Why mutual building societies matter

Andrena Ramsamugh McMayo, Guest Writer

Mutuals are member organisations. Membership is derived through customer relationships, such as the ownership of an account or mortgage.

In Jamaica, mutuals within the financial-services landscape include some building societies, credit unions and insurance companies.

Since mutuals have no external shareholders to pay dividends, they do not usually seek to maximise and make large profits, but rather to return value to their members who are the owners of the institutions. The PA Consulting Group, in an international study in 2003, found that: "Profitability of the banking sector is inversely proportional to the market share of mutuals within the banking sector".

This was not only due to mutuals taking fewer profits themselves but also because they create competitive pressure on commercial banks to cut excess profits.

The mutual building society model originated in the United Kingdom in the 18th century, at which time most of the original building societies were 'terminating', that is, the organisation dissolved when all members acquired houses.

In the 1830s, 'permanent' building societies emerged so that the provision of homes could be extended to more than a few members.

Presently, only two member-owned building societies remain in Jamaica, Victoria Mutual and Jamaica National, which together account for market share of approximately 88 per cent of industry assets, providing competitive balance. The other two building societies are owned by commercial banking groups.

For a building society, value is returned not only through better rates on mortgages, but higher rates on savings and lower transaction fees - a novelty in these times when banking fees are at unprecedented levels and interest rates are at 30-year lows.

Jamaica's mutual building societies now provide a complete range of financial services to members, whether on their own or through subsidiaries, such as savings, investments, wealth management, stockbroking, general insurance and money-transfer services.

Mutuals generally tend to be more inclusive in their approach, that is, their products and services often find favour even with lower-income households. High-rate savings products, for example, are likely to have lower minimum balance requirements than stockholder-organised financial institutions.

Nevertheless, mutual organisations face a number of challenges, the most critical one being that it is more difficult for member-owned companies to access the equity markets to raise capital.

Unlike the United Kingdom and Australia, mutual building societies in Jamaica face restrictions on the provision of certain products such as credit cards and chequing accounts.

Andrena Ramsamugh McMayo is the treasurer at Victoria Mutual Building Society.