On the Allocation of the Net Monetary Benefits of Credit Union Membership

ship are numerous, but the most important and most familiar bene? fits are dividend rates on savings in excess of those offered by other depository institutions, and loan rates below those charged by other consumer lending institutions.2 Since the primary source of credit union funds is the sale of shares to members, while the primary use of funds is loans to members, a potential conflict arises between the interest of members who are primarily savers and that of members who are primarily borrowers.3 Maintaining low loan rates may limit the credit union's ability to pay dividends, while the maintenance of high dividends may require higher loan rates. The resolution of the potential conflict between the competing interests of the two groups of credit union members is not a simple task in an unconstrained environment, and it is made more difficult by the regulatory constraints which credit union management must satisfy. Two aspects of regulation?the ceiling rate on loan interest charges and the ceiling rate on dividend payments?prevent the credit union from treating the competing groups equitably in allocating the net monetary benefits of credit union membership; the result is a pro-borrower bias. The industry convention of paying interest re? bates seems to increase the pro-borrower bias in the allocation of such benefits.