A credit union is a type of cooperative ‘run by its members for the members’. It is a not-for-profit organization formed by the people who have something in common, such as their church, trade union, club, industry or locality.
In order to join a credit union you are required to meet its eligibility criteria, i.e. you need to share the same common bond with the current members.
In many countries today, however, credit unions allow outsiders to apply for membership, that is, people who do not have a common bond.
Credit unions, which are democratically controlled by their members, aim to promote thrift (savings), provide credit at competitive rates, plus other financial services to their members.
Some of them also provide services that support local community development, and sustainable international development on a local level.
There are many types of credit unions across the world, ranging from institutions with just a few dozen members, to massive organizations worth billions of dollars and hundreds of thousands of members.
They exist alongside other cooperative or mutual organizations engaging in cooperative banking.
Credit unions versus other financial institutions
The main difference between banks, other financial institutions and credit unions, is that account holders in credit unions are the owners. They choose their board of directors in a 1-person-1-vote system, regardless of how much they have deposited.
Credit unions, unlike conventional banks, see themselves as community-oriented, not-for-profit organizations.
While offering similar services to mainstream banks, credit unions use different terminologies. They have draft accounts (checking accounts), share accounts (savings accounts), share term certificates (certificates of deposit, etc.
According to most surveys, customers are generally more satisfied with credit union services than those provided by banks.
They claim to provide a wider range of savings and loan products, and at a much cheaper price than microfinance institutions do.
In most cases, credit unions require that a member has saved for a set period before becoming eligible to borrow money.
Their loans may range from very large ones, to amounts more typically lent by a payday or doorstep lender.
In most countries, their interest rates are capped. Life insurance is usually in-built, meaning that if the borrower dies, the loan is fully repaid.
“Credit unions pool their members’ savings deposits and shares to finance their own loan portfolios rather than rely on outside capital. Members benefit from higher returns on savings, lower rates on loans and fewer fees on average.”
Credit unions globally claim to offer members from all walks of life much more than just financial services. Members have the chance to be owners of a financial institution that helps create opportunities, such as growing farms, building family homes, educating their children, and starting small businesses.
The World Council of Credit Unions adds:
“Regardless of account size in the credit union, each member may run for the volunteer board of directors and cast a vote in elections. In some countries, members encounter their first taste of democratic decision making through their credit unions.”
Video – Bringing the Credit Union to the Member
This World Council of Credit Unions video explains how new technologies are enabling unions to offer immediate and direct financial services to members who had been considered unreachable before.