Building societies are mutuals – they are owned by their members, each of whom has one vote regardless of how much money they put into the society. They were originally designed to help their members to buy houses (hence the name), although they now make loans for a much wider range of purposes. Several of the larger building societies also offer current accounts.
Building societies began in Britain in the nineteenth century. There were 60,000 in the UK by 1900, with most towns having at least one local building society (many still retain regional names). However, a lot of them merged in the twentieth century and following a change in the law in 1986, several turned into banks. Therefore, some of the companies traditionally thought of as building societies – such as Alliance and Leicester – are in fact banks. By 2008, there were only 59 building societies in the UK, although a few had become very large.
How do they work?
- Building societies are owned by their customers, meaning there are no external shareholders to please. Profits can either go to the members (customers) or be reinvested in the business.
- Like banks, building societies pay interest on deposits and charge (usually higher) interest on loans.
- At least five building societies in the UK offer current accounts (Coventry, Cumberland, Leeds, Nationwide and Norwich & Peterborough).
- Building societies are subject to more legal regulations than banks, meaning that they are generally regarded as more stable. UK law requires that a building society obtains at least 50% of its money from depositors (higher than most banks). This means that it can obtain no more than 50% on the money markets. Short-term borrowing and lending on the money markets by banks was a key factor in the banking crisis of 2008. In addition, the law requires that 75% of building society lending must be secured against residential property.
- Whereas many retail banks are linked to investment banks, building societies have no investment wings. This means that some of the ethical questions (as well as questions over stability) that are associated with investment banking do not arise.
- While some see buildings societies as an ethical alternative to banks, others raise ethical objections to them, or at least to some of them. They share responsibility with banks for inflating the housing market by giving so many loans to home buyers. This was one of the causes of the crash of 2008. In addition, research by Ethical Consumer magazine found that a number of building societies own subsidiaries in tax havens.