Why are credit unions so risky

Cooperative shares: good returns with low risk

In rural areas it is “good form”, but it is also interesting in terms of returns: participation in a cooperative bank. However, such investments are designed for the long term and are not risk-free.

The idea of ​​a cooperative dates back to the middle of the 19th century, when farmers, craftsmen and small businesses came together to form self-help institutions. With the introduction of the cooperative law in May 1889, the first Raiffeisenbank developed under Friedrich Wilhelm Raiffeisen, and the first Volksbank was created under Hermann Schulze-Delitzsch.

Self-help, self-responsibility and self-administration - Friedrich Wilhelm Raiffeisen is one of the founders of the cooperative movement and is the namesake of the Raiffeisen organization. Photo: dpa

Today these institutes operate jointly - and in many cases jointly - as universal banks in the cooperative financial network. There are also nationally active, professional cooperative banks, such as the Deutsche Apotheker- und Ärztebank (Apobank) and the Sparda banks, which have seen a particularly strong influx of members in recent years. The numbers are impressive. At the end of 2010 there were 1,138 cooperative banks in Germany serving around 30 million customers in more than 13,500 branches. Almost 17 million members are currently registered in the cooperative registers. With around 100,000 members and 360,000 customers and total assets of almost 40 billion euros, Apobank is the largest cooperative primary bank today.

Good for your image

However, while membership of the Sparda banks, established in 1896 as "Eisenbahn-Spar- und Kreditkassen", is compulsory for business relationships, all customers in the Volks- and Raiffeisenbanken area are no longer required to participate. In rural areas in particular, however, it is quite common for many customers to also be shareholders in the local bank. Membership for entrepreneurs and the self-employed is also a matter of course for image reasons. However, you cannot participate in every Volksbank or Raiffeisenbank. Regional restrictions are often provided, for example on the catchment area of ​​the respective institute, while Apobank focuses on the medical professions. In any case, it is assumed that not only shares will be acquired, but a customer relationship will also be entered into.

Cooperative shares have a nominal value between 50 and 2,000 euros (Apobank: 1,500 euros), and in many cases partial payments are also permitted. There is just as little stock exchange trading as there is a secondary market, that is, shares are issued by the respective cooperative at face value and also taken back again. A price risk, such as with stocks, is therefore ruled out. In order to avoid foreign infiltration or undesirable influence, however, the number of cooperative shares per investor is usually limited.

Everyone has a voice

There are many benefits associated with membership. The shareholders of a cooperative bank have a say in the general meeting. You can therefore determine the fortunes of “your” bank and also decide on the distribution and the composition of the supervisory board. Co-determination is only restricted at larger banks because representatives are elected for the meeting. In addition, the rule at the cooperative banks is that each member has one vote. The number of shares is therefore irrelevant.

Some cooperative banks also offer their members preferential conditions, for example when taking out a loan or taking out insurance. Often, at the end of a financial year, reimbursements are also paid, which are based on the use of services of the institute or are based on the interest income of the institute. These reimbursements are often automatically reinvested in long-term profit participation rights, so they are only paid out on request.

One of the most important advantages, however, is the dividend paid out. Most cooperative banks today pay between four and 6.5 percent dividends, an average of 5.45 percent was recently transferred. In addition, the comrades often also receive a “dividend in kind”: At the general meeting - which has a special socio-political significance in smaller places - the participants receive a more or less opulent meal.

However, it should be remembered that a cooperative share ultimately represents a company participation. So there is no guarantee of dividend payment. If the company does not do well, the dividend can be reduced or even canceled altogether. The Berliner Volksbank, for example, has proven that this is the big exception, as it still paid a 2.5 percent dividend in 1999 despite high losses. For image reasons alone, the protection scheme of the cooperative banks decided to cover the payment as well as the loss of the institution, so that no customer was harmed. Such services are based solely on goodwill. At many institutions, investors are legally liable not only with their deposit if “their” bank is in trouble, but must - at least in theory - even meet an obligation to make additional contributions. This can range up to three times the nominal value of the share.

Delayed repayment

Selling shares is more difficult than joining a credit union. The shares can be terminated at any time, but will only become effective at the end of the financial year. In addition, the credit will only be paid out after the next Annual General Meeting, so that in individual cases more than 18 months can pass before repayment. When a comrade dies, membership passes to the heirs and ends at the end of the financial year in which the inheritance occurred. Only the original credit balance is paid out, not a possibly higher proportion of the bank's current equity.

When participating in a cooperative bank, the investment character will only play a subordinate role. The dividend in the form of the distribution and the meal is attractive in most cases, but the limitation of the number of shares, but also the obligation to make additional contributions and the difficult sales opportunities do not allow extensive asset management. On the other hand, the participation is quite interesting for image reasons. It also enables a look "behind the scenes" of the banking system. Peter Jobst