Social Finance

Social Finance is a form of financial activity which includes institutions responding to certain social needs that cannot be met by conventional financial and investment schemes.

Social Finance and Credit Unions

tag logo Social Finance

The concept of ’Social Finance and Credit Unions’ is not present in Malta. What is reported in this Fact Sheet, will serve as an indication.

What is Social Finance and what types of institutions does it involve?

Social Finance generates an inclusive prosperity and its primary goal is the creation and development of social capital that benefits all, particularly those who were otherwise excluded and neglected. Social Finance includes a range of organisations and institutions providing financial services to those who had no access to commercial finance. These organisations are generally independent of state authorities or public policy initiatives and their funding comes from many sources including: local investors, charities and charitable foundations, faith-based organisations, local governments, companies and various donors.

Social Finance includes the following types of organisations:

Credit Unions – which are co-operative, non-profit financial institutions whose members save in form of shares, which are then used for re-lending,
Micro Finance Funds – providing small loans to small businesses and individuals without reliance on conventional collateral and credit-rating,
Mutual Guarantee Funds – which are associations of small and medium-size businesses that are pooling savings in order to borrow more,
Community Loan Funds – usually owned and controlled by local communities and making capital available to community regeneration projects whose loans are often used to leverage additional capital,
Community Venture Capital Funds – similar to conventional venture capital funds but dedicated to projects with certain social mission,
Socially responsible Investment Funds – investing in companies with social or ethical mission.

What are Credit Unions?

Credit Unions are co-operative financial institutions privately owned and controlled by their members. They differ from commercial banks and other financial institutions by the fact that members who have accounts in the credit union are also its owners who have a right to elect board of directors in a democratic “one person – one vote” system regardless of the amount of money invested. Only members of a credit union may deposit or borrow money from it.

Credit unions may be viewed as non-profit organisations, or as for-profit enterprises making profit for their members who receive it in the form of reduced interest rates on loans or as dividends paid on savings (which are usually taxed as ordinary income).

Credit unions usually follow the principle “once a member – always a member”, which allows current membership to continue even if an individual no longer qualifies as a member (having changed a profession or moved outside the area). However they may have a right to expel a member who causes a financial loss or commits a crime. Also members who voluntarily terminated their membership may not be allowed to rejoin the credit union.

Credit Unions may serve a specific employee group (i.e. teachers) or anyone who lives and works or studies within a certain area. The membership is often extended to the family and relatives of a member.

The majority of credit unions provide services to individual consumers, but there are also Corporate Credit Unions serving the needs of credit unions with operational support, clearing of funds, product and service delivery etc.

What are the advantages and disadvantages of Credit Unions?

Credit Unions and Community Banks offer the following advantages to their customers:

they focus attention on the needs of local communities, businesses and farmers (unlike commercial banks aimed at generating profits for their managers and shareholders),
they channel most of their loans to local people and businesses (unlike commercial banks that may invest their funds anywhere),
they are generally accessible to their customers (members) on site (unlike commercial banks that may not have branches in small towns or rural areas),
they are usually deeply involved in the affairs of local communities,
they are willing to consider character, family history and discretionary spending in their loan policy (unlike commercial banks which often apply impersonal criteria like credit scoring to all loan decisions without regard to individual circumstances),
they offer fast decision-making on business loans, because decisions are made locally (unlike in commercial banks which often convene loan approval committees),
being small businesses themselves they better understand the needs and problems of small business owners.

On the other hand their disadvantages and risks for customers include the following:

deposits in credit unions and community banks are often not guaranteed (or insured) by the state institutions (unlike deposits in commercial banks in many countries), although they may be insured in other form (e.g. by a specialised insurance company owned by credit unions)
due to their small size and less oversight from supervisory institutions they are more likely to go bankrupt as a result of financial problems or fraud,
often they cannot be competitive with commercial banks in terms of range and quality of services, especially in the area of electronic banking (ATM network, internet access etc.).