A Typology for Credit Unions (1997)

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This document has been made available in electronic format
by the International Co-operative Alliance (ICA)
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April, 1997
(Source: ICA Review, Vol.90 No.1, 1997, pp.39-47)

A Typology for Credit Unions 
by Donald McKillop, Charles Ferguson and Gary O'Rourke*
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Introduction
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Based upon three distinct growth stages within country specific industries,
an assumption can be made about the existence of an evolutionary
development path for credit union industries.  It would be our contention
that credit unions move from 'nascent' through 'transitional' and on to a
'mature' stage of development as a consequence of growth. Implicit  in this
typology  is that there is a differential asset size associated with these three
distinct development stages, with the 'mature' stage representing the largest
asset size position. Growth in asset size triggers a form of 'economic
determinism' that in turn helps lead to changes in the ideology and operation
of credit unions  based on a more business orientated approach. Equally, the
economic environment within which any credit union industry operates is
likely to have a profound effect, especially where this environment is
deregulated and subject to competitive forces and market rate structures.
Also, in an economic environment where electronic technology is a channel
for the distribution of services and products,  credit unions are further
pushed by a technological imperative towards a more business orientated
approach. Therefore, besides asset size, key features  in the economic and
technological environment will create conditions for 'transition' credit union
industries to make the transformation to a 'mature' industry. 

Categorising credit union industry development into a three stage typology
does not of course mean that a simple claim can be made about the
homogeneity of any given credit union industry. For instance, in 'mature'
and 'transition' industries there will be wide variation in the characteristics
of particular credit unions, not only in terms of their asset size, but also,
importantly, in terms of their characteristics and value position towards
issues such as, for example, the need for greater business orientation.
Caution therefore needs to be exercised in the application of a broad
'industry'  typology  since, in reality, credit union industries are in fact
heterogeneous.

Our  typology however provides an 'ideal type model' of different industry
growth stages. Although the actual descriptive reality  will  invariably  prove
to be more complex and involve greater variation than our neat abstract
model  about to be presented, the use of such an ideal type model is  still  a
useful heuristic device.  In other words our belief is that it is  both easier to
illustrate, and also to debate, the dynamics of change occurring within credit
union industries by abstracting the key features of different  industry 
growth  stages into such  an ideal type framework. 

The extent to which our typology is also a prescriptive one is an important
point, but  comment and debate on this  should  be postponed until the
concluding section. What follows is a discussion of the key features
involved in the different industry types within our development typology.  

Mature Industries
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Table 1 highlights the key attributes to be found in a mature credit union
industry. 


Table 1:  Attributes of a Mature Credit Union Industry
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Large Asset Size

Deregulation

Loose Common Bond

Competitive Environment

Electronic Technology Environment

Well Organised, Progressive Trade Organisations

Professionalisation of Management

Well Developed Central Services

Diversification of Products and Services

Products and Services Based on Market Rate Structures

Emphasis upon Economic Viability and Long Term Sustainability
     of Individual Credit Unions

Rigorous Financial Management of Operations

Deposit Insurance Mechanism Established  

In order to examine the attributes outlined for a mature industry, an obvious
example is that of the credit union industry in the United States. The de
regulation of US depository institutions in 1977 had a profound effect on
the nature of credit unions, both in terms of the kinds of products and
services they can provide and in terms of their purpose and management as
financial institutions. The post deregulation US experience therefore
provides a  'demonstration effect'  of a credit union industry  operating at a
mature stage. The main effect of de-regulation of US credit unions was the
introduction of a less restrictive interpretation of the common bond
requirement for membership, thereby increasing potential membership and
creating conditions for mergers. Since de-regulation in 1977, the US credit
union industry has undergone a period of consolidation. The net effect of
this industry concentration has been a reduction in the number of individual
credit unions. Those with assets below $2 million have declined from over
65% in 1980 to 38% in 1992 (Kaushik and Lopez, 1994). Equally, for
credit unions in the asset category above $5 million, there has been
consistent growth both in absolute size and in relative terms. It is projected
that this trend towards increased concentration is likely to continue in the
future. 
    
Since deregulation,  membership has grown consistently in the US, with
some 25 percent of  the population now  belonging to a credit union.
Widening the scope of common bonds, making potential qualification for
membership broader, has played an important role in membership growth.
Equally, the attractiveness of US credit unions to consumers has been
increased by liberalisation of the products and services that they can offer.
Deregulation has enlarged the lending powers of US credit unions to include
mortgages and credit card operations. Similarly, improvements in their
depository offerings, including cheque book accounts, have also helped
credit unions operate more effectively in meeting a fuller range of their
members' financial needs in a deregulated, competitive financial services
environment.

Additionally, the management of credit unions in the US has undergone
'professionalisation' as would be expected given the challenges of operating
in a new deregulated environment. That the purely voluntary ethos has
given way to a new breed of manager may not be entirely universal, but the
US credit union industry is not based exclusively on the principles of a
voluntary movement. 

The defining characteristic of credit unions in a mature industry within our
typology is the greater emphasis placed upon them as efficient providers of
financial services. The US credit union industry displays a good  fit  with
our mature classification.  In other words, although still member-owned
financial institutions, 'business principles' of  growth  and efficiency
strongly prevail to inform the strategy and operation of  credit unions in the
US. Deregulation and the loosening of traditional credit union common
bonds has provided a strong  impetus towards membership growth and, in
consequence, the further development of an already large industry asset
base.
 
The existence of features such as credit union central services and the
pofessionalisation of  management  also constitute defining characteristics of
credit  union maturity which, again, is well illustrated in the US example.
Given the sophistication of a de-regulated financial services environment,
competing more effectively with mainstream financial institutions is
obligatory if credit unions are to meet member expectations about the quality
and range of products and services they offer. Such moves towards greater
diversification of products and services to members, means that credit
unions, in a mature industry, increasingly take on more of the features of
mainstream financial institutions. There is of course a fear here that credit
unions might ultimately, at some point in the future, converge with these
mainstream institutions.   
	
Although still the subject of a fair  degree of ideological debate in the US,
the discernible features of a  greater  business orientation  by  credit unions
in a mature industry can nevertheless be seen to relate to changes in the
institutional nature of credit unions; to the provision of products and
services based more on market rate structures; and to the more sophisticated
financial management of credit union operations. This first point, the
changed institutional nature of credit unions in a mature industry, can be
described in fairly  straightforward terms. Emphasis, for instance, is placed
on 'visionary leadership' with greater use made of the skills of professional
full time salaried staff. Membership is deliberately sought from a more
diverse base with an overriding aim to encourage growth. 'Business
orientation' by definition also includes greater emphasis on  economic
viability and encourages the goal of long term financial sustainability for any
given credit union. Equally, it discourages the automatic proliferation of
credit unions that have no long term economic sustainability. 
 
Changes in the products and services offered by credit unions similarly
provide a visible expression of maturity. Providing products and services
based on market rate structures means that in a mature industry there is an
intent to provide real positive rates of interest that are competitive with local
financial markets. Equally, there is an aim that rates of interest should
accurately reflect the risk of the activity that is being financed. By widening
their product portfolios, credit unions are operating with an underlying
belief that product diversification is what  members themselves want and
that greater business orientation is therefore to their ultimate benefit.

A rigorous approach to the financial management of credit unions is yet a
third aspect of the greater business orientation associated with a mature
industry. Better financial controls and disciplines are therefore emphasised
in day to day operations. Improving their capital adequacy  is an important
aim which underwrites the emphasis placed on the economic viability of
credit unions and their long term sustainability. The creation of bad debt
provisions is similarly regarded as a further feature which helps to ensure
the asset quality of credit unions, thereby contributing to continued long
term financial viability and sustainability.
 
Defining maturity, as seen from Table 1, involved consideration of multiple
factors, so that placing any  particular credit union industry in the mature
category is of course a matter of judgement. This judgement is based upon
the weight of industry features measured against the range of factors
outlined in our ideal type mature classification. The weight of evidence
supports the view that the US credit union industry  should be classified as
mature.  Other credit union industries that could be classified as mature are
to be found in Australia, Canada and  Korea. 

Nascent Industries
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Having considered in some detail the attributes of a mature industry,
consider now the other extreme, that of a nascent industry. Table 2 contains
a summary of the key attributes of nascent credit union industries:

Table 2: Attributes of Nascent Credit Union Industries
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Small Asset Size

Regulated

Tight Common Bond

Emphasis on Voluntarism

Serve weak/poor Sections of Society

Single Savings and Loans Product

Require Sponsorship from Wider Credit Union Movement
to take Root

High Commitment to Traditional Self-Help Ideals

The development of nascent industries should be understood in the context
of  a global 'associational revolution'. Thus,  in the words of one
commentator,:

"A striking upsurge is under way around the globe in organised voluntary
activity and the creation of private, nonprofit or non-governmental
organisations....The scope and scale of this phenomenon are immense.
Indeed, we are in the midst of a global 'associational revolution' that may
prove to be as significant as the rise of the nation-state was to the latter
nineteenth." (Salamon,1994)

In the developing countries of Africa, Latin America and the former Soviet
bloc, the need for self help organisations is well recognised and their
potential importance is, as indicated above, highly significant. Recent
historical events have added to this potential. For instance,  the worldwide
potential for credit unions has dramatically increased with the removal of the
Iron and Bamboo curtains. Areas of the world such as Russia, Central and
Eastern Europe, China and Vietnam  offer vast potential for the emergence
of new credit union industries. The commitment of the wider credit union
movement to helping create the global  development of credit unions is a
testament to the distinctiveness of credit unions. They are not merely
financial institutions but also, in respect to development issues, agencies
with a strong social purpose. In other words, economic development is seen
as inseparable from the empowerment of individuals and the emergence of
democratic institutions. Credit unions are a mechanism that facilitate the
involvement of individuals and communities in decisions that affect their
own economic well being. 

The historical and cultural variety found throughout the areas of the world
where nascent industries are located means of course that no simple,
unilinear development path can be prescribed for all nascent industries; their
development in reality will vary  under the influence of historically specific
economic and social conditions.      

Transition Industries
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Within a transition industry  we believe that both the 'economic
determinism' of growth in assets and  a changing economic environment
play a significant role in the process of causing  credit unions to seek a more
business orientated approach. In other words, the seeds of change within
credit unions are sown much earlier than at the mature stage. The
demonstration effect of what is happening in a mature credit union industry
may lend support for protagonists of a market driven approach. However,
the dynamics of asset growth  and  the changing economic environment
particularly if it encourages de-regulation - triggering the need for, and
making possible, a business orientated approach are played out in the earlier
transitional stage in the  development of a credit union industry.  Table 3
summarises the key attributes of a transition industry.

Table 3: Attributes of Transition Credit Union Industries
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Large Asset Size

Shifts in Regulatory Framework

Adjustments to Common Bond

Shifts Towards Greater Product Diversification

Emphasis on Growth and Efficiency

Weakening of Reliance on Voluntarism

Recognition of Need for Greater Effectiveness and Professionalism 
of Trade Organisations

Development of Central Services

Transition industries have reached a size where they could emulate the
features of the more mature industries and the content of Table 3 is based
upon an assumption that 'mature' industries provide a 'demonstration
effect' that 'transition' industries in fact wish to follow. During this
transition phase the credit union industry is likely to be militating for a
relaxation in the rules governing its common bond. This rests with the fact
that a common bond which is too restrictive may inhibit credit union
growth. The importance of growth for credit unions rests with the fact that it
can enhance the achievement of cost efficiencies and scale economies
(McKillop et al, 1995). The achievement of scale economies and cost
efficiency can in turn enable credit unions to more easily meet their reserve
requirements; generate a superior surplus performance; narrow the spread
between borrowing and savings rates; and reduce the incidence of bad debt
by permitting credit unions to more easily diversify particularly in terms of
their customer base. Another key attribute of the industry in transition is that
there is likely to be a ground swell of support for enhanced financial product
freedoms. These new freedoms invariably focus upon additional money
transmission facilities and new forms of lending, particularly those of
lending secured on land. 

Relaxation of both the common bond and the financial portfolio open to
credit unions is likely to result in profound changes in credit union operating
characteristics and performance. In particular, the risk profile of credit
unions will alter with credit unions subject to more pronounced levels of
business risk. For example, credit unions information cost advantage on
new loan applicants may decrease and default rates may rise as the common
bond widens. This transition phase is therefore likely to witness the
introduction of a statutory deposit insurance scheme to protect
depositors/shareholders. Improving other central services, such as
marketing and technical support to credit unions, are also crucial aspects of
an industry in the transition phase.

Conclusion
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Credit unions are distinctive organisations based upon a unique economic
and social philosophy where the importance of being  member owned,
democratic institutions is a paramount value consideration. What happens in
the mature, larger credit union industries has, we believe, a demonstration
effect for the probable development path of transition industries, especially 
where these industries are experiencing the kinds of pressures and
opportunities created by a de-regulated, competitive financial  services
marketplace. We would also argue that the transition credit union industries
provide a similar demonstration model for nascent credit unions. Nothing is
static in any sphere of life and credit unions are no exception. However, in
the case of credit unions, it is not simply a question of considering the
process of  change but also of looking at  continuity,  particularly  in respect
to credit union ideals.  Do the  core values of the credit union movement
provide constant and enduring guiding principles? The traditional vision of
credit unions has been a simple one and it has been engaging, compelling
and sincere. The power of this vision has led to the establishment of a
worldwide movement which has been a co-operative success story. Whilst
change and innovation of the kind we have described is perhaps inevitable,
it cannot be at the expense of the core values of mutuality  and democratic
membership control.  


Sources
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Brockschmidt, P., (1977), Credit Union Growth in Perspective, Federal
Reserve Bank of Kansas  City, February, pp 3-13.

Ferguson, C. and McKillop, D G. (1997) "The Strategic Development of
Credit Unions", John Wiley & Sons, Chichester, United Kingdom, 246
pages.

Kaushik S. K and Lopez, R H., (1994), The Structure and Growth of the
Credit Union Industry in the United States; Meeting Challenges of the
Market, American Journal of Economics and Sociology, Volume 53,
Number 2, pp 219-243.

Salamon, L., (1994), The Rise of the Non-Profit Sector, Foreign Affairs,
Volume 3, pp. 

McKillop, D G., Ferguson, C., and Nesbitt, D., (1995), Paired Difference
Analysis of Size Economies in UK Credit Unions, Applied Economics,
Volume 27, pp 529-537.


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*	Donald McKillop (right), a Professor of Financial  Services at
Queens University Belfast; Charles Ferguson (below left), a Senior Lecturer
in Executive Development at the University of Ulster; and Gary O'Rourke
(below right), a Research Officer at the University of Ulster. In addition to
their present designations the authors are members of a Financial Services
Research Group which specialises in the study of mutual and co-operative
financial institutions.