Credit Unions and Demutualisation

Headnote

Abstract

This paper reviews experience with credit union demutualisation to date in the light of increasing discussion about whether demutualisation is a likely (or inevitable) future stage in the evolutionary process. It is argued that the credit union industry faces an inherent demutualisation bias which emerges as the sector develops maturity. Contributing factors include the emergence of professional management pursuing personal objectives, together with the economic realities of technological change, financial liberalisation, increased competition, and prudential regulation based on minimum capital requirements. Demutualisation incentives may partially reflect the unsuitability of the mutual form of governance in larger, more sophisticated financial institutions, but there is also a significant risk of demutualisation based on wealth expropriation motives. Alternative policies and strategies which might avoid this demutualisation bias are examined.

Keywords: Demutualisation; Credit Unions; Governance; Regulation

I. Introduction

Although Credit Unions are active in many countries', there are stark international differences in their financial sector importance2, regulation, and range and sophistication of activities. In some countries larger credit unions are indistinguishable from retail banks (with whom they compete), with membership drawn from all income groups3. In many other countries, credit unions are in more formative stages of the development process and are typically smaller institutions with more limited product offerings, serving lower income groups neglected by mainstream financial institutions.4 Consequently, there are marked cross-country differences in issues of current importance.

Demutualisation falls into this category, eliciting much (often heated) discussion in countries with a mature credit union sector such as Australia and the USA.5 It is also relevant for other countries, because regulatory and strategic decisions made in the formative years ultimately influence the evolution of credit unions and long run prospects for their survival as mutual organisations.

If mutuality is seen as a necessary characteristic of credit unions, demutualisation is equivalent to demise of the credit union. It is certainly the case that demutualisation enables new owners to impose a profit objective at the expense of the social goals articulated by credit unions.

It is argued here that the emergence of professional management pursuing personal objectives, together with the economic realities of technological change, financial liberalisation and increased competition, create attractive conditions for demutualisation. While that attraction may derive partially from the unsuitability of the mutual...