Credit Unions

3 March 2017

Credit unions: a revolution– importance and impact Although credit unions do not advertise much, and you have to become a member to use their products and services, they are growing so fast that their presence is everywhere. Today, Credit Unions are one of the most important organizations that humans being have ever created to survive from their financial problems. They target both young and old people, civil and military, men and women, and handicapped.

Operating solely to meet the needs of their members rather than make profits, credit unions are empowering communities, churches, and employee groups to spread their collective wealth as people see fit. It is no surprise, then, that the credit union motto: “Not for profit, but for services,” resonates more loudly than ever before. The first cooperative was organized in 1844 by a group of workers in Rochdale, England; that same year in Germany, Victor Aime Huber developed some of the early European cooperative theories, and Wilhelm Raiffeisen created the first true credit unions in Germany in 1852 and 1864(United States-NCUA 1).

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According to Barbara A. Good Credit Unions date back to mid-nineteenth century Germany, and the concept migrated to the United States in the early 1900s (2). To join one of them, you have to become a member by sharing a common bond with other members because Credit Unions serve only their members. Once upon a time, members had to be closely connected in some way, either by where they worked, where they lived, or where they worshiped.

Although Bank Lobbyists oppose to the expansion of the Credit Unions as financial cooperative institutions, they have become popular (a revolution). With their existence, they bring changes to the banking industry, and they should continue to exist as they are from the beginning. Credit unions, known as cooperatives, are born from the idea that people in the same community, same workplace, and having the same interests as well as the same difficulties regroup themselves. They put their money together, and they return it as loan to the members of the group. Barbara A.

Good reports that “the Massachusetts law defined a credit union as a cooperative association formed for the purpose of promoting thrift among its members and adopted the principle of member deposits financing member loans” (2). The idea that credit unions are financial institutions encourages its members to save regularly and can facilitate the borrowing of money at lower interest rates than those normally charged by other financial institutions. The rapid growth of tax-exempt credit unions at the expense of taxable depository institutions will increase in the size of the tax subsidy and may stifle the future growth of the community banks.

From the beginning, Credit Unions (CU) are not-for-profit organizations and members-owned, and because of that, any profit the organization earns beyond operating costs is returned to the members in the form of better interest rates, low or no fees, improved and expanded services and facilities on saving and lower rates on loans (Sharma, Sharma, and Jana 19). That is why the CU can often offer higher rates on savings and lower rates on loans than banks can.

Consequently, their members are satisfied with access to the services that they are provided, which leads to an excessive growth of Credit unions in numbers, as well as in assets. Tokle and Tokle states in a study of the influence of credit unions and Savings and Loan Competition on Bank Deposit Rates in Idaho and Montana that : Examining the effect that credit union competition may have on banks is of more interest today than back in 1971 because in addition to credit union assets and liabilities becoming more like banks, there has been rapid growth of credit unions since then.

For example, from 1970 to 1996, bank total assets grew by 123% in real terms, while credit union total assets grew by 344% . Thus, credit union membership is more common today compared to what it was in 1971. At year-end of 1996, 32. 2 percent of the Idaho population and 36. 3 percent of the Montana population were credit members. (Tokle and Tokle 429). This shows how the population reacts to the credit unions’ movement and how the contribution of savings and loan associations to the market structure has also a statistical impact on banking activities.

Tokle and Tokle shows how this affects the result of the interest rates offered by the CU on savings (CDs) and loans to their members. After comparing the interest rates offered by CU & SL and Banks on one and two-year CDs, they came up with this conclusion: “Thus, while both the CU and SL variables were of similar magnitude, the CU variable had a positive and significant effect on one and two-year CD interest rates paid by banks”(435). Credit Unions, like banks, mediate transactions between savers and borrowers, although credit unions have maintained a relatively small market share.

Note: Figures are percentages. (a) Includes non-financial corporate business, federal government, and government-sponsored enterprises. Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, Table L. 222 As of October 2009, U. S. credit unions serve 93 million members, hold 10 percent of U. S. savings de-posits, and make 13. 2 percent of all non-revolving consumer loans. Since 1985, the share of U. S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent (4).

It is important that National Credit Union Association (NCUA) as regulator/insurer realize that credit unions are part of the solution to this nation’s problems of the lack of economic empowerment and growth in predatory lending. We must work to see that America’s credit unions continue its strong performance in meeting these needs and extend that service even further. With their demonstrated heartbeat for extending service to folks from all walks of life, credit unions can be the financial partner many Americans are missing in their struggle for a piece of this nation’s economic pie.

To show the reality of things, Brown and Shariff reports that “credit union, offering savings accounts, loans and other financial services to individuals, churches and business in the neighborhood-the grass roots, is putting Central Brooklyn back on the financial map. ”(2). Through the MIDFLORIDA credit union of Winter Haven, a client was interviewed, and she was asked “why does she come to the credit union, and how does she feel about it? ” She answered “that is the only place she can borrow a small amount of money as $ 60. 00 to pay for her drug prescription.

So, she does business with them regularly because they always satisfy her needs; she feels big and proud to be a member of the group” (Raphael). She encouraged that everyone should have to be a member of a credit union, and it is not question of wealthy or poor, men or women, white or black because there is no discrimination, no partiality inside a such institution; this is cooperative which means member-owned”(Raphael). Also, as Midflorida credit union reported that “the credit union has a long history since 1978 (date of existence) to now, and it is over of $ 1,000,000,000. 0 in assets and 6,000,000. 00 as net income according the last statement of financial condition as of June 30, 2010” (Jones). To verify the preciseness (accuracy) of the data received from the employee, some researches must be done on the National Credit Union Association (NCUA) website. The NCUA reports that “MIDFLORIDA credit union had an asset of $ 88,681,088 with a total shares and deposits $83,740,769. 00 of 50,414 accounts generated a net income of $234,609. 00 as of June 30, 1990” (United States. NCUA 1).

And 20 years later, as of June 30, 2010, there is an explosion in the MIDFLORIDA’s growth of transactions as reports the NCUA. “Its assets grow to over $1,408,556,788, and its shares and deposits exceed of 253,611 accounts reach $1,014,041,971. 00, and 39,256 loans accounts had a total of $724,874,860. 00” (United States. NCUA 2). That shows not only the accuracy of the data given by the employee, but it also gives an example of the credit unions’ growth. It presents how they have been in perfect health from 1990 to 2010.

Those reports must encourage the government to be interested in such activities, and he has to take more measures to secure the credit unions’ movement face to their predators. With the apparition of Credit Unions, the lawmakers know their importance in the society, and they did not and do not stay passive; they took some actions to regulate the situation, and until now they continue to act harder than before. The National Association Credit Union (NACU), a federal agency, was created to regulate the credit unions, and separately, The National Association of Federal Credit Unions (NAFCU) represents federally chartered credit unions.

Because legislators recognized that credit unions are mutually owned organizations operated entirely by and for their members, credit unions have always been exempt from federal income tax. In this case, congress encouraged the success of the credit union movement in order to bring financial services to people who were unable to obtain them elsewhere, and to foster the development of a system of financial cooperatives that would serve as a valuable alternative to the traditional for-profit banking system.

Despite the low profile and mundane operations of the vast majority of credit unions, the tax-exempt status enjoyed by the institutions has long been a source of controversy in the United States. Much of the criticism of the credit unions is based on the belief that the tax-exempt credit unions are no longer serving the purpose and intent of the original legislation.

The large credit unions are more interested in growth of membership rather than focusing on serving “people of small means. ” Supporters of banks argue that allowing such practices to serve the general public is unfair for the banks and, therefore, all credit unions should not maintain their tax-exempt status. Some argue that Congress should consider repealing the federal tax exemption for the largest credit unions that are competing with other tax-paying depository institutions.

To show that credit unions have failed from their main mission, Bill Swindell reports that “a GAO (General Accounting Office) report released today showed that credit unions are not doing as good of a job as banks in serving lower-income customers, spurring a leading congressional critic to question whether the credit union industry still deserves its tax-exempt status. ”(1). The banks representatives struggle to take off the tax-exempt that make them different from credit unions, and that make also credit unions what they are.

For that reason, an obvious battle has risen between the lobbyists from banks and lobbyists from credit unions. Swindell reports that “the banking lobbyists oppose the bill because they contend it would permit credit unions to stray from their original mission to serve lower-income and underserved areas, and they also complain that they (credit unions) have an unfair advantage over the banks because they are tax exempt. ”( 2). Credit unions are not existed to serve only poor, but any group of people can put their money together and return it as loan to the group members; that is where the idea of credit unions came from.

With such an idea, any class in the society can get its own credit union to satisfy its needs. The tax exemption has nothing to do with a credit union’s size, the services it offers, or the members it serves; thus, credit unions deserve their tax-exempt status because of their not-for-profit, democratically controlled cooperative structure. Whenever credit unions and banks face into battle on Capitol Hill concerning the tax-exempt status, credit unions should emerge on top.

The tax-exempt status of credit unions should continue because of the unique services offered by them, and the tax subsidy serves as means to transfer income to the people of “small means”, and they should not be transformed to a for-profit organization. Today, credit unions are not just serving the low-income and underserved areas because every rank of society profits from their services. Credit unions should continue to look out for their members’ interests and provide a level of service that is not generally available at other financial institutions.

Whether it is providing a loan to help a member cover unexpected medical bills, giving financial counseling to a member whose company closed its doors, or simply offering a better deal on a used car loan, credit unions should make a difference for their members and the communities they serve. Many credit unions continue to serve an important purpose in our economy. They have focused on providing financial services to low- and moderate-income individuals based on common bond of membership.

The concerned authorities should continue to keep an opened eye on the regulation of the credit unions movement in order to maintain the balance and to allow always their existence as cooperative. For many credit unions, however, the focus has shifted. The Credit Union Membership Access Act of 1998 (CUMAA), regulation HR 1151 signed by President Clinton on August 7, 1998, has helped credit unions expanded their “membership base” far beyond the original intent allowing some credit unions to grow aggressively to match the size of large community banks and to offer many of financial services provided by their bank peers (Wheelock and Wilson 33).

Critics argue that the tax preferences and favorable regulations enjoyed by many large credit unions can influence the performance and competitiveness of other depository institutions (those who are not eligible for the preferential tax and regulatory treatment), providing an unfair competitive advantage to such credit unions over the other taxable depository institutions. Therefore, the policymakers need to justify whether it makes sense to provide tax and regulatory advantages to all credit unions.

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