Credit Union Member Group Domination Under High Interest Rate Environments

17 Pages Posted: 28 Apr 2020

See all articles by Antonio Mercer

Antonio Mercer

Pontificia Universidade Catolica do Parana

Angela Póvoa

Pontificia Universidade Catolica do Parana

Pedro Piccoli

Universidade Católica do Paraná (Universidade Católica do Paraná)

Date Written: September 2019

Abstract

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

Mercer, Antonio and Póvoa, Angela and Piccoli, Pedro, Credit Union Member Group Domination Under High Interest Rate Environments (September 2019). Annals of Public and Cooperative Economics, Vol. 90, Issue 3, pp. 555-571, 2019, Available at SSRN: https://ssrn.com/abstract=3586872 or http://dx.doi.org/10.1111/apce.12228

Antonio Mercer (Contact Author)

Pontificia Universidade Catolica do Parana

Angela Póvoa

Pontificia Universidade Catolica do Parana

Pedro Piccoli

Universidade Católica do Paraná (Universidade Católica do Paraná) ( email )

Curitiba
Brazil

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