Credit Union Capital

Credit Unions are unique in the financial intermediary business world because the majority of the capital of the organization is, at the same time, owned by all of the members of the credit union and by none of them. The capital of a credit union is essentially an indivisible collective pool.

The members of a credit union provide a small amount of initial capital when they open their membership and that capital is identifiable as belonging to them. As well, many credit unions, in living up to the third co-operative principle, allocate and pay patronage (or dividends) to members based on some measure of the members' transaction volumes with the credit union. If this is delivered to the member as a retained equity amount, then that capital is also identifiable as belonging to a single member. Retained patronage is typically not paid to a member until some trigger point in the future (perhaps when the member turns 65, for example). Also, patronage is normally only paid/allocated when the credit union has had a successful (i.e., profitable) year of operations.

Notwithstanding that a small amount of credit union capital is identifiable as belonging to specific members, the vast majority of a credit union's capital is the collective pool and is indivisible. This indivisible pool typically dwarfs the identifiable equity described above. So, for all intents and purposes, there is no way for a member to decide to leave a credit union and take any meaningful amount of equity with them (only their original small contribution and perhaps some retained patronage that is identifiable as theirs).

As well, no secondary market exists whereby a member can sell or assign their "share" of the collective equity; so, there exists no means for an individual member to extract something that might be considered their share of the collective equity. It seems, then, that the only way to reduce the collective pool of capital (without dissolving the credit union) is to destroy value through the operation of the credit union or to encounter an unexpected loss due to some random event.

These are key points and have far-reaching implications for a credit union. This capital arrangement is unique to credit unions and co-operatives. Generally speaking, the business and legal foundation we live within is built on, amongst other things, the principle of individual property rights. In a traditional business (like a bank, for example), individual property owners contribute identifiable property (capital) to the enterprise with the expectation of a return (i.e., dividend and/or capital gain) and with the expectation that the proportion of capital they provided dictates the proportion of the enterprise's capital they own and can sell or assign. In other words, a shareholder of a bank individually owns a proportion of the bank's residual value and this permits that individual to sell or assign that share which provides a means for the individual to extract the value of "their" capital from the organization.

In the case of a credit union, a member that walks away (i.e., closes their membership) from the credit union, leaves all collective capital that they may have helped build at the credit union by using its services and products to the remaining collective membership. All of the remaining members now collectively own all of the capital but again, none of them individually owns any of that capital. In this sense, all members own the collective capital yet no member owns any of the collective pool.

It is also important to note that a new member who opens a membership suddenly becomes part-owner of the collective pool and can expect to participate in any of the benefits of that collective pool of capital from day one. That member has as much power (i.e., one member, one vote) as any other member. There is no temporal relationship between membership opening and availability of benefits.

Most credit unions have chosen to live by internationally recognized co-operative principles; one of which says that all members contribute the same amount of initial capital and then are rewarded or compensated as owners based on the volume of transactions or business they conduct with the credit union. As well, credit unions will not exclude anyone who wants to be a member or "shareholder" and the credit union will provide education and training to members, staff, directors and other stakeholders. In other words, while a direct financial benefit is contemplated for members through the use of the credit union's products and services, so too are non-direct, potentially non-financial benefits (like education and other sustainable development investments) to members of credit union communities.

In this regard, the collective capital exists to serve the members of the credit union in achieving co-operative principle driven goals amongst any other goals a credit unions' members may decide upon and define through its Board of Directors. There is no threat of an owner removing their capital or using their capital to drive the credit union enterprise in one direction or another because, as an individual, the member does not own or control the collective capital. The collective membership (through its democratically elected Board), decides how its capital will be used for the benefit of members (who also happen to be the customers) and other stakeholders of the members' communities.