Credit union

Based on Wikipedia: Credit union

In 2006, as the American housing market teetered on the edge of collapse, nearly one in four mortgages from commercial banks were subprime—those risky loans that would soon detonate the global economy. At credit unions? Just three and a half percent.

This wasn't luck. It was structure.

The Bank That You Own

Here's the fundamental difference between a credit union and a bank: when you deposit money at a credit union, you become an owner. Not a customer. An owner. You get a vote in how the institution is run—one person, one vote—regardless of whether you have fifty dollars in your account or fifty thousand.

Banks work the opposite way. Shareholders own banks, and shareholders want profits. The bigger your stake, the bigger your say. Customers are the product, not the purpose.

Credit unions flip this entirely. They're nonprofit cooperatives, which sounds like they're charities, but that's a common misunderstanding. They're not giving money away. They still need to bring in more than they spend—in accounting speak, they need a "surplus"—or they'll cease to exist. The difference is what they do with that surplus. Instead of funneling it to distant shareholders, they return it to members through better rates, lower fees, and improved services.

The numbers bear this out. In the United States, public trust in credit unions sits at sixty percent. For big banks? Thirty percent. Small businesses are eighty percent more likely to be satisfied with a credit union than with a major bank.

A Slovak Village Invents the Future

The first cooperative financial institution in Europe emerged not from the banking centers of London or Paris, but from a Slovak village in 1845. Samuel Jurkovič founded the Spolok Gazdovský—roughly translated as "The Association of Farmers"—with a simple premise: members would save regularly, and from those pooled funds, they could offer each other affordable loans.

Jurkovič added some unusual requirements. Members had to commit to living a moral life. Every year, each member was obligated to plant two trees in a public place.

The association lasted only six years, but it planted something more durable than trees. The Slovak national thinker Ľudovít Štúr wrote that he wished "such excellent constitutions" would spread throughout the region. "They would help to rescue people from evil and misery," he said. "A beautiful, great idea, a beautiful excellent constitution!"

Seven years after Jurkovič's association folded, Franz Hermann Schulze-Delitzsch picked up the thread in the Kingdom of Saxony. He consolidated lessons from two pilot projects—one in Eilenburg, one in Delitzsch—into what historians generally recognize as the first true credit unions. Schulze-Delitzsch focused on urban workers. His system thrived.

Then came Friedrich Wilhelm Raiffeisen, who in 1864 founded the first rural credit union in Heddesdorf, Germany. By the time Raiffeisen died in 1888, credit unions had spread across Italy, France, the Netherlands, England, and Austria.

Ten Cents in Quebec

The first credit union in North America opened its doors on January 23, 1901, in Lévis, Quebec. Its first deposit was ten cents.

The founder was Alphonse Desjardins, a reporter in the Canadian parliament. In 1897, he'd learned of a case that changed his life: a man in Montreal had been ordered by the court to pay nearly five thousand Canadian dollars in interest on a loan of just one hundred fifty dollars. The moneylender had bled him dry.

Desjardins spent years studying European cooperatives, then developed something new—a parish-based model tailored to Quebec's Catholic communities. He called it the caisse populaire, the people's bank.

In November 1908, Desjardins traveled to Manchester, New Hampshire, to help French-speaking immigrants from Quebec establish St. Mary's Bank Credit Union—the first in the United States. These Franco-American communities had a practical problem beyond idealism: Anglo-American banks frequently rejected their loan applications. The credit union was survival as much as philosophy.

Two years later, in Boston, the Woman's Educational and Industrial Union established something different: the Industrial Credit Union, modeled on Desjardins' system but open to everyone, regardless of faith or ethnic background. It was the first community credit union in America.

The house where St. Mary's Bank Credit Union first operated is now America's Credit Union Museum.

Global Reach, Local Roots

Today, credit unions exist in 118 countries. The World Council of Credit Unions counted 85,400 of them at the end of 2018, collectively serving over 274 million members and overseeing 2.19 trillion dollars in assets. In just two years, from 2016 to 2018, the global credit union movement added more than one hundred million new members.

The geography of credit union membership tells an interesting story. The countries with the most credit union members in raw numbers are what you'd expect: the United States leads with 101 million, followed by India with 20 million, then Canada with 10 million. Brazil, South Korea, the Philippines, Kenya, Mexico, Ecuador, Australia, Thailand, Colombia, and Ireland round out the top tier.

But if you measure by penetration—what percentage of the economically active population belongs to a credit union—the map changes completely. Barbados leads the world, with eighty-two percent of its working-age population holding credit union membership. Ireland is second at seventy-five percent. Then come Grenada, Trinidad and Tobago, Belize, St. Lucia, St. Kitts and Nevis, Jamaica, and Antigua and Barbuda.

Small Caribbean nations dominate this list. The United States, despite its massive raw numbers, sits at forty-eight percent. The global average is just over eight percent.

In several African countries, credit unions go by a different name: SACCOs, which stands for Savings and Credit Cooperatives. Kenya alone has over five million SACCO members.

The 2008 Test

Financial crises are stress tests. The 2008 crash revealed something important: banks were two and a half times more likely to fail than credit unions.

Part of this was the subprime disparity mentioned earlier. But there's a deeper structural reason. Credit unions exist to serve their members. They're not under pressure to generate returns for shareholders who don't use the bank. This changes the incentives around risk.

The aftermath showed another pattern. Between 2008 and 2016, American credit unions more than doubled their lending to small businesses—from thirty billion dollars to sixty billion. During that same period, overall small business lending in the United States declined by around one hundred billion dollars. When banks pulled back, credit unions stepped forward.

How Credit Unions Differ from Microfinance

Credit unions are sometimes confused with microfinance institutions—organizations that provide small loans to low-income borrowers, particularly in developing countries. Both serve people often ignored by traditional banks. But there's a crucial distinction.

In microfinance, whether provided by nonprofits or for-profit companies, control over the money rests with the institution. A small group of microfinance providers decides who gets loans, on what terms, and how funds are allocated. They benefit from a highly profitable sector.

In credit unions, the borrowers are the owners. Members control their own pooled resources. The distinction sounds subtle, but it changes everything about power and accountability.

The Plumbing Behind the Movement

Individual credit unions serve individual people—what the industry calls "natural-person credit unions" or "retail credit unions." But who serves the credit unions?

The answer is corporate credit unions, also known as central credit unions in Canada. These are credit unions for credit unions, providing operational support, clearing funds between institutions, and delivering products and services that would be too expensive for small credit unions to build alone.

Credit unions also form cooperatives among themselves. These credit union service organizations, or CUSOs, are typically for-profit subsidiaries owned by one or more credit unions. The largest example in the United States is CO-OP Financial Services, which provides an ATM network and shared branching—allowing members of one credit union to use another credit union's branches as if they were their own.

This cooperative infrastructure extends to credit counseling services, insurance, and investments. Credit unions collaborate to provide services they couldn't offer individually.

Regulation and Insurance

In the United States, federal credit unions are chartered and overseen by the National Credit Union Administration, known as NCUA. This agency also provides deposit insurance, similar to how the Federal Deposit Insurance Corporation protects bank deposits.

State-chartered credit unions answer to their state's financial regulatory agency. They can choose to get deposit insurance from the NCUA or from American Share Insurance, a private insurer based in Ohio. No state provides its own deposit insurance anymore—too many bank failures taught that lesson.

Canada takes a different approach. Most credit unions there are provincially incorporated, with deposit insurance provided by provincial Crown corporations. In Ontario, for example, eligible deposits up to 250,000 Canadian dollars are insured by the Financial Services Regulatory Authority of Ontario. Federal credit unions exist too, incorporated under federal charters and backed by the Canada Deposit Insurance Corporation.

In the United Kingdom, credit unions receive the same protection as banks and building societies—deposits covered up to 85,000 pounds per person per institution through the Financial Services Compensation Scheme.

The Tax Question

Credit unions in the United States don't pay federal income tax. State credit unions are exempt under Section 501(c)(14)(A) of the tax code. Federal credit unions fall under Section 501(c)(1).

Banks have long complained about this, arguing it gives credit unions an unfair advantage. Credit unions counter that their nonprofit structure and community focus justify the exemption—they're not maximizing profit for shareholders, so they shouldn't be taxed as if they were.

This debate resurfaces periodically in Congress. So far, the exemption has survived.

The Latin American Expansion and Crisis

In the 1940s, the Catholic Church began promoting credit unions in Latin America as a way to help the poor. The movement took off in the 1950s and 1960s, particularly in Bolivia, Costa Rica, the Dominican Republic, Honduras, and Peru.

The Regional Confederation of Latin American Credit Unions, known as COLAC, formed to coordinate the movement. With funding from the Inter-American Development Bank, credit unions grew rapidly through the 1970s and into the early 1980s. By 1988, COLAC credit unions represented four million members across seventeen countries, with a loan portfolio of about half a billion dollars.

Then came the crisis. From the late 1970s onward, many Latin American credit unions struggled with inflation, stagnating membership, and serious loan recovery problems. In the 1980s, international donor agencies like the United States Agency for International Development tried to rehabilitate the system, providing technical assistance and pushing credit unions to focus on mobilizing local deposits rather than depending on outside funding.

In 1987, the Latin American debt crisis triggered bank runs. Credit union members rushed to withdraw their money. High default rates on loans compounded the liquidity problems. Many credit unions in the region didn't survive.

But the movement adapted. In Costa Rica, credit unions have nearly tripled their share of the financial market since 1996, growing from 3.7 percent to 9.9 percent by 2016. They've grown faster than both private-sector banks and state-owned banks. Poland launched its credit union system in 1992; by 2012, there were 2,000 branches serving 2.2 million members.

What Happens When Things Go Wrong

Like banks, credit unions are legally required to maintain reserves—a ratio of assets to liabilities that provides a cushion against losses. If a credit union cannot maintain positive cash flow and is forced to declare insolvency, its assets are distributed to creditors, including depositors, according to bankruptcy law.

If the remaining assets don't cover all deposits, depositors will lose some or all of their money—unless they're protected by deposit insurance. This is why insurance matters so much. In most developed countries, deposit insurance promises to reimburse members for lost funds up to a certain threshold, making the failure of a credit union painful but not catastrophic for its members.

The Movement's Mission

The World Council of Credit Unions describes its mission as helping "organize, expand, improve and integrate credit unions and related institutions as effective instruments for the economic and social development of all people." That language—"all people"—is intentional.

Credit unions often describe themselves as serving "people, not profit." It's a slogan, but surveys consistently show it reflects member experience. Customer satisfaction ratings at credit unions significantly exceed those at banks. Credit unions claim to offer broader loan and savings products at lower cost than most microfinance institutions, particularly in the context of financial inclusion—bringing banking services to people traditionally shut out of the financial system.

Whether credit unions can maintain this character as they grow remains an open question. The movement now encompasses everything from tiny volunteer operations with a handful of members to institutions with hundreds of thousands of members and billions of dollars in assets. The largest credit union in the United States, Navy Federal, serves over thirteen million members and holds more than 170 billion dollars in assets. Is that still a community-oriented cooperative, or has it become a bank in all but legal structure?

The credit union movement would argue that ownership matters regardless of scale. As long as members own the institution and elect its board—one person, one vote—the fundamental dynamic differs from shareholder-owned banks. The incentives point in different directions.

Whether that argument holds as institutions grow ever larger is a question the movement will continue to face. But for now, 375 million members worldwide have made their choice. They'd rather own their bank than be its customer.