Credit union

A branch of the Coastal Federal Credit Union in Raleigh, North Carolina

A credit union is a member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members.[1][2]

Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size, ranging from volunteer operations with a handful of members to institutions with assets worth several billion US dollars and hundreds of thousands of members.[3] Credit unions operate alongside other mutuals and cooperatives engaging in cooperative banking, such as building societies.

"Natural-person credit unions" (also called "retail credit unions" or "consumer credit unions") serve individual people, as distinguished from "corporate credit unions," which serve other credit unions.[4]

Differences from other financial institutions

Credit unions differ from banks and other financial institutions in that those who have accounts in the credit union are its members and owners,[1] and they elect their board of directors in a one-person-one-vote system regardless of their amount invested.[1] Credit unions see themselves as different from mainstream banks, with a mission to be "community-oriented" and "serve people, not profit".[5][6][7]

Credit unions offer many of the same financial services as banks, but often using a different terminology; common services include share accounts (savings accounts), share draft accounts (checking accounts), credit cards, share term certificates (certificates of deposit), and online banking.[1] Normally, only a member of a credit union may deposit or borrow money.[1] Surveys of customers at banks and credit unions have consistently shown a significantly higher customer satisfaction rate with the quality of service at credit unions.[8][9] Credit unions have historically claimed to provide superior member service and to be committed to helping members improve their financial situation. In the context of financial inclusion credit unions claim to provide a broader range of loan and savings products at a much cheaper cost to their members than do most microfinance institutions.[10]

Not-for-profit status

In the credit union context, "not-for-profit" is not the same as for a "non-profit" charity or similar organization.[11] Credit unions are "not-for-profit" because their purpose is to serve their members rather than to maximize profits.[10][10][11] But, unlike charities and the like, credit unions do not rely on donations, and are financial institutions that must perforce make what is, in economic terms, a small profit (i.e., in non-profit accounting terms, a "surplus") to remain in existence.[10][12] According to the World Council of Credit Unions (WOCCU), a credit union's revenues (from loans and investments) must exceed its operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency.[12]

F.W. Raiffeisen wrote in 1870 that credit unions "are, according to paragraph eleven of the German law of cooperatives, 'merchants' as defined by the common code of commerce. They accordingly form a sort of commercial business enterprise of which the owners are the Credit Unions' members".[13]

In the United States, credit unions incorporated and operating under a state credit union law are tax-exempt under Section 501(c)(14)(A).[14] Federal credit unions organized and operated in accordance with the Federal Credit Union Act, and they are tax-exempt under Section 501(c)(1).[15]

Global presence

The directors of the Mulukanoor Women's Thrift Cooperative stand at the entrance to their credit union in Karimnagar district, Andhra Pradesh, India

Based on data from the World Council, at the end of 2014 there were 57,480 credit unions in 105 countries around the world. Collectively they served 217.4 million members and oversaw US$1.79 trillion in assets.[16] The World Council does not include data from co-operative banks, so, for example, some countries generally seen as the pioneers of credit unionism, such as Germany, France, the Netherlands and Italy, are not always included in their data. The European Association of Co-operative Banks reported 38 million members in those four countries at the end of 2010.[17]

The countries with the most credit union activity are highly diverse. According to the World Council, the countries with the greatest number of credit union members were the United States (101 million), India (20 million), Canada (10 million), Brazil (6.0 million), South Korea (5.7 million), Philippines (5.4 million), Kenya and Mexico (5.1 million each), Ecuador (4.8 million), Australia (4.5 million), Thailand (4.1 million), Colombia (3.6 million) and Ireland (3.3 million).[16]

The countries with the highest percentage of credit union members in the economically active population were Barbados (82%),[18] Ireland (75%), Grenada (72%), Trinidad & Tobago (68%), Belize and St. Lucia (67% each), St. Kitts & Nevis (58%), Jamaica (53% each), Antigua and Barbuda (49%), United States (48%), Ecuador (47%) and Canada (43%). Several African and Latin American countries also had high credit union membership rates, as did Australia and South Korea. The average percentage for all countries considered in the report was 8.2%[16]

Credit unions were launched in Poland in 1992; as of 2012 there were 2,000 credit union branches there with 2.2 million members.[19]

History

Friedrich Wilhelm Raiffeisen founded the first rural credit unions in Germany
A caisse populaire credit union in Lévis, Quebec, circa 1920

Modern credit union history dates from 1852, when Franz Hermann Schulze-Delitzsch consolidated the learning from two pilot projects, one in Eilenburg and the other in Delitzsch in the Kingdom of Saxony 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.[20] In 1864 Friedrich Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf (now part of Neuwied) in Germany.[20] By the time of Raiffeisen's death in 1888, credit unions had spread to Italy, France, the Netherlands, England, Austria, and other nations.[21]

The first credit union in North America, the Caisse Populaire de Lévis in Quebec, Canada, began operations on January 23, 1901 with a 10-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 C$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, New Hampshire was the first credit union. Assisted by a personal visit from Desjardins, St. Mary's was founded by French-speaking immigrants to Manchester from Quebec on November 24, 1908. America's Credit Union Museum now occupies the location of the home from which St. Mary's Bank Credit Union first operated. On November 1910 the Woman's Educational and Industrial Union set up the Industrial Credit Union, modelled on the Desjardins credit unions it was the first non-faith-based community credit union serving all people in the greater Boston area. The oldest statewide credit union in the US was established in 1913. The St. Mary's Bank Credit Union serves any resident of the Commonwealth of Massachusetts.[22]

After being promoted by the Catholic Church in the 1940s to assist the poor in Latin America, credit unions expanded rapidly during the 1950s and 1960s, especially in Bolivia, Costa Rica, the Dominican Republic, Honduras and Peru. The Regional Confederation of Latin American Credit Unions (COLAC) was formed and with funding by the Inter-American Development Bank credit unions in the regions grew rapidly throughout the 1970s and into the early 1980s. In 1988 COLAC credit unions represented 4 million members across 17 countries with a loan portfolio of circa half a billion US dollars. However, from the late 1970s onwards many Latin American credit unions struggled with inflation, stagnating membership and serious loan recovery problems. In the 1980s donor agencies such as USAID attempted to rehabilitate Latin American credit unions by providing technical assistance and focusing credit unions' efforts on mobilising deposits from the local population. In 1987 the regional financial crisis caused a run on credit unions. Significant withdrawals and high default rates caused liquidity problems for many credit unions in the region.[23]

Stability and risks

Credit unions must make enough surplus to cover expenses, otherwise, like any other business, they cannot continue, in which case they can become insolvent and cease to exist; the effect on those with funds deposited varies between jurisdictions.

Several factors combine to put credit unions at risk of failure. They may not be allowed to lend enough money to enough people who are willing and able to repay because of their rules on responsible lending. When debtors get into trouble, they will often repay liabilities such as payday loans with high interest rates first, leaving the credit unions until last. In some cases courts may, after ruling against debtors, leniently allow them to pay off their debts with very small payments, sometimes free of interest, over a long period.[24]

Corporate

Credit unions as such provide service only to individual consumers. Corporate credit unions (also known as central credit unions in Canada) provide service to credit unions, with operational support, funds clearing tasks, and product and service delivery.

Leagues and associations

Credit unions often form cooperatives among themselves to provide services to members. A Credit Union Service Organization (CUSO) is generally a for-profit subsidiary of one or more credit unions formed for this purpose. For example, CO-OP Financial Services, the largest credit union owned interbank network in the US, provides an ATM network and shared branching services to credit unions. Other examples of cooperatives among credit unions include credit counseling services as well as insurance and investment services.

State credit union leagues can partner with outside organizations to promote initiatives for credit unions or customers. For example, the Indiana Credit Union League sponsors an initiative called "Ignite", which is used to encourage innovation in the credit union industry, with the Filene Research Institute.[25]

The World Council of Credit Unions (WOCCU) is both a trade association for credit unions worldwide and a development agency. The WOCCU's mission is to "assist its members and potential members to organize, expand, improve and integrate credit unions and related institutions as effective instruments for the economic and social development of all people".[26]

The Credit Union National Association, commonly known as CUNA, is a national trade association for both state- and federally chartered credit unions located in the United States. The National Credit Union Foundation is the primary charitable arm of the United States' credit union movement and an affiliate of CUNA.

Deposit insurance

In the United States, Federal credit unions are chartered by and overseen by the National Credit Union Administration (NCUA), which also provides deposit insurance similar to the manner in which the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance to banks. State-Chartered credit unions are overseen by the state's financial regulation agency and may, but are not required to, obtain deposit insurance. Because of problems with bank failures in the past, no state provides deposit insurance and as such there are two primary sources for depository insurance – the NCUA and American Share Insurance (ASI), a private insurer based in Ohio.

In Canada, most credit unions are provincially incorporated and regulated, with deposit insurance provided by a provincial Crown corporation. For example, in Ontario, up to $100,000 of coverage is provided through the Deposit Insurance Corporation of Ontario.

See also

References

  1. 1 2 3 4 5 "12 U.S.C. § 1752(1), CUNA Model Credit Union Act (2007)" (PDF). National Credit Union Administration. Archived from the original (PDF) on 2009-05-09. Retrieved 26 August 2015.
  2. ↑ O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 511. ISBN 0-13-063085-3.
  3. ↑ "Slide 1" (PDF). Retrieved 2011-10-09.
  4. ↑
  5. ↑ "The Credit Union Difference". Credit Union National Association.
  6. ↑ Archived January 15, 2012, at the Wayback Machine.
  7. ↑ "Converts sing praises of credit unions". MSN Money. Archived from the original on 2012-03-09.
  8. ↑ Allred, Anthony T. & Adams, H. Lon (2000). "Service quality at banks and credit unions: what do their customers say?". Managing Service Quality. 10 (1).
  9. ↑ Allred, Anthony T. (2001). Employee evaluations of service quality at banks and credit unions. International Journal of Bank Marketing. 19.
  10. 1 2 3 4 "What is a Credit Union?". woccu.org.
  11. 1 2 "Not-for-profit", noun, Oxford English Dictionary (2008)
  12. 1 2 "WOCCU, "PEARLS: Ratios: R — Rate of Return and Costs & S — Signs of Growth". Woccu.org. Retrieved 2011-10-09.
  13. ↑ F.W. Raiffeisen. The Credit Unions. Trans. by Konrad Engelmann. The Raiffeisen Printing and Publishing Company, Neuwid on the Rhine, Germany, 1970.
  14. ↑ "Part 4. Examining Process: Chapter 76. Exempt Organizations Examination Guidelines: Section 22. Credit Unions — IRC 501(c)(14)". Internal Revenue Manual. Internal Revenue Service. Retrieved August 31, 2015.
  15. ↑ "Other Section 501(c) Organizations". Publication 557: Tax-exempt Status and Your Organization. Internal Revenue Service. February 2015. Retrieved August 31, 2015.
  16. 1 2 3 World Council of Credit Unions, 2014 Statistical Report
  17. ↑ "European Association of Cooperative Banks, Annual Statistical Report, 2010". Eurocoopbanks.coop. Retrieved 2012-06-06.
  18. ↑ Percival, Geoff (March 19, 2012). "75% of Irish adults in credit unions". Irish Examiner. Archived from the original on April 12, 2012.
  19. ↑ Diekmann, Frank J. (July 2, 2012). "Poland's CUs: From Zero To Mature In Just 20 Yrs". Credit Union Journal. pp. 1, 22.
  20. 1 2 J. Carroll Moody & Gilbert C. Fite. The Credit Union Movement: Origins and Development 1850 to 1980. Kendall/Hunt Publishing Co., Dubuque, Iowa, 1984
  21. ↑ Singh, S. K. (2009). Bank Regulations. Discovery Publishing House. p. 199. Retrieved October 16, 2014.
  22. ↑ "St. Mary's Credit Union". Retrieved 2009-08-24.
  23. ↑ Bernd Balkenhol (1999). Credit Unions and the Poverty Challenge. Upper Saddle River, New Jersey 07458: International Labour Organization. pp. 45–47. ISBN 9789221108528.
  24. ↑ "Is your cash safe with the struggling credit unions? One a month is now going bust with more forecast to struggle.". The Guardian newspaper. 11 May 2013. Retrieved 30 July 2013.
  25. ↑ "Indiana credit union reps chosen to take part in ICUL ignite program for innovation". Bank Credit News.
  26. ↑ "Mission". WOCCU. Retrieved 2009-11-25.

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