Cooperative Banking – banking with a conscience?

It’s tough for banks to build public trust. Every so often, a new banking scandal involving corruption or failure to fulfil regulations erupts, setting their efforts back years. Events like the 2008-09 global financial crisis, which reached its climax with the bankruptcy of Lehman Brothers, undermined public trust in many institutions, including banks. However, there seems to be a type of bank that is more resilient to trust-breaching events – cooperative banks! 

What are cooperative banks?  

In the simplest of terms, co-operative banks are owned by their members, which can be defined as clients who own at least one member share. One example comes from Polish law. To become a member, one must first have an account at a cooperative bank for at least three months and formally ask for membership. After a positive response, the management board requires an entry fee. The price of these shares, which is decided by the financial institution in question, is constant, so speculation is avoided. In Poland, cooperative bank members also need to have Polish citizenship.

But what does membership mean? Members can take part in the general meetings of shareholders, the most important governing structure. This is the conscience of cooperative banks, even though they still have a supervisory board and a board of directors. And those latter two groups are under the scrutiny of the general meetings of shareholders that also decide on key matters. Every member only holds the power of one vote during the general meetings of shareholders, no matter how many shares they own.

There are a couple more meaningful differences between the cooperative banks’ and traditional banks’ shares. First, as already mentioned, the price is constant. And, second,  share ownership is not anonymous and the bank knows who owns shares at any given time. Third, in case of bankruptcy, members with shares do not have rights to the residual assets of the bank. Moreover, members are committed to pay the debts of the bank and remain liable for these amounts for a number of years.

How is cooperative banks’ approach different? 

Cooperative banks are community based and mostly located in smaller towns and villages. The European Association of Cooperative Banks defined the most important goals of cooperative banking as: trust, solidarity, proximity, co-governance, alleviation of financial exclusion and care for the environment. Cooperative banks are not as profit driven as traditional banks, which is why they are more willing to lend money to the less privileged, and often support local events and communities. According to Oliver Wyman, the average donation of traditional banks amounted to about 0.12% of their total revenue and it was mainly aimed at national and international initiatives or big international charities, while co-operative banks donated on average 0.47% of their total revenue to mostly local initiatives. 

The differing logic of banks, regulatory institutions and co-operative banks is shown in the following table. 

Source: Evolution of Cooperative Banking Sector in Poland and Financing Local Development, Andrzej Sołoma 

Challenges

However, the unique characteristics of cooperative banks also come with a set of challenges.

They are usually small institutions existing in mostly rural regions, which means that they do not have as many resources as big commercial banks. To deal with this challenge, cooperative banks group together into associations. For example, in Poland in 2020 there were 530 cooperative banks, 326 of them were part of the IPS (Institutional Protection Scheme) BPS group and 192 were in the IPS SGB. Such banking groups are often led by one bigger cooperative bank that functions as a semi-central bank. Banks that join together still retain their independence, however.

They are guided by two main rules:

• Solidarity: the responsibility of mutual help in case of trouble.
• Subsidiarity: if a smaller bank in an IPS receives a request that is too demanding for its capabilities, it can forward that request to the leading bank.

Another challenge is the fact that co-operative banks’ client base is mainly made up of customers from areas that have been suffering demographically from urbanisation. A significant portion of the young population migrates to bigger cities, so the cooperative banking customers tend to be much older. The focus on rural regions, although being one of cooperative banks’ bigger strengths, also limits their potential customer pool. To alleviate this issue, these banks could invest in new technologies, which should attract the younger customer base. Investment in marketing campaigns aimed at the younger and urban population might also be effective. While such investments might prove too big of an effort for individual banks, I believe that, if made collectively by the banking associations, they would prove effective. Some Polish cooperative banks have been quite effective in introducing innovative solutions. Biometric ATMs, for instance, have been introduced by multiple cooperative banks in Poland. Using a fingerprint to take out cash is a lot more convenient than traditional cards.

Conclusion  

Traditional banks tend to focus on big agglomerations, country-wide and international events and affairs, which leaves local communities out of the loop. What’s more, during a crisis, these institutions often pull resources from areas they deem less strategic. These two behaviours contribute to the issue of underbanking.

Cooperative banks seem to be a possible part of the solution to this issue. Their main focus is on local communities. They fill in the gaps left by other banks’ pursuit of profit. And they seem to be more resistant to crises, especially the kinds that have previously damaged trust in traditional banks. Investments in cooperative banks in seriously underbanked communities around the world might alleviate some of these communities’ struggles.