What financial cooperatives can teach the big banks
The success of financial cooperatives during the global financial crisis shows there is a credible alternative to the investment-owned banking system.
|Professor Johnston Birchall|
Data presented to the ILO by Johnston Birchall, Professor of social policy at Stirling University (United Kingdom), show that this “alternative banking system” has been more stable and more efficient than many economists had predicted.
“In Europe and North America, there was a slight dip in 2008 (in the cooperative banks) and then you see them coming back in 2009, 2010, 2011 – everything was improving,” he told ILO News.
“In credit unions in other parts of the world you can see that they didn’t even face a drop in 2008. They didn’t notice the banking crisis; they just kept on growing slowly, regularly, not dramatically.”
By contrast, several investor-owned banks had to be bailed out – or even crashed - at the height of a global financial crisis that many have blamed on risky bank activities.
|Financial co-ops global snapshot|
“Financial cooperative” is an umbrella term for cooperative banks, credit unions and building societies, as well as banks that are owned by agricultural or consumer cooperatives. What they all have in common is that they are customer-owned banks.
Credit unions were set up originally to serve people with the lowest incomes, many in developing countries and in North America. The majority of cooperative banks are based in Europe and serve a range of customers.
“The idea is that you become a member. You pay a small fee which is called a member share and then you have a vote, but you only have one vote because it is a people-centred rather than a money- centred business,” explained Birchall.
“You can’t buy more votes by having more shares. You might not have very much power but you have, as in any democratic organization, the possibility of influencing the way the bank is run by electing or refusing to elect boards of directors. And if things go wrong you can change them, which you can’t do with any other type of bank.”
Birchall’s research shows that the financial cooperatives kept credit flowing during the crisis, especially to small-and-medium-sized enterprises (SMEs), and remained stable across regions of the world.
The difference between financial cooperatives and the investor-owned banks, said Birchall, is that cooperatives do not take the same risks because they are not after huge profits.
|Co-ops in the crisis|
“They already have decent reserves that make them stable and sustainable, but they also -in one way or another- return the profits back to the members, either with an annual dividend or by simply pricing their products low.”
Another factor that contributes to their stability is that they motivate managers differently. Most simply pay them the going rate, Birchall explained.
“Before the crisis, economists said financial cooperatives were bound to be less efficient than investor-owned banks because they did not reward their managers with shares. Now the thinking is, this is great, we shouldn’t be rewarding managers with shares because managers will then take high risk strategies, bail out five years later as multi-millionaires and leave the banks to go bankrupt.
“So all the things the experts used to think were wrong with financial cooperatives have now turned out to be their advantages,” he added. “Financial co-ops may not have the same ups as other banks, but neither do they have the same downs. As such they are more sustainable businesses than other banks.”