Member-based enterprises: the spotlight on financial services co-operatives

February 13, 2015

The cooperative organizational form is making remarkable strides all over the world. For many years this organizational form was virtually ignored in reports, studies and policies because of the dominance of enterprises based on shareholder value. Co-operatives have been around for a long time, however; they even existed in ancient Egypt long before Christ. Modern co-operatives originated in the Industrial Revolution and the agricultural depression in the mid-19th century. They were created to combat market failure, exploitation, hunger and poverty. United by their common interests, members were able to fully participate in social and economic life by means of co-operatives. Co-operatives are not charitable institutions, however. They must be able to compete with companies that are based on different organizational forms. They must be innovative and offer good products and services at acceptable prices. There is one major difference with companies based on different organizational forms, though. Co-operatives must make a profit for the sake of continuity and further growth, but profit is not the goal. Listed companies make a profit in order to give the – usually anonymous – shareholders a return on their invested capital. In co-operatives, members are the owners or shareholders. This enables co-operatives to take a long-term view. In co-operative companies, the process for making decisions and determining strategy is "bottom-up" via member representation. This is very different from public or closed corporations that are governed top-down. You might even say that co-operatives are economic democracies in action.

There has been a resurgence of interest in cooperations as a result of their relatively good performance the past years. They have proved more resilient in successive crises than companies with different organizational forms. These days, cooperations are also created in response to governments scaling back their involvement. In the European Union, cooperative enterprises are seen as vehicles for combating the high unemployment levels in some countries. The combined membership of all cooperations worldwide is about 1 billion members; this is 16 percent of the world population. In the Netherlands, recent years have seen the creation of energy and healthcare co-operatives, in particular, but self-employed workers are joining forces in co-operatives as well.

Besides agricultural co-operatives, financial co-operatives play an important part in Europe as well. Co-operative (mutual) insurers have a market share of almost 30%. Together, European co-operative banks have a market share of about 25 percent on domestic banking retail markets, and this share has seen a virtually continuous increase over the past decade. Due to their focus on the real economy, cooperative banks weathered the initial financial crises relatively well and received barely any government assistance. They did feel the subsequent economic recessions, but collectively they are still strong. In 2013 there was a slight contraction for the first time in their combined balance sheet total and loan portfolio of approx. 3 and 0.2 percent, respectively. This drop was very limited, though, compared to the decrease in the total assets and loan volumes of other banks of almost 10 and 5 percent, respectively. European cooperative banks also gained almost three million members in 2012 and 2013. Their balance sheet structure is also different in two very striking respects. Loans to households and companies make up about 50 percent of their combined balance sheet total, while the same ratio for all other banks is 37 percent. On the liabilities side, cooperative banks are financed by savings to a much larger extent than all other banks; cooperative banks have great funding resilience. In addition, cooperative banks have even seen significantly higher returns on their capital in recent years than all other banks. Furthermore, it turns out that cooperative banks show anti-cyclical behavior: in economically good times they issue fewer loans, while in times of recession they issue considerably more loans than all other banks. In short, European cooperative banks were, and still are, distinguished players on the European banking market. With their cooperative governance they visibly contribute to the diversity of national banking systems and therefore to the stability of financial systems.

Image: © Nationale Beeldbank

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Member-based enterprises: The spotlight on financial services co-operatives, Hans Groeneveld (2015)
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