What Is a Financial Cooperative?

Female middle-age bank customer at a desk with a bank officer reviewing documents
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DEFINITION
A financial cooperative (co-op) is a member-owned, nonprofit financial institution that operates under a members-first philosophy to serve a population’s banking needs.

A financial cooperative (co-op) is a member-owned, nonprofit financial institution that operates under a members-first philosophy to serve a population’s banking needs. A financial co-op may be able to offer lower fees and better rates because they are not seeking profits to return to investors. 

Cooperatives are important organizations for the world’s economy. Here’s what they are, how they work, and what contributions they can make to their local communities. 

Definition and Examples of a Financial Cooperative

The defining characteristic of a financial cooperative (co-op) is its structure, which is typically member-owned and governed rather than investor-owned—a unique characteristic for a financial institution. The most common types of financial cooperatives are credit unions and cooperative banks. They’re often locally-owned and operate as nonprofits. They also tout their values and customer-centric business model. Financial co-ops return revenue to members in the form of lower rates, fewer fees, and higher dividends.

Cooperatives do not take the same risks as shareholder-owner banks because they are not after large profits. Thus, while many large banks suffered incredible losses during the financial crisis of 2008 and beyond, co-ops were able to come out stable and strong. In fact, co-ops kept growing steadily during that time period. 

  • Alternate name: Cooperative financial institutions, credit union
  • Acronym: CFI

A credit union is an example of a financial cooperative. Credit unions were originally established to serve people with the lowest incomes in North America and developing countries. The purpose of these financial cooperatives is greater financial inclusion

Credit unions are open to the public; anyone who meets the requirements can become a member. 

How a Financial Cooperative Works 

It’s fairly simple to become a member of a financial cooperative. Once a new customer opens a savings account, they become a member of the co-op. 

It’s common for a credit union to require the following to open a savings account and become a member:

  • New member fee
  • Minimum savings deposit
  • Social security number (or ITIN or EIN)
  • Address (some co-ops require customers to live in the area they service)
  • Government-issued photo identification

As a member, the new customer is able to apply for loans and other banking products at the co-op rates. 

Because financial cooperatives are owned by members instead of outside investors, they don’t have the same pressure to deliver profits. When a member applies for a loan, for example, they may be able to secure an interest rate lower than what a bank with investors would offer. 

Notable Happenings

The United Nations (UN) named 2012 as the “International Year of Cooperatives. Financial cooperatives were recognized as a major contributor to socio-economic development, especially in regard to poverty reduction, employment generation, and social integration. 

The UN passed a resolution to encourage all member states to raise awareness about the impact financial cooperatives have on social and economic development. It also sought to promote the formation and growth of cooperatives as cooperatives create a more inclusive financial environment, as well as encouraged governments to create policies, laws, and practices that were conducive to the formation of cooperatives.

Cooperatives have also been recognized for their resilience in the face of the 2008 global financial crisis. Cooperatives are able to continue extending credit to members, particularly to the small- and medium-sized enterprises during difficult times. 

Financial Cooperative vs. Financial Institution

Although a financial cooperative is considered a financial institution, it distinguishes itself from most other financial institutions in the way it is structured and the way it makes money. While financial cooperatives are owned by members who have one vote each, financial institutions are owned by investors.

This important distinction changes the way each organization operates. Most traditional financial institutions are publicly traded entities and must satisfy investor demands to earn profit. FInancial cooperatives do not have investors to satisfy and instead work to meet members’ needs instead. There are some other key differences between the two. 

Financial Cooperative Financial Institution
Owned by members Owned by investors
Typically local or regional Can be local or national
Operate as nonprofits For-profit business model
Can offer lower rates and fees because they do not need to distribute profits to shareholders Typically has more fees and higher rates in order to satisfy profits desired by investors
Members are shareholders with one vote apiece Investors can buy many shares of a financial institution and exercise more control based on their investment

Key Takeaways

  • Financial cooperatives are nonprofit financial institutions that offer banking services to members.
  • Financial cooperatives may offer lower rates on loans and higher dividends on investments. 
  • Financial cooperatives are often local organizations and were originally established to serve low-income populations.
  • Becoming a member of a financial cooperative usually requires opening a savings account with a small amount of money deposited. 
  • Credit unions are the most common type of financial cooperative. 

Article Sources

  1. National Cooperative Business Association.”Financial Services Co-Ops.” Accessed Jan 20, 2022. 

  2. International Labour Organization. “What Financial Cooperatives Can Teach the Big Banks.” Accessed Jan. 20, 2022.

  3. Cooperative Federal. “How To Join a Cooperative Federal.” Accessed Jan. 20, 2022.

  4. United Nations. “2012: International Year of Cooperatives.” Accessed Jan. 20, 2022.

  5. Centre for Socio-Economic Development. “Cooperatives for Inclusive Growth,” Page 3. Accessed Jan. 20, 2022.

  6. Financial Stability Institute. “ Regulation and Supervision of Financial Cooperatives,” Page 1. Accessed Jan. 20, 2022.