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If you’ve ever wandered the warm, misty streets of Vancouver in the spring, driven the flat endless plains of the Canadian Prairies, or even grew up in small town Ontario, there’s a very good chance that you’ve seen a credit union here and there. Throughout Canada, both small and large independent credit unions are a staple of the communities they serve, and although the majority of Canadians conduct their personal finances with one of the big banks, credit unions are as much a part of the financial services landscape in Canada as they are a part of its physical landscape.
According to the Canadian Credit Union Association, over 10 million Canadians trust a local credit union or caisse populaire with their finances. While it’s common to find these alternative financial institutions on the corners of many Canadian communities, anyone that has never actually banked with one of these cooperative financial organizations will likely have a few questions about where they came from, why they exist, and what exactly they have to offer.
In this article, we’ll answer these questions and more, identifying the main difference between banks and credit unions and exploring the important concept of the common bond of association. We’ll also look at the history of credit unions and caisses populaires, how they’re governed and structured, who regulates them in Canada, and why they’re so important to the communities they serve.
What Is a Credit Union?
A credit union is a member-owned, nonprofit alternative financial institution and financial cooperative (co-op) that offers its members the same traditional banking products and financial services as the big banks. Credit unions offer deposit accounts like chequing and savings accounts, online and mobile banking services, registered and non-registered investments, credit cards, lines of credit, business loans, consumer loans, and even mortgages. Much like traditional chartered banks, many credit unions also operate on a branch network, maintaining a brick-and-mortar branch or banking centre in their communities where members can conduct financial transactions in person, make deposits or withdrawals, open and close accounts, and seek financial and investment advice.
Known in Quebec and in other French-speaking regions of Canada as caisses populaires, these member-owned, nonprofit financial cooperatives are essentially the francophone equivalent of credit unions.
Although they offer the same financial products and services as big banks, credit unions really are quite different in a number of ways. They’re governed and structured differently, they’re driven by a different purpose than banks, and their commitment to their local rural or urban communities are generally centered around one thing—the financial wellness of their members.
This member-first approach is central to how a credit union works. But before we explore how a credit union works, it’s important to understand what exactly brings credit union members together in the first place. After all, what unifying foundation could possibly drive near strangers together to pool their financial resources in support of each other and their community?
This unifying foundation is rooted in a concept known as the common bond of association—a concept that still forms the legal foundation for credit unions across Canada today.
What Is a Credit Union’s “Common Bond of Association”?
One particularly unique aspect of credit unions is the concept of the common bond of association or simply the common bond.
The common bond of association is a term that represents a unifying social connection between all members of a credit union. By capturng a set of characteristics individuals in a specific credit union share, it’s this common bond that is used to represent a credit union’s field of membership. In order to be eligible to join a credit union in Canada, individuals must typically share this common bond with the other members.
A credit union that requires its members to share a common bond is also known as a “closed bond” credit union. While many credit unions originated as closed bond credit unions, serving only members that shared in their common bond, the majority of credit unions in Canada today are now “open bond” credit unions, providing their services to members throughout their entire community. The common bond of association can be based on a number of unifying concepts, including living in a specific geographic region, working in the same industry, sharing the same profession, attending the same school, belonging to the same church, or being a part of the same religious, ethnic, or cultural group.
It’s the common bond that brings together, say, Nova Scotia’s lobster farmers, Ontario’s police officers, or British Columbia’s teachers. The common bond of association leverages a shared sense of community distilled into a few simple characteristics. This ultimately forms a trusted foundation where members are willing to share in a level of collective, cooperative financial responsibility where they save money together and lend money to each other at reasonable interest rates.
The concept of the common bond is rooted in the philosophy of trust and cooperation that forms the operating principles for credit unions and their members. These principles are based on the ethical values of self-help, responsibility, democracy, equality, equity, and solidarity.
Although credit union mergers throughout Canada have arguably eroded some of the origins of the common bond among many larger credit unions—and although recent changes to provincial legislation across the country has allowed for more flexibility in the common bond of association in the modernization of credit unions—it still remains an important and effective concept, one that has played an important role in the development of credit unions, caisses populaires, and financial cooperatives.
While its importance has arguably diminished, the common bond of association is still considered a mandatory requirement and a fundamental principle of the credit union system. In Canada, it is still referenced in important provincial legislation, including the Credit Union Act (Alberta), the Credit Union Incorporation Act (British Columbia), and the Credit Unions and Caisses Populaires Act (Ontario).
A Brief History of Credit Unions
Exploring the history of credit unions can be helpful in understanding how these cooperative financial institutions originated, and it can provide insight into why they continue to exist today.
Canada’s credit unions can be traced back to nineteenth-century Europe, with the first successful credit unions emerging in Germany in the 1850s. These original financial cooperatives were organized by the German lawyer, politician, economist, and cooperative pioneer Franz Hermann Schulze-Delitzsch, and they were based on two pilot projects aimed at providing local participants who were excluded from traditional banking with the opportunity to borrow from their collective pool of savings. In these cooperative banks—or peoples’ banks, as they were known—subscribers made small deposits and received access to credit and dividends.
The first credit unions were initially situated in urban locations, serving local traders, merchants, artisans, and other skilled workers, and ultimately relied on commercial activities.
Around the same time, another German cooperative pioneer, Friedrich Wilhelm Raiffeisen, founded the first rural credit union. This credit union was created to address the financial challenges of the poor individuals living in a rural area of Germany by leveraging what is known as “social capital” and exploiting the deep Christian values of the village. Relying heavily on the common bond of association—a concept credited to Schulze-Delitzsch—these individuals living in rural Germany had smaller incomes that were both seasonal and less predictable.
These two models quickly spread throughout Germany and the rest of Europe and by 1900 had made their way to North America.
Beginning with just a ten-cent deposit and driven by a growing concern for unfair lending practices, the first credit union in North America was founded in 1900 and opened in 1901. It was a single caisse populaire in Lévis Quebec, Canada, founded by Alfonse Desjardin and his wife, Dorimène Roy Desjardins.
Today that organization is known as the Desjardin Group.
What’s the Difference between a Credit Union and a Bank?
In terms of financial products and services, banks and credit unions are virtually the same, with the exception that banks serve customers and credit unions only serve their members. Unlike banks, however, credit unions are not driven by profits. Other than differences in their governing structure, ownership, and fundamental purpose, this is one of the most important differences between credit unions and the big banks.
A bank is a business. Corporate banks are primarily focused on driving growth, hitting revenue targets, and maximizing profits and returns for their investors and shareholders. They do this in a number of ways, but one primary way is through interest income, where banks take consumer deposits at a low interest rate in exchange for a security and lend out those funds to other consumers at a higher interest rate in the form of financial products, like loans and mortgages. The difference between interest paid on deposits and the interest received on loans and mortgages is the interest spread, and that interest spread is the bank’s profit.
Now, while credit unions operate in much the same way, their purpose is not to maximize profits—their purpose is simply to serve their members.
Credit unions are focused on supporting their communities by promoting the financial well-being of their members, and any profits they generate are returned to their members in the form of dividends or improvements to their services. This includes lower service fees and lower interest rates on loans and mortgages.
A credit union’s profits are also used to support their communities in other ways, including funding special projects or initiatives, making charitable donations, and even providing scholarships and bursaries.
How Does a Credit Union Work?
Credit unions are created by their members and owned by their members. On the most basic level, individuals voluntarily pool their money together and essentially buy shares in a credit union. This pool of money is used to provide financial services to one another. Since credit unions are nonprofit financial cooperatives, any profits that are made by the credit union are reinvested in the credit union or used to benefit the member-owners. These benefits can take a number of forms, including dividends that are returned to the members, technological or credit union software improvements, lower service fees, and better interest rates on loans and mortgages.
Since credit unions are jointly owned, they are also democratically controlled. That means as partial owners, members of a credit union have a right and a responsibility to elect and maintain the governing structure of their organization. Credit union members democratically elect a volunteer board of directors that provides support and assistance to the organization’s chief executive officer. The board of directors is ultimately responsible for overseeing the operations and governance of the credit union, approving budgets, and ensuing the organization’s success.
In addition to the members and board of directors, credit unions also have a management team that is responsible for the day-to-day operations of the credit union, managing the team of professionals that provide financial services and financial support to its members. It’s the management team’s responsibility to ensure that the credit union is meeting the day-to-day needs of the financial institution’s members.
Special committees may also be elected or formed in order to oversee special projects or initiatives, including internal reviews, software implementations, regulatory initiatives, governance concerns, and other internal or community-based projects or initiatives.
Together, these four elements—members, a board of directors, a management team, and special committees—form the typical governance and operating structure of a credit union.
How Are Credit Unions Regulated?
While credit unions can be either provincially or federally regulated, most credit unions operating in Canada today are provincially regulated with only two exceptions: Coast Capital Savings and UNI Financial Corporation.
Credit unions and caisses populaires in Canada were exclusively regulated by their respective provinces until 2012, when the Government of Canada announced a framework that allowed provincial credit unions and caisses populaires to continue operations as federal credit unions (FCUs). The introduction of the new legislative framework, which resulted in amendments to the Bank Act and allowed for cooperative ownership, was intended to “promote the continued growth and competitiveness of the sector and enhance financial stability.”
While each province or territory may have more than one body responsible for regulating financial institutions, the following list includes each province or territory and its respective regulator responsible for overseeing credit unions or caisses populaires (see here for a full list of oversight bodies, including those for Canada’s three territories):
- British Columbia: BC Financial Services Authority (BCFSA)
- Alberta: Alberta Treasury Board and Finance
- Saskatchewan: Financial and Consumer Affairs Authority (FCAA)
- Manitoba: Financial Institutions Regulation Branch (FIRB)
- Ontario: Financial Services Regulatory Authority (FSRA)
- Quebec: Autorité des marchés financiers (AMF)
- New Brunswick: Financial and Consumer Services Commission (FCNB)
- Nova Scotia: Nova Scotia Securities Commission
- Prince Edward Island: Office of the Superintendent of Credit Unions
- Newfoundland and Labrador: Regulatory Affairs Branch
As of December 2022, there were 420 credit unions and caisses populaires in the Canadian credit union system, according to the Canadian Credit Union Association. This includes 207 credit unions with 1,669 locations and over 6 million members, and 213 Dejardins caisses populaires with 530 locations and nearly 5 million members.
Together, the credit union system in Canada includes over 10 million members.
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