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Credit union

A credit union is a cooperative banking/cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services to its members.[1][2][3] Many credit unions exist to further community development[4] or sustainable international development on a local level.[5]

Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size,[6] ranging from volunteer operations with a handful of members to institutions with several billion dollars in assets and hundreds of thousands of members. Yet credit unions are typically smaller than banks; for example, the average U.S. credit union has $93 million in assets, while the average U.S. bank has $1.53 billion, as of 2007.[7]

The World Council of Credit Unions (WOCCU) defines credit unions as "not-for-profit cooperative institutions".[8] In practice however, legal arrangements vary by jurisdiction. For example in Canada credit unions are regulated as for-profit institutions, and view their mandate as earning a reasonable profit to enhance services to members and ensure stable growth.[9]

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

Other names

In some places, credit unions are called by other names; for example, in many African countries they are called "savings and credit cooperative organizations" (SACCOs), "to emphasize savings before credit".[8] in Spanish-speaking countries, they are often called cooperativas de ahorro y crédito,[10][11] but in Mexico they are typically called a caja popular.[12] French terms for "credit union" include caisse populaire[13] and banque populaire.[14] Afghan credit unions are called "Islamic investment and finance cooperatives" (IIFCs) and comply with Islamic banking practices.[15]

Why You Might Consider Joining a Credit Union

For a more in depth overview, read the full article: Differences Between Banks and Credit Unions - And Why You Might Consider Joining a Credit Union

Credit unions are cooperative financial institutions that offer many (if not all) of the same services you would get at a regular bank. The difference is that when you open an account you become a MEMBER and an OWNER. That means it’s up to all of those banking there to keep the organization accountable. Of course, you can just open an account and forget about it, but if you choose to get involved you can join a committee or run for the democratically elected Board of Directors. Whereas banks have SHAREHOLDERS (outside investors to whom they are accountable), credit unions have MEMBERS. Your money is backed by the same Federal guarantee as a bank, but instead of FDIC it’s through NCUA.[16] You’re covered and it’s all good. They also tend to have an advantage in terms of interest rates in savings accounts or loans, because their interest is to benefit YOU and the other members, not the shareholders. Many also offer a wide range of great, free financial classes and management tools in terms of your personal banking and using that specific credit union.

Credit unions also focus on specific communities. They have strict limitations on who they can serve. This is where it can get difficult for some people to find a credit union to join. You must be within the field of membership in order to qualify for membership. It is specific to each institution. One way to think of it is this: you’re joining a community when you open an account. It is very difficult for credit unions to expand their fields of membership–the banks are interested in keeping them small so they don’t threaten their profits, so a lot of lobbying goes on–hence why there isn’t a national credit union we can all run and join right now. Look into field of membership requirements to see if you can join.

Differences from other financial institutions

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[17] 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.[18]

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.[19] 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 accounts (checking accounts), credit cards, share term certificates (certificates of deposit), and online banking.[2]

Normally, only a member of a credit union may deposit money with the credit union, or borrow money from it.[2] 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, "[c]redit unions provide a broader range of loan and savings products at a much cheaper cost [to their members] than do most microfinance institutions".[20]

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 oversaw US $1.1 trillion in assets.[21] 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, such as Germany, France, Netherlands and Italy, are not included in their data. The European Association of Co-operative Banks reported 34 million members in those four countries at the end of 2005.[22]

The nations with the most 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% [numbers higher than 100% are possible because 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).

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.[23]

In 1864 Friedrich Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf (now part of Neuwied) in Germany.[24] 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 January 23, 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, New Hampshire holds the distinction as 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.

Pierre Jay, then Massachusetts Commissioner of Banks and Edward Filene, a Bostonian merchant, were central in establishing enabling legislation in Massachusetts in 1909. The Woman's Educational and Industrial Union, credited with many social service initiatives, heard of this cooperative financial model and wrote to DesJardins. He provided them with the data they needed and on November 23, 1910, they created Industrial Credit Union, the first non-faith-based or community credit union, established for all people in the greater Boston community. St. Mary's Credit Union (not to be confused with St. Mary's Bank Credit Union) was established in Marlborough, MA in 1913. Servicing any resident of the Commonwealth of Massachusetts, St. Mary's Credit Union is the oldest state-wide Credit Union nationally[25].

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 McCarren 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.

Not-for-profit status and the need for a surplus

In the credit union context, "not-for-profit" should not be confused with "non-profit" charities or similar organizations.[26] Credit unions are "not-for-profit" because they operate to serve their members rather than to maximize profits.[27][28][29] But unlike non-profit organizations, credit unions do not rely on donations, and are financial institutions that must turn what is, in economic terms, a small profit (i.e. "surplus") to be able to continue to serve their members.[30][31] According to WOCCU, a credit union's revenues (from loans and investments) need to exceed its operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency[32] and "credit unions use excess earnings to offer members more affordable loans, a higher return on savings, lower fees or new products and services".[8]

WOCCU's position is deeply rooted in global credit union history. F.W. Raiffeisen, the founder of the global movement, 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".[33]

Corporate credit unions

Most credit unions provide service only to individual consumers. By contrast, 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. 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 other corporate credit unions and holds approximately $45.3 billion in assets.[34]

Leagues and associations

The World Council of Credit Unions is both a trade association for credit unions worldwide and a development agency. 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".[35]

Credit unions in the United States have traditionally used 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).

Credit unions with a specific focus on serving low- and moderate income people and communities, most of which are typically low-income designated by the National Credit Union Administration (NCUA), often join the New York, New York-based National Federation of Community Development Credit Unions (Federation), a national trade association providing investments, technical assistance, education and training and advocacy for community development credit unions (CDCUs) nationwide.

The Credit Union Executives Society (CUES), based in Madison, Wisconsin, provides professional development and resources to thousands of credit union executives and directors worldwide. It partners with world-renowned universities to offer graduate-level executive education specifically for credit union leaders.

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. A significant number of credit unions are affiliated to ACE Credit Union Services (ACECUS) or UK Credit Unions (UKCU). Many Scottish credit unions are represented by the Scottish League of Credit Unions (SLCU) which has headquarters in Glasgow; however the majority of larger credit unions choose ABCUL.

Credit Union Central of Canada is the trade association for Canada's credit unions outside Quebec. The Desjardins Group represents Quebec's credit unions. Structurally, it blends the functions of a trade association and a more European-style cooperative bank.

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.

In New Zealand, most credit unions are affiliated to the New Zealand Association of Credit Unions.

Further reading

  • 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.
  • F.W. Raiffeisen. The Credit Unions. Trans. by Konrad Engelmann. The Raiffeisen Printing and Publishing Company, Neuwid on the Rhine, Germany, 1970.
  • Fountain, Wendell. The Credit Union World. AuthorHouse, Bloomington, Indiana, 2007. ISBN 978-1-4259-7006-2

External links

UK Credit Unions - a trade body representing many smaller credit unions in the UK

References

This page originally adapted from the Wikipedia page: [1]
  1. 12 U.S.C. § 1752(1), CUNA Model Credit Union Act § 0.20 (2007)
  2. 2.0 2.1 2.2 12 U.S.C. § 1757, CUNA Model Credit Union Act § 3.10 (2007)
  3. Arthur O' Sullivan, Steven M. Sheffrion; Economics: Principles in action; Pearson Prentice Hall; 2003 http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&
  4. National Federation of Community Development Credit Unions, "What is a CDCU?"
  5. http://www.woccu.org/dev/programs/
  6. http://www.woccu.org/dev/publications/
  7. Mike Schenk, Vice President for Economics and Statistics, CUNA, "Commercial Banks and Credit Unions: Facts, Fallacies, and Recent Trends", at *2 (2007)
  8. 8.0 8.1 8.2 WOCCU, "What is a Credit Union?
  9. for example the Ontario Credit Union Act, 1994 (as amended) c.11, s.24 (i)
  10. CUNA, Products and Services, "Spanish Stuffer: Las Cooperativas de Ahorro y Crédito
  11. DePeru, "Cooperativas de Ahorro y Crédito
  12. Caja Popular Mexicana, "Misión (you have to navigate to the "Misión" link)
  13. Desjardins, "Liste de caisses par région
  14. Banque Populaire de Rwanda, S.A., "Historique de l'UBPR
  15. WOCCU, "What is a Credit Union?
  16. http://www.ncua.gov/
  17. 12 U.S.C. § 1757(6), CUNA Model Credit Union Act § 0.70 (2007)
  18. 12 U.S.C. § 1760, CUNA Model Credit Union Act § 4.90 (2007)
  19. 12 U.S.C. §§ 1760-1761b, CUNA Model Credit Union Act §§ 5.15-5.20 (2007)
  20. The Microfinance Gateway, "Credit Unions: Questions to Barry Lennon of WOCCU" (follow link to "Credit Unions: Questions to Barry Lennon of WOCCU")
  21. World Council of Credit Unions, 2006 Statistical Report.
  22. European Association of Cooperative Banks, Annual Statistical Report, 2005.
  23. 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
  24. J. Carroll Moody & Gilbert C. Fite. The Credit Union Movement: Origins and Development 1850 to 1980. p. 8
  25. http://www.abettercreditunion.com
  26. Compare "not-for-profit", definition B, noun, Oxford English Dictionary (2008) ("An organization, corporation, etc., which does not operate for the purpose of making a profit".), with "non-profit", definition A(2), noun, Oxford English Dictionary (2008) ("A non-profit-making organization; spec. a charity".).
  27. "not-for-profit", definition A, adjective, Oxford English Dictionary (2008) ("Designating an organization, corporation, etc., which does not operate for the purpose of making a profit. Cf. NON-PROFIT, adj., FOR-PROFIT adj"
  28. WOCCU, "What is a Credit Union?" ("As not-for-profit cooperative institutions, credit unions use excess earnings to offer members more affordable loans, a higher return on savings, lower fees or new products and services"
  29. The Microfinance Gateway, "Credit Unions: Questions to Barry Lennon of WOCCU" (follow link to "Credit Unions: Questions to Barry Lennon of WOCCU") ("Credit unions don't try to maximize profitability by charging high fees or rates of interest because they are owned by the people who use their services"
  30. WOCCU, "PEARLS: Ratios: R - Rate of Return and Costs & S - Signs of Growth
  31. The Microfinance Gateway, "Credit Unions: Questions to Barry Lennon of WOCCU" (follow link to "Credit Unions: Questions to Barry Lennon of WOCCU")]
  32. WOCCU, "PEARLS: Ratios: R - Rate of Return and Costs& S - Signs of Growth
  33. F.W. Raiffeisen. The Credit Unions. Trans. by Konrad Engelmann. The Raiffeisen Printing and Publishing Company, Neuwid on the Rhine, Germany, 1970.
  34. U.S. Central FCU, "About U.S. Central
  35. http://www.woccu.org/about/mission/