Optimal Interest Rates in Cooperative Banks with Non-member Customers

Abstract

AUTHORPrevious attempts to understand the functioning of cooperative banks have often considered them as being similar to credit unions. However, we argue that credit unions are only a subset of cooperative financial institutions and the models used to describe their behavior cannot be generalized to all cooperative banks. Additionally, there is an important factor that characterizes cooperative banks' behavior and outcomes, which does not apply to credit unions: the role of nonmembers and their contribution to the members' overall welfare through bank deposits and interest earnings. In this paper, we move from the Smith et al. (1981) model developed to describe credit unions' pricing policy on interest rates and we propose a more general model by incorporating nonmember depositors and borrowers, who play a key role in determining cooperative banks' interest rates.

Credit Union Member Group Domination Under High Interest Rate Environments

“…Other authors have supported this finding (Bressan et al. ; Catturani and Venkat ; Leggett and Stewart ; Siudek and Zawojska ). However, this does not mean that CUs are not concerned with positive financial results, once they are challenged to remain solvent and competitive in the financial market (Carvalho et al.…”

“…Due to the high rates, we propose that local CUs would satisfy their members’ needs by providing loans at a lower interest rate. Consequently, borrower‐dominant behavior would be more common in these local organizations than the neutral behavior predicted by theoretical models (Catturani and Venkat ; Siudek and Zawojska ; Smith et al. ; Smith ; Taylor ; Walker and Chandler ).…”

“…The importance of protecting members’ interests from CU managers, as well as the individual interests of each member group is acknowledged. Thus, the neutral behavior of CUs is reinforced by its subsidiary nature with more satisfactory dividend and loan rates, compared with the rates on offer in the financial market (Catturani and Venkat ; Croteau ; Patin and McNiel , b; Siudek and Zawojska ; Smith et al. ; Taylor ; Walker and Chandler ).…”

“…Therefore, CUs have no profit motive of their own, other than maximizing the welfare of their membership (Catturani and Venkat ; Croteau ; Siudek and Zawojska ; Taylor ; Walker and Chandler ). Navratil () provided empirical evidence in support of this statement.…”

“…If the objectives of both member groups are of equal importance, the CU will attempt to pay the highest return rates on savings and, at the same time, charge the lowest interest rate on loans (Bauer ; McKillop and Wilson ; Siudek and Zawojska ; Taylor ). Most theoretical economic models for CUs state that the most efficient configuration to meet the conflicting objectives of members is to adopt a balanced approach in the distribution of monetary benefits to both the major groups (Catturani and Venkat ; Siudek and Zawojska ; Smith et al. ; Smith ; Taylor ; Walker and Chandler ).…”