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Credit Union Capital (Re-visited)

Updated on July 30, 2014

As discussed in a previous post, the capital of a credit union is owned by all members and owned by none at the same time. It is owned by the collective and not by individual members. The capital is present to work for all members’ (present and future) benefit and has been built up through serving members (past and present). Without an appropriate level of capital, a credit union would be hamstrung in its ability to serve its members’ financial needs and therefore would not be able to deliver on its purpose and vision. So, a key part of a credit union’s strategy should be capital preservation or sustainability to ensure the longevity of the credit union’s ability to serve members. The term “sustainability of capital” is better than “growth of capital” or “preservation of capital” as sustainability talks to maintaining the “right” level of capital to meet the credit union's objectives. Growth can be construed as maximizing capital and preservation can be construed as maintaining a certain dollar value of capital. Growth and preservation are both important to the credit union's continued success so “sustainable” is the better descriptor.

In our discussion of value and who receives it in a previous post, we alluded to maximizing value to the members as customers and owners. A key element to sustainability that was missing was the capture of any value in the form of profit or retained earnings to help build the credit union’s collective capital base.

We know that the growth of a credit union is dependent on a certain level of capital being available. And, assuming that the credit union intends to grow, it will need increasing levels of capital to ensure it can support that growth while not being offside with regulations and legislation. Therefore, if no value is held back in the credit union and returned to the collective pool of capital, then the growing credit union will soon extinguish its ability to continue to grow unless it finds another way to introduce more capital without violating the fourth co-operative principle (i.e., without diluting member control). It will be important to manage capital at the correct level to support the growth of the credit union into the future. Too much capital means it will not be delivering as much value to current members as it could and too little capital means it will be providing more value than it should to current members (to the detriment of future growth and sustainability).

A way needs to be found to balance the financial and customer perspectives (the two hats worn by the majority of the credit union's members) and to maximize the credit union's ability to deliver on its purpose and vision. What we will eventually demonstrate is that maximizing the financial perspective can lead a credit union to destroy value in the customer perspective and vice versa – in either outcome, overall member value has been destroyed because the member is both customer and financial owner and by destroying value in either perspective destroys overall value to the member.

Even though a Canadian credit union is a for-profit, tax-paying entity, it is not correct to conclude that it should use the collective capital to seek to maximize profits within the credit union. There is a need, however, to have resources available for the credit union to directly effect its purpose and vision as well as to support future service delivery to members.


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