Difference Between Cooperative & Private Sector Banks

Digital Vision./Digital Vision/Getty Images

A bank is a financial institution that deal with other people's money, accepting deposits from customers that are payable on demand, acting as custodians of the money as well as providing loans. However, banks can be run in different ways, with cooperative banks -- known as credit unions in the U.S. -- and private sector banks two of the most common structures around the world.

A bank is a financial institution that deal with other people's money, accepting deposits from customers that are payable on demand, acting as custodians of the money as well as providing loans. However, banks can be run in different ways, with cooperative banks -- known as credit unions in the U.S. -- and private sector banks two of the most common structures around the world.

Definition

A cooperative bank is a financial institution that is run by its members. These members are at once both the owners and the customers of the bank, by virtue of holding shares in the bank and/or having deposits with them. Cooperative banks are based on the principles of the first labor cooperatives that saw people in the same trade, with the same goals, banding together to protect their common interests.

Private sector banks -- also known as commercial or stockholder banks – are run by a private individual or group for the purposes of making a profit for the owners and the shareholders.

Services

The two types of bank differ in the scope of the services they offer. Cooperative banks typically lend money to small businesses and individuals; commercial banks -- as they tend to have larger deposits to draw on -- will also lend to large industry and commerce. Commercial banks also offer merchant banking services such as facilitating a company floating on the stock market; cooperative banks do not. Cooperative banks tend to offer better rates of interest to savers than commercial banks. Cooperative banks have a limited scale of operation, typically contained within a state; many commercial banks operate nationwide and some have branches overseas. Commercial banks trade in foreign currencies, a practice that cooperatives do not engage in.

Organization

A cooperative bank is run on the principle that every member’s vote matters. While a management team may be appointed to make decisions regarding the day-to-day operation of the bank, any major decisions are made by use of a ballot among members. This voting system is employed to elect the board of directors, who then appoint general managers. In a private sector bank the board members make all the decisions independently of the shareholders and customers.

Aim

Because the people who own a cooperative bank are the customers of that bank, the focus of the institution is on meeting the needs of the customers. The primary goal is to offer the customers the best services and products possible. In a private sector bank, the primary focus is profit.

Values

Cooperative banks take a community-led approach to banking; another feature linked to their antecedents, cooperative labor movements. They are involved in the development of local communities and seek to expand the availability of banking services to people who may have been deprived of them. As such, they are much more prevalent than private sector banks in rural areas and low-income urban districts. Private sector banks value the autonomy of enterprise above all else, and concentrate their activities in the areas in which capital gains are likely to be highest, typically the centers of major conurbations.

References

About the Author

Dirk Huds has been a writer/editor for over six years. He has worked for bookshops and publishers in an editorial capacity and written book reviews for a variety of publications. He is currently studying for his master's degree.

Photo Credits

  • Digital Vision./Digital Vision/Getty Images