Cooperative & Mutual Financial Institutions: Historical Role and Future Potential
Diverse groups like credit unions, building societies, and cooperative banks have played key roles in the financial sector globally. Despite challenges leading to a decline in numbers, reasons for their emergence and potential future avenues indicate a possible revival. Demutualizations have impacted institutions like life insurance companies, with mixed results in terms of efficiency. Exploring the past and future of cooperative and mutual financial institutions is essential for understanding their significance in the changing financial landscape.
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Presentation Transcript
May 2016 Cooperative & Mutual Financial Institutions: Is there a Future? Professor Kevin Davis, Research Director, ACFS & Professor, Monash University Professor of Finance, University of Melbourne
Outline Historical role of cooperatives / mutuals in the financial sector Reasons for demise General Australia Forms of demise Future potential
Historical Role Diverse group of institutions internationally with varying cooperative/mutual features Credit Unions Building Societies/S&Ls Friendly Societies Cooperative Banks (particularly Europe) Life/General Insurance Companies And mutuals with profit motivated members! Stock Exchanges Payments system providers Mastercard, Visa, CLS Bank, Swift Credit Bureaus eg CRAA Baycorp Veda Experian
Reasons for Emergence Responses to Financial Exclusion Competitive Advantages Information advantages Agency Issues, Objectives and Trust Reduce stakeholder conflicts Managerial risk-taking incentives Not for Profit - Funding Advantages Not for Profit Communal Goals Operating Costs - Volunteers and Sponsors Tax advantages
A Declining Role Between 1970 and 1984 Share of household assets of Building societies increased from 8.6 to 22.5% Credit Unions increased from 1 to 5.7% Savings banks fell from 64.3 to 41.7% Credit Unions Numbers: 600 early 1980s; 285 in late 1996; <100 in 2016 Building Society Numbers: 146 in 1979; 66 (52 mutual) in 1985; 9 in 2016 (not all mutual) Most of decline in numbers due to mergers, some demutualisations some wind-up (Broadway Credit Union) some (recent) conversion to operating businesses as community bank branches of Bendigo Bank
A Declining Role Demutualisations Life/General Insurance companies Capita (1990) AMP (1997), NML (1995), Colonial (1996), NRMA (2000) 58% of life insurance industry in 1985, now zero ASX - 1998 Building Societies Credit Unions MyState, Goldfields, Friendly Societies IOOF, Over 50s Participants in demutualisation get windfall gain At expense of potential future members Little evidence that demutualisation increases efficiency Many subsequently taken over by others
Reasons for Demise Privatisation (expropriation) incentives from build-up of communal wealth Increasing heterogeneity of members with increased scale Loss of information advantages, & common communal goal, & member involvement Increased competition and member mobility Inability to pursue objectives (including cross- subsidisation) inconsistent with profit maximisation Less incentives for efficiency/cost minimisation than for-profits? Inconsistency of professional managers growth objectives and lack of access to external equity capital
Reasons for Demise - Australia Deregulation and Competition Regulatory bias against mutual form (eg banking) And APRA's "Catch 22" permanent capital requirement for forming new mutual ADIs Implicit/Explicit Government Insurance of Competitors Capital Adequacy requirements Removal of Tax-free status 1995 Board skill requirements and compliance demands APRA regulation and finance sector complexity Long term decline in financial exclusion, growth in for- profit interest in retail customers
Cooperatives and Finance: The Future Mutuality and not for profit not the same as cooperatives Industry Super Funds Not for profit Governance: sort of mutual Modern financial sector not conducive to cooperative model Complexity, scale, regulation, competition Scope for established mutuals to prosper Barriers to entry high and incentives for creation of new, purely financial, cooperatives low (and efforts better focused elsewhere)
