A headline in Enterprise Magazine provoked me. The text talked about ‘… collectivizing Canada’s provincial centrals and CUSO’s’ when it was introducing an article on the restructuring and streamlining of second tier entities. In fact the reverse is true. In our quest for greater efficiencies (and scale), control is being concentrated in fewer and fewer hands. Some researchers say that there is a ‘life cycle’ for credit unions, one that will most likely lead to de-mutualization.
I fear that those involved in small and medium size credit unions fail to see the course that big (and bigger) credit unions are taking.
Two good publications from overseas follow the logic and the particulars based on the experiences there. In CREDIT UNIONS: A THEORETICAL AND EMPIRICAL OVERVIEW, McKillop and Wilson see credit unions reaching a ‘mature’ state where heavy reliance is placed on professional managers and the concept of the common bond of membership has been abandoned. Mature credit unions become substantially similar to investor owned institutions. In a paper titled AUSTRALIAN CREDIT UNIONS AND THE DEMUTUALIZATION AGENDA, Kevin Davies lays out the incentives, the competing interests, and the technical options that may be considered to protect the ‘communally owned net assets’.
Kevin Davies writes about the ‘hard reality’: “…credit union growth and increasing financial sophistication have led to a paradoxical situation in which a mutual governance structure creates the seeds of its own destruction. This arises from the increased importance, and incentives, of professional management, and from requirements to accumulate financial capital for risk management purposes which, in larger organizations becomes of sufficient size to make expropriation activities, via demutualization, worthwhile.”
When I read the following slide, one Davies created to accompany the paper, it fit the Canadian scene:
The Future?
• Two reasons for the movement’s inability to prevent mutual self destruction
– The dominance of large credit unions and professional managers in setting movement goals and strategy
– The concurrent growth of self interest, particularly when the identification with a particular community served by the credit union has disappeared.
With consolidation, the erosion of effective co-operative governance (‘disaffected memberships’), and a widespread deference to those managing large credit unions, Canadian credit unions have been marching down this path, incrementally. We collectively own some substantial assets, and the assets are vulnerable. But, lest I am misunderstood, I am not accusing those now in leadership positions of any misconduct – I think most of them believe the efficiency arguments and want to build ‘successful’ organizations – but they may not appreciate the course they are taking us on.
Davies argues that in due course there is a de-mutualization bias. Changes are implemented in small ways and for what appear to be good ‘managerial’ reasons – stream-lining, merging, rationalizing… And then it is realized that there is a market value for the business that is many times higher than the book value. Large credit unions will be the target, not small ones. And the real threat is to the ‘community owned’ value. If a credit union is privatized, how is it done fairly- especially recognizing the social capital contributed by previous generations? Do the current insiders and members get the windfall? Or is that value retained for the benefit of the community in another form?
In BC, and elsewhere, the check on possible abuses may lie with a credit union membership; but only if they are engaged and informed. It also lies with peer credit unions. It may be time for credit unions to lay out the ground rules (likely in legislation) to ensure that communally owned value is not plundered or frittered away. We may choose to wait until ‘it’ happens, or we can be pro-active.