Definition of a cooperative bank (Source : ICBA, International Cooperative Banks Association)

A cooperative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Cooperative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Cooperative banks generally provide their members with a wide range of banking and financial services (loans, deposits, banking accounts…). Cooperative banks differ from stockholder banks by their organization, their goals, their values and their governance. In most countries, they are supervised and controlled by banking authorities and have to respect prudential banking regulations, which put them at a level playing field with stockholder banks. Depending on countries, this control and supervision can be implemented directly by state entities or delegated to a cooperative federation or central body. Even if their organizational rules can vary according to their respective national legislations, co-operative banks share common features:

• Democratic member control : cooperative banks are owned and controlled by their members, who democratically elect the board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.

• Customer-owned entities : in a cooperative bank, the needs of the customers meet the needs of the owners, as cooperative bank members are both. As a consequence, the first aim of a cooperative bank is not to maximise profit but to provide the best possible products and services to its members. Some cooperative banks only operate with their members but most of them also admit non-member clients to benefit from their banking and financial services.

• Profit allocation : in a co-operative bank, a significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves. A part of this profit can also be distributed to the cooperative members, with legal or statutory limitations in most cases. Profit is usually allocated to members either through a patronage dividend, which is related to the use of the cooperative’s products and services by each member, or through an interest or a dividend, which is related to the number of shares subscribed by each member.

Cooperative banks are deeply rooted inside local areas and communities. They are involved in local development and contribute to the sustainable development of their communities, as their members and management board usually belong to the communities in which they exercise their activities. By increasing banking access in areas or markets where other banks are less present – SMEs, farmers in rural areas, middle or low income households in urban areas - cooperative banks reduce banking exclusion and foster the economic ability of millions of people. They play an influential role on the economic growth in the countries in which they work in and increase the efficiency of the international financial system. Their specific form of enterprise, relying on the above-mentioned principles of organization, has proven successful both in developed and developing countries.

 Cooperative banks

Larger institutions are often called cooperative banks. Some of these banks are tightly integrated federations of credit unions, though those member credit unions may not subscribe to all nine of the strict principles of the World Council of Credit Unions (WOCCU).

Like credit unions, cooperative banks are owned by their customers and follow the cooperative principle of one person, one vote. Unlike credit unions, however, cooperative banks are often regulated under both banking and cooperative legislation. They provide services such as savings and loans to non-members as well as to members, and some participate in the wholesale markets for bonds, money and even equities.^[2] Many cooperative banks are traded on public stock markets, with the result that they are partly owned by non-members. Member control is diluted by these outside stakes, so they may be regarded as semi-cooperative.

Cooperative banking systems are also usually more integrated than credit union systems. Local branches of cooperative banks elect their own boards of directors and manage their own operations, but most strategic decisions require approval from a central office. Credit unions usually retain strategic decision-making at a local level, though they share back-office functions, such as access to the global payments system, by federating.

Some cooperative banks are criticized for dilution of cooperative principles. Principles 2-4 of the Statement on the Co-operative Identity can be interpreted to require that members must control both the governance systems and capital of their cooperatives. A cooperative bank that raises capital on public stock markets creates a second class of shareholders who compete with the members for control. In some circumstances, the members may lose control. This effectively means that the bank ceases to be a cooperative. Accepting deposits from non-members may also lead to a dilution of member control.