Building Societies: What They Are, How They Work, and Real-Life Examples
AB
Summary:
Building societies are unique financial institutions that provide a wide range of services, focusing on savings and mortgages. Unlike banks, they are entirely owned by their members and are common in the UK, Ireland, Australia, and other countries. This article delves into the history, structure, and key differences between building societies and banks, offering valuable insights into this financial model.
What is a building society?
A building society is a unique financial institution that plays a crucial role in several countries, including the UK, Ireland, Australia, New Zealand, and various other Commonwealth nations. Much like credit unions in the United States, building societies are distinct in that they are entirely owned by their members rather than shareholders. They offer a range of financial services, including mortgages, deposit accounts, and are often supported by insurance companies.
Understanding building societies
Building societies serve as essential financial institutions in countries where they operate. Their primary offerings encompass deposit accounts, loans, and mortgages, with a strong focus on savings and mortgage lending. Mortgages, in particular, are a cornerstone of their services, providing individuals and businesses with the means to make substantial real estate purchases without the need to pay the entire upfront amount. Borrowers gradually repay the loan along with interest over several years until they own the property outright.
What sets building societies apart from traditional banks is their ownership structure. While banks are typically publicly traded entities, accountable to shareholders, building societies are entirely owned by their members. Each member has a say in the society’s operations, creating a democratic and community-oriented financial model. These members often come from backgrounds in construction trades, real estate, or cooperative housing.
The Building Societies Association, founded in 1869, represents the interests of building societies in the UK. This association serves as a collective voice for all 43 building societies in the UK, in addition to the seven credit unions operating in the country. Collectively, these financial institutions cater to the needs of over 26 million customers in the UK.
Special considerations
It’s important to note that British building societies face specific regulations. One notable restriction is that they are not allowed to raise more than 50% of their funds from wholesale markets. In contrast, banks have a more diverse range of funding sources, from open markets to bond issuances and investments in commercial markets. This diversity gives banks certain advantages over building societies.
However, it’s worth mentioning that some building societies made investment decisions similar to those of banks in the lead-up to the financial crisis and had to deal with financial challenges. Several notable examples include Barnsley Building Society, which was acquired by Yorkshire Building Society in 2008, Derbyshire Building Society, acquired by Nationwide Building Society in 2008, and Dunfermline Building Society, acquired by Nationwide Building Society in 2009.
History of building societies
While building societies may seem like a modern concept, their history dates back several centuries. The earliest forms were known as “terminating societies” because they were initially established for temporary purposes. These societies were designed to help members find and own housing, addressing the housing needs of their communities.
The first known terminating society, Richard Ketley’s, was formed in Birmingham in 1775. By 1825, more than 250 such societies were in operation across the UK. In 1845, the Metropolitan Equitable emerged as the first permanent building society, solidifying the foundation for this unique financial model.
The Building Societies Protection Association was established in London in 1869 to safeguard the interests of these societies. By 1910, there were 1,723 building societies operating in the UK. The Building Societies Act, passed into law in 1986, provided societies with the legal authority to offer housing and banking services to their members.
Building societies vs. credit unions
One of the distinguishing features of building societies is their ownership structure, which is akin to that of American credit unions. In the UK, the 43 building societies and seven credit unions are entirely owned by their members. This shared ownership model is a key aspect of their identity.
Credit unions, on the other hand, can vary in size, ranging from small, volunteer-only operations to larger entities established by corporations, organizations, and other groups for their employees and members. While credit unions may differ in scale, they share a fundamental business model. Members pool their money by purchasing shares in the cooperative, enabling them to access loans, demand deposit accounts, and various other financial products and services.
Profits generated by credit unions typically go towards funding community projects and services that benefit their members and the broader community. However, credit unions may have limitations when it comes to in-person transactions due to having fewer physical locations compared to major banks. While most credit unions offer online banking and auto-bill pay, the convenience level may not match that of large banks like TD Bank, a prominent institution in Canada.
Examples of building societies
Building societies operate in a competitive landscape, similar to other financial institutions. They vie for customers based on factors like interest rates and withdrawal limits. In the UK, Nationwide stands out as the largest building society, with £272.35 billion in group assets as of the end of the 2022 fiscal year. The top five building societies also include Coventry, Yorkship, Skipton, and Leeds.
How many building societies are in the UK?
The United Kingdom boasts a total of 43 distinct building societies. These financial institutions are represented by the Building Societies Association, which also serves as the voice for seven national credit unions. Together, these organizations cater to approximately 26 million members, highlighting the significant presence of building societies in the UK’s financial landscape.
What makes building societies different from banks?
Building societies differentiate themselves from traditional banks in several key ways. Unlike banks, they are not publicly traded entities, and, as such, they are not accountable to shareholders. Instead, building societies are owned by their members, with each member having a say in the society’s decision-making processes. This democratic structure promotes community-oriented financial services. Despite this unique ownership model, building societies provide a broad spectrum of financial services, including deposit accounts, loans, and mortgages.
What is the world’s largest building society?
Nationwide holds the title of the world’s largest building society, and it’s a prominent figure in the United Kingdom. As of the end of the 2022 fiscal year, Nationwide reported £269.07 billion in society assets, underscoring its significant presence in the building society sector.
The bottom line
While traditional banks are the first choice for many individuals when seeking financial services, building societies offer an appealing alternative. These member-owned financial institutions have a rich history of providing deposit accounts, home loans, and other financial products. They operate in a manner reminiscent of credit unions, which are more common in the United States. This unique financial model brings together community-oriented ownership and a comprehensive suite of financial services, making building societies a noteworthy player in the financial industry.
Frequently asked questions
How do building societies differ from traditional banks?
Building societies differ from banks in their ownership structure. While banks are publicly traded and accountable to shareholders, building societies are entirely owned by their members. Each member has a say in the society’s operations, fostering a community-oriented approach to financial services.
Are building societies limited to the United Kingdom?
No, building societies are not limited to the United Kingdom. While the UK is a prominent hub for building societies, they can also be found in other countries, including Ireland, Australia, New Zealand, and various Commonwealth nations.
What is the history of building societies?
The history of building societies dates back several centuries. The earliest forms, known as terminating societies, were established to assist members in finding and owning housing. The first known society, Richard Ketley’s, was formed in 1775 in Birmingham. By 1825, more than 250 such societies operated across the UK.
Can anyone become a member of a building society?
Membership eligibility for building societies can vary, but members are often individuals involved in construction trades, real estate, or cooperative housing. Specific eligibility requirements may differ from one society to another.
What is the significance of the building societies association?
The Building Societies Association, established in 1869, serves as a representative body for all building societies in the United Kingdom. It advocates for the interests of building societies and ensures their voice is heard in the financial industry.
Key takeaways
- Building societies are unique financial institutions owned entirely by their members, providing services similar to traditional banks.
- They focus on savings and mortgage lending, helping individuals and businesses make real estate purchases over time.
- Building societies have a democratic ownership structure, with each member having a say in the institution’s operations.
- These institutions have a rich history, dating back several centuries, and can be found in various countries worldwide.
- Building societies face limitations in in-person transactions but offer an appealing alternative for community-oriented financial services.
Share this post: