Brazilian credit union member groups: Borrower-dominated, saver-dominated or neutral behavior?
| Autor | Bressan, Valeria Gama Fully |
| Cargo | Report |
Theoretical models concerning Credit Unions (CUs) suggest that the type of CU domination determines the way
it allocates the monetary value it generates. A borrower- (saver-) dominated CU benefits borrower (saver)
members at the expenses of saver (borrower) members, and a neutral CU equally benefits its member groups.
This paper applies direct measure of monetary benefits to each member group (Patin & McNiel, 1991a) to test
for the existence of dominated behavior in Brazilian CUs, and is the first to apply panel data regressions to
identify the determinants of CUs behavior. We use a unique panel data with 40,664 observations taken from 533
CUs affiliated with the largest Brazilian cooperative network. Results indicate Brazilian CUs are dominated by
borrowers, but behave close to neutrality. Panel regression estimates show that common or multiple bond type,
size and overdue loans of a CU have no effect on its behavior, the greater the total amount of loans over social
capital and adjusted equity over total assets are the more likely a CU is borrower dominated, and the greater the
age and current operational expenses over total asset of a CU are the more likely a CU is saver dominated.
Key words: credit union; member group domination; monetary benefits; panel data.
Introduction
The owners (members) of a financial cooperative, or simply credit union (hereafter CU), are borrowers who consume loans and savers who supply savings deposits. The gap between the dividend rate paid to savers and the interest/loan rate paid by borrowers gives the main source of income to a CU (Spencer, 1996).
A CU acts as a financial intermediary between its net saver members, who want high dividend rates on savings (i.e., shares in CUs), and its net borrower members, who prefer low interest rates on loans. These two opposite objectives of member groups create the inherent borrower-saver conflict in CUs (Smith, 1986). Thus, a borrower- (saver-) oriented/dominated CU is expected to benefit net borrower (saver) members at the expenses of net saver (borrower) members, and a neutral CU is expected to equally benefit its member groups. This paper aims to investigate and explain the member group orientation/domination of CUs in Brazil.
We have divided the literature on CUs member group orientation/domination into theoretical and empirical groups of studies. As follows, we first review the most important theoretical studies, and then the most important empirical studies on CUs member group orientation/domination.
Taylor (1971) was one of the first authors to explicitly recognize the existence of conflict among member groups within a CU. On the basis of a simple graphical analytical model of CU, he shows the conflict among member groups is not likely to restrict membership, and therefore credit availability, on purely economic grounds. The first reason for this is that members do not belong exclusively to one group (i.e., borrowers or savers) or other. The second reason is that the relationships between current savers and new borrowers, and current borrowers and new savers, are complementary.
Disagreeing with Taylor (1971), Flannery (1974) used a simple graphical analytical model to show that non price rationing (i.e., restrictions on membership) is crucial for saver and borrower dominated CUs to operate. Exactly because of this, Flannery (1974) argued that dominated CUs would produce more distortion in terms of credit availability than simple profit maximizing monopolistic competitors. A neutral credit union, which is considered by Flannery to act exactly like a simple sales maximizing firm, would supply more credit to consumers than capital markets operating under monopolistic competition.
Following this line of inquiry, Smith, Cargill and Meyer (1981) develop a theoretical model in which a CU chooses the loan rate and dividend rate so as to maximize the weighted sum of the net gains on savings and loans, with the weights labeled behavioral preference parameters. They show that the loan rate for a borrower- (saver-) oriented CU would be less (more) than for a neutral CU, and the dividend rate on savings would be less (more) than for a neutral CU; and that a borrower- (saver-) oriented CU would issue more (less) debt or invest extra funds less (more) than if equal treatment or neutral behavior was the case. Despite their results, they argue that a CU would likely seek to maximize its total net gain or, in other words, behave neutrally for three reasons. First, neutral behavior is coherent to the fairness and equity considerations that lie behind the cooperative philosophy. Second, borrowers or savers might hesitate to participate in a CU that intentionally penalizes their interests. Third, individual members might always switch in their roles as net borrowers or net savers.
The model developed by Smith et al. (1981) was extended by Smith (1984) in order to consider that savings and loan transactions have maturities which extend beyond current period. Thus, Smith (1984) incorporated into his model a more realistic and detailed balance sheet constraint, and imposes that the operating statement for the CU's current accounting period must net out to zero. He showed that the optimal loan and dividend depend critically on the preferences of the CU, such that a borrower- (saver-) oriented CU will treat savers (borrowers) so as to maximize profit and use the profit to set the lowest (highest) possible loan rate (dividend rate). He also showed that in a borrower(saver-) oriented CU the loan (dividend) rate would tend to absorb exogenous disturbances while the dividend (loan) rate would tend to remain unchanged. Interestingly, Smith (1988) extended Smith's (1984) stylized model of CU to incorporate uncertainty, but only considered risk neutral CUs to develop his entire model, thus ignoring the CU orientation/domination issue.
Other works such as Black and Dugger (1981) and Walker and Chandler (1977) have not developed formal analytical models of CUs, but still recognize that a CU orientation is likely to affect the manner it operates or behaves. Thus, it should be noticed that, except for Spencer (1996), all theoretical studies after Taylor (1971) have recognized the conflict among member groups translated into the CU domination/orientation is likely to affect the way CUs are operated and behave.
In terms of empirical evidences on the significance of dominated behavior among CUs, Flannery (1974) seems to have been the first study attempting to classify CUs as saver-dominated, borrower-dominated or neutral. However, it failed to distinguish between variations caused by dominated behavior and random errors so that its results should be taken with caution (Smith, 1986).
Smith (1986) tested the variant objective functions of CUs (i.e., saver- or borrower- oriented or neutral) by relying on comparative static results obtained by Smith (1984). In so doing, he employed a two-step approach where in the first step the CUs are classified into the borrower (saver) oriented group if their predicted values for loan (dividend) rates, obtained from two linear regression equations, are greater than (less than) the observed values for loan (dividend rates)(1). In the second step, Smith (1986) tested the variant objective function of CUs by carrying out regressions to test if the classified CUs would respond to changes in the explanatory variables as predicted by the comparative static results obtained by Smith (1984). Because his results did not show any evidence to support the variant objective function hypothesis, he concluded that the 951 federally insured American credit unions in his sample had behaved neutrally from 1975 to 1979.
Based on the theoretical works of Walker and Chandler (1977), Smith et al. (1981) and Smith (1984), Patin and McNiel (1991a) developed a direct measure of the net monetary benefits to saver and borrower members, and applied it to calculate the differences between the net monetary benefits allocated to savers (NMBS) and borrowers (NMBB) in the years 1984 and 1985 for each of 10,565 (10,142) federally chartered and 4,657 (4,932) state chartered/federally insured CUs in the United Sates. They tested if the CU industry in USA balanced the interest of borrowers and savers by observing if the mean of the differences between NMBS and NMBB for all CUs in their sample would differ from zero when using the t test. They found that the CU industry as a whole allocated more benefits to member-savers than to member-borrowers but argued that this result does not imply each CU in the sample exhibited this type of behavior. Thus, they proposed a way to adjust for the possibility of size bias in order to create an index of domination for each CU. Using this index distribution, they found that 80% of CUs they had previously classified showed evidence of neutral behavior. Patin and McNiel (1991b) employed this same approach to analyze CUs in USA and found, like Patin and McNiel (1991a), that most CUs exhibited neutral behavior.
The National Credit Union Administration (NCUA) of USA changed its membership policy in 1982 so that members from groups without any affinity with the core group of a CU could participate. In other words, NCUA started to allow multiple group credit unions to operate. Since the National Association of Federal Credit Unions (NAFCU) claims that non-core members are more likely to be borrowers in a CU than the core members, Leggett and Stewart (1999) used a more restrictive version of the approach proposed by Patin and McNiel (1991a) to identify the orientation of 2,025 federally chartered CUs in 1997 from the twenty-five largest Metropolitan Statistical Areas in USA. They found that on average CUs were saver-oriented regardless of the type of their membership but common bond CUs had a stronger saver orientation than multiple bond CUs.
Goddard and Wilson (2005) conducted an empirical study on the effect of size, age and...
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