Credit Union Member Group Domination Under High Interest Rate Environments
17 Pages Posted: 28 Apr 2020
Date Written: September 2019
Theoretical models for credit unions advocate that such organizations should pursue a neutral orientation in order to accommodate the conflicting interests of borrower members, who seek lower interest rates, and saver members, who look for higher returns on their savings. However, there is a lack of empirical support for such neutrality in high interest rate environments. This is because under such conditions, credit unions could accomplish their social mission by providing microcredit at a lower interest rate to local communities, thus becoming more borrower‐dominated. This paper investigates the member group domination of credit unions in Brazil, a country known for its high interest rates, and finds that the majority of credit unions (78.34%) are borrower‐dominated. This behavior becomes more pronounced when local interest rates rise, contradicting the predictions of neutrality‐seeking models. A percentage increase in the interest rate, increases about 5 times the likelihood of a CU becoming extreme borrower‐dominated. Besides interest rates, age, lower size, capital and lower efficiency of the credit unions are the main determinants of borrower domination.
Keywords: Credit unions, member group domination, agency conflict
JEL Classification: C33, G21, L31
Suggested Citation: Suggested Citation