Many people have heard about mutual societies, but the big questions remain to be, what a mutual society is and how are their services different from other financial institutions?
A mutual society is an organization that works on the principle of mutuality (duh). Its existence is based on the purpose of raising funds through its membership. The funds are then utilized to provide common services to all registered members of the society. Unlike large financial organizations like banks that enjoy economies of scale just by virtue of having more customers and less operational costs, mutual society is run by members through registration fees. Therefore, benefits them through its services. These societies are usually founded by groups of people who wish to share their resources and rewarded for that.
Mutual society can be run like a bank or insurance company. They can be formed by people from all walks of life who wish to enjoy tax efficient advantages of a mutual and deliver a cost-considerate, low entry investments, insurance, assurance, and investment products through a partnership operating and direct marketing. Nevertheless, mutual societies have an upper hand over the banks since:
• (Key point!) The building societies invest back its profits to the businesses owned by the society. This is in contrast with banks that are supposed to pay dividends to their shareholders at the end of each financial term. This feature gives a mutual society advantage over banks when it comes to offering competitive rates of interests on both savings and mortgages. The society set the rates to be used in rewarding those who have saved with it at just the rate that was charged to borrowers. Such a margin boosts the chances of societies running on profit.
• (Let’s forget about the recent scandal but…) When you think of a mutual society, what should come to your mind are organizations that are more approachable, more personal, and more trustworthy far much than banks. There is more saver and borrower satisfaction far much higher than the case with banks. The customer services are also of high quality compared to banks.
• People who are seeking to borrow from financial institutions rely on advice given by these institutions about mortgages or other financial services. Unlike in mutual societies, many banks have replaced personal counters services with call centers and closed local branches. This denies borrowers the chance to be advised how to utilize the borrowed money. This has led to some customers loosing properties they used as collaterals to borrow the money, which is not the case in mutual societies.
Despite these differences, most mutual societies operate and offer services that are similar or competing against those offered by commercial banks. They may offer competitive interest rates and fee tariffs on deposit accounts, loans, and savings just like the banks.
A lot of the information in the post came from Scottish Friendly – you can find them here on twitter https://twitter.com/scotfriendly here.
Anyway upon mutual agreement of the members, a mutual society can be converted to a non-mutual organization. This process of demutualization may convert the organization into a full public company or partial mutual holding society.
A mutual society gives the member the ultimate power to claim ownership of the organization and thus running it for the sake of the benefitting from it. This is the unique characteristic that defines mutual society when compared with other companies, businesses or bank. They do not have external shareholder thus exist for the sake of benefitting its members through its running services.
