their affiliates aggressively compete to provide services to credit unions through their ATM networks, corporate checking accounts, and certificate of deposit programs. In 2007, the American Bankers Association barred credit union employees from attending ABA sponsored educational seminars. This includes online classes that require registration. Based upon the pretext that the ABA only wants to serve its members, the American Bankers Association continues to attempt to weaken credit unions and take back the 6% market share that credit unions currently hold.

Credit unions maintain that no matter their size or field of membership, the fact that they are owned by their members and not shareholders makes them fundamentally different from banks[8]

References

  1. ^ CUNA Ratedex comparing bank and credit union rates
  2. ^ World Council of Credit Unions, 2006 Statistical Report.
  3. ^ European Association of Cooperative Banks, Annual Statistical Report, 2005
  4. ^ J. Carroll Moody & Gilbert C. Fite. The Credit Union Movement: Origins and Development 1850 to 1980. Kendall/Hunt Publishing Co., Dubuque, Iowa, 1984, p. 4
  5. ^ J. Carroll Moody & Gilbert C. Fite. The Credit Union Movement: Origins and Development 1850 to 1980. p. 8
  6. ^ 2005 statistical report from the World Council of Credit Unions
  7. ^ Credit Union Competition, from the American Bankers Association web page regarding industry issues.
  8. ^ Why Credit Unions are tax exempt, from the governmental affairs section of CUNA's web site.
  • Ian MacPherson. Hands Around the Globe: A History of the International Credit Union Movement and the Role and Development of the World Council of Credit Unions, Inc. Horsdal & Schubart Publishers Ltd, 1999.

See also

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