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«Donal G. McKillopa John O.S. Wilsonb Abstract In 2012 there were 55,952 credit unions across 101 countries with more than 200.2 million members and ...»

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Recent Developments in the

Papers in Credit Union Movement


By Donal McKillop and John

Banking & O.S. Wilson


Abstract: In 2012 there were 55,952 credit unions across

101 countries with more than 200.2 million members and

approximately $1693 billion in assets. There is a great

WP Nº 14-002

diversity within the credit union movement across these

countries. This reflects the various economic, historic and

cultural contexts within which credit unions operate. 1st Quarter 2014 Credit unions have survived and grown over many years and in many countries, demonstrating what can be achieved by a volunteer‐led not‐for‐profit movement.

Recent Developments in the Credit Union Movement Donal G. McKillopa John O.S. Wilsonb Abstract In 2012 there were 55,952 credit unions across 101 countries with more than 200.2 million members and approximately $1693 billion in assets. There is a great diversity within the credit union movement across these countries. This reflects the various economic, historic and cultural contexts within which credit unions operate. Credit unions have survived and grown over many years and in many countries, demonstrating what can be achieved by a volunteer‐led not‐for‐profit movement.

Keywords: Banks, Credit unions, Common bonds ________________________________________________________________

a Queen's University Management School, Queen's University Belfast, Riddel Hall, 185 Stranmillis Road, Belfast, Northern Ireland BT9 5EE, UK. Tel: +44 28 9097 4852. Email: dg.mckillop@qub.ac.uk b School of Management, University of St Andrews, The Gateway, North Haugh, St Andrews, Fife, KY16 9SS, UK. Tel: +44 1334 462803. Email: jsw7@st-and.ac.uk + Address for correspondence: Professor John O.S. Wilson, School of Management, University of St Andrews, The

Gateway, North Haugh, St Andrews, Fife KY16 9AJ, UK. Tel: +44 1334 462803. Fax: +44 1334 462812. e-mail:

jsw7@st-andrews.ac.uk 1

1. Introduction At the beginning of the 21st century, the widely held belief was that highly developed financial systems dominated by large commercial and investment banks and liquid capital markets supported by state-of-the-art risk management systems would continue to finance investment and stimulate economic growth.1 However, since the onset of the financial crisis in 2008, turmoil in the financial system has impacted severely on the financial services industry. Many banks have suffered large losses and have had to raise additional capital, either privately or through their respective national governments, via a variety of bailout schemes. The magnitude of government-backed bank bailouts, recapitalization plans, liquidity injections, and credit guarantee schemes raised concerns about the business models pursued by banks in many parts of the developed world.

Policy makers have strived to strengthen regulation and supervision of the financial system by placing limits on the scale and scope of banking activities.

However the magnitude of government bailouts in many countries has meant that the financial crisis also became a sovereign debt crisis.2 These developments have led academics, practitioners and policy-makers to re-examine the scale, scope, governance, performance and the safety and soundness of financial institutions. It is 1 The importance of banks in mobilizing savings and allocating resources to investment projects is highlighted in a seminal contribution by Gurley and Shaw (1955). They argue that financial intermediation increases available investment funds by providing credit through banks and other financial intermediaries. Empirical research suggests that financial development stimulates economic growth. However, disentangling the effects of the extent to which financial intermediation determines the volume of available investment funds from how efficiently these investment funds are used is difficult. Levine (2005) provides an analysis of the links between financial development and growth.

2 Caprio and Honohan (2014) and Correa and Sapriza (2014) provide useful overviews of banking and sovereign debt crisis. For an historical perspective, see Calomiris (2014).

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unions in the financial system.

Credit unions are self-help cooperative financial organisations geared to attaining the economic and social goals of their members and their local community.3 Credit unions cannot do business with the general public due to limitations based on serving a membership that is characterised by a common bond.

Common bonds are effectively the social glue which binds credit union members together. Unlike most other financial institutions credit unions are not required to simultaneously satisfy shareholders’ profit expectations and disparate customer needs. Nor are their managers awarded bonuses that are linked to equity shareholder value measures. It could be argued that it has been the drive to maximise shareholder value and employee bonuses which has encouraged other financial organisations to engage in risky investment and unsafe lending practices resulting in the present financial turmoil.

Like all cooperatives, credit unions rely on active participation of members to differentiate them from shareholder-owned firms, and to develop and support competitive advantage in the provision of savings and loan products and other ancillary services. In essence the benefit of credit union membership can be thought of as use it or lose it. Shareholders of other financial institutions may obtain monetary benefits without actually using the institution’s products and services. For all their distinctiveness, credit unions are also subject to the realities of the economic environment – realities that, at times, may not complement, and, at other times, 3 The neoclassical theory of the firm, based on an assumption of profit maximization, is inadequate for understanding the economic behaviour of cooperative organizations, which embody multiple values and objectives. Defining a credit union’s objective function is an issue that has exercised researchers since the early 1970s (Smith et al, 1981, Smith, 1984).

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the struggle to maintain a balance between the social and philosophical objectives on one hand, and the economic realities of a financial intermediary on the other must increasingly be grappled with.

The rest of this article is structured as follows. Section 2 examines the historical development of credit unions and presents a descriptive analysis of their respective stage of development in various parts of the world. In Section 3 we focus on credit unions in the United States, where the movement has been most successful. Section 4 provides some final thoughts.

2. The Development and Evolution of Credit Unions The credit union is a unique institution deriving its exclusivity from the amalgamation of a number of otherwise common ideas. These include: a consumer co-operative; a micro financial intermediary; a legal corporation; a social movement;

and a social philosophy. The Rochdale Society of Equitable Pioneers was formed in Rochdale, England in 1844 and its rules provide the essential principles of consumer co-operation, including credit unions.4 Hermann Schulze-Delitzsch, a politician and judge, founded the first urban credit co-operative in 1850 in Germany. Friedrich Wilhelm Raiffeisen, a mayor in Germany’s western Rhineland, formed the first rural credit co-operative in 1864.

From this point on, co-operative financial institutions flourished in several other 4 The Rochdale Principles of Cooperation include: open, voluntary membership; democratic control; limited return, if any, on equity capital; net surplus belongs to user-owners; education; and cooperation among cooperatives

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ideals of Schulze-Delitzsch by Luigi Luzzatti, an Italian scholar who promoted and formed people’s banks on the basis of the developments he had observed in Germany.

A close correspondent of Luzzatti was Alphonse Desjardins in Quebec, Canada, who organized the first Canadian credit union (Caisse Populaire) in his hometown of Levis, Quebec in 1901, thus bringing the credit union experience to North America. Desjardins’ motivation was a unique blend of Catholic revulsion of usury and the Quebec political and religious philosophy of ´la survivance´. This philosophy was founded upon three fundamentals; the Church, the Soil, and the Hearth. The caisse populaire both buttressed and rested upon these same three pillars (Thompson, 1978). Thompson suggests that Desjardins was in contact with Luzzatti, Henry Wolff of Britain, and Charles Gide of France.5 Furthermore that he read of Raiffeisen, Schulze-Delitszch and the Rochdale Pioneers. Thompson suggests that Desjardins united all of these elements into an institution that was not only unique to Quebec, but also became the basis for the modern credit union structure and operation.6 It was from Canada that the credit co-operative ideal entered the United States, with Desjardins helping to organize a credit union in Manchester, New Hampshire for a Franco-American parish. During this time Desjardins met with Pierre Jay, the commissioner of banks in Massachusetts, and Edward Filene, a Boston 5 Henry Wolff was the Founder of the International Cooperative Alliance. Charles Gide was a French economist and held professorships at the universities of Bordeaux, Montpellier, and Paris. Gide was an expert on international monetary problems.

6 Today in Canada there are 450 Desjardins affiliated caisse populiares, and a further 427 credit unions outside the Desjardins system. The total Canadian movement thus consists of 877 credit unions/caisses with $256 billion in assets and serving 11.1 million members with each unit averaging an asset base of $292 million and a membership of 12,616. Credit Unions in Canada are provincially chartered and incorporated.

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(1990,1991) state that Jay is credited with drafting the first general credit union statute in the US, the Massachusetts Credit Union Act of 1909, while Filene was largely responsible for promoting credit unions in Massachusetts and more generally in the US. In 1921, Bergengren, a Massachusetts lawyer and friend of Desjardins, along with Filene, formed the Credit Union National Extension Bureau, which they charged with spearheading credit union legislation in every US state as well as at the federal level. Bergengren was the guiding spirit who was responsible for the drafting of, and lobbying for, credit union legislation in thirty-nine states before writing the 1934 US Federal Credit Union Act.7 This Act encapsulated much of his interpretation of what credit unions are, how they would be structured, and how they would operate, into law. Bergengren also drafted the Canadian 1932 Nova Scotia Credit Union Act.

Credit Unions Worldwide There has been a rapid growth in the credit union movement over the past decade (see Table 1). The World Council of Credit Unions (WOCCU) estimates that in 2012, there were 55,952 credit unions operating in 101 countries. These credit unions had a membership of 200.2 million (population penetration of 7.7%) and had total assets of $1,693.9 billion. The penetration rate measures credit union prevalence within a particular region. Arguably, it underestimates the effectiveness of credit unions as well-functioning financial intermediaries and this might be 7 th June 26 1934 (Chapter 750) “An Act to establish a Federal Credit Union system to establish a further market for securities of the United States and to make available to people of small means credit for provident purposes through a national system of co-operative credit thereby helping to stabilize the credit structure of the United States.”

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scope for improvement would seem quite high within many regions. It should also be emphasised that the penetration rate of less than 4% for Europe is a little misleading since this includes Eastern Europe where credit union development has only recently begun. A related point is that it does not include Continental Europe because credit unions have not emerged as a distinct group within this region as their activities have been subsumed by credit cooperatives.

Insert Table 1 near here Within this international system of credit unions, there are credit unions such as those in the developing world, which have just a handful of members, provide basic savings and loans products and are run and organised exclusively by volunteers. At the other end of the spectrum there are credit unions in North America which are full-service financial providers, are staffed by paid employees, have hundreds of thousands of members and billions of dollars in assets.

Table 2 presents descriptive statistics on credit unions, by geographic area.

Asia dominates in terms of credit unions numbers (39%) but they have only 21% of worldwide members and 10% of worldwide assets. In contrast North America has 13% of credit union numbers but 52% of worldwide members and 79% of total assets. In Table 2 the average reserve to asset ratio (a measure of capital strength) is 9.55% across all countries. However, there is considerable variation by region, ranging from 6.32% for Asia to 14.28% for Latin America. This suggests under- and over-capitalisation in Asia and Latin America respectively. There is also considerable

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Africa. WOCCU (2012) suggests that for a credit union to have an excellent effective financial structure it should have a loan-to-asset ratio of 70-80%.

Insert Table 2 near here Some insights into patterns of credit union development can be uncovered with the aid of organizational life-cycle theory. This assumes credit unions follow an evolutionary development path partitioned into distinct growth phases. These phases comprise Nascent (formative), Transition and Mature. This classification typology was developed by Ferguson and McKillop (1997, 2000). Credit unions positioned within each of these stages can be characterised by various financial and organizational attributes. This is shown on a country-specific basis in Table 3.

Insert Table 3 near here Credit union movements at a nascent stage of development tend to have a small assets size, high levels of structural and conduct regulation, a tight common bond, a heavy reliance on volunteers, and provide basic savings and loans products.

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