Member Group Orientation of Credit Unions and Total Member Benefits

Abstract

A credit union (CU) is a cooperative association which provides saving and lending services to its members. Historically, the underlying justification for public policies encouraging the formation and development of CU's revolves around the idea that CU's facilitate the provision of borrowing and saving services to groups that would otherwise be inadequately served by other types of financial institutions (Flannery, 1974). In the spirit of cooperative institutions, the idea that CU's should balance the interests of borrowers and savers is also part of the traditional public policy consensus on the proper role of CU's (Taylor, 1971; Flannery, 1974). The implicit assumption is that a balanced treatment of borrowers and savers results in greater benefits to all members. As a practical matter, however, there are a number of reasons CU's may achieve a less than perfect balance in the treatment of borrowers and savers. Member savers want to receive the highest possible return on their savings at the CU, but this can only occur if borrowers at the CU are charged high loan rates. Borrowers, on the other hand, want to minimize interest charges on their loans, but this can only occur if CU's minimize the cost of loanable funds by paying low dividend rates to savers. Since a CU cannot simultaneously maximize the dividend rate paid to saving members and minimize the loan rate charged to borrowing members, a conflict may develop between net savers and borrowers. Because the members of a CU are also the owners (and to varying degrees operators) of the CU, member group conflict could result in preferential treatment for one particular member group (borrower-oriented or saver-oriented behavior) rather than balanced or neutral treatment.