Banks vs. Credit Unions

Both banks and credit unions are institutions which offer financial products and services to their clients.

Banks are financial, for profit institution who are eligible to operate only after receiving governmental license in order to accept deposits. There are two types of banks: commercial banks and investment banks. The first are also called retail banks. In most countries, banks are regulated and supervised by the central bank and sometimes by the national government.

Banks have three main roles in the economy. First, accept and safely secure financial deposits, from which pay interest on. Second, they are responsible for the payment system and undisturbed money transfers. Third banks are money creators, by issuing loans to both people and companies.

Credit unions, similarly to banks, offer financial products and services to people. They are, in contrary to banks, non for profit organizations, thus the profit generation is not their ultimate goal. Credit unions are financial co-operatives set up to meet the needs of their members, with surpluses or profits returned to members and staff in the form of surplus earnings, dividends, reinvestment in the institution or rebates of partial interest paid on eligible credit products.

Credit unions are not profit oriented, thus usually offer to customers higher interest rates for deposits and lower interest rates for loans. They operate as a member-focus institutions. It means, that they are owned and operated by its members (not stockholders). Members of credit unions are all those who made an initial deposit.

Key decisions are made by a board of directors whose members are elected and accountable to the membership at the annual general meeting of the credit union. Credit unions target the clientele which are poor and less poor.

Both banks and credit unions improve access to capital, which is a necessary condition for a dynamic economic activity. They differ in terms of goals, organization and clientele.