Building Societies: Offering Attractive Interest Rates On Savings And Cheaper Mortgages

The origin of Building societies:

The origin of Building societies:

Building societies are financial institutions that specialize in the provision of banking services such as savings accounts and other related services, particularly mortgage lending. The first institutions were established when several people came together in order to co-operate towards the construction of their own houses. A completed house was allocated through lottery to a member. Regular contributions were made to the society until each member became the successful owner of a house. With time, these institutions began borrowing money from investors to facilitate the construction of houses more quickly. About a hundred years ago, the majority of building societies in UK shifted their focus from the building of houses to the provision of capital for the construction of houses.

The legal provisions governing Building societies:

The British banking laws in the 1980s were changed to permit building societies to provide banking services similar to normal banks. In 1986, another Act was passed with the objective of allowing building societies to compete with banks effectively. There were about 59 building societies in UK with an estimated total asset base exceeding 360 billion, by the beginning of 2008. Nevertheless, financial challenges during the period 2007- 2010 saw several mergers, which resulted in the number coming down to 47. Building societies in UK compete actively with banks, particularly for deposits and mortgage lending.

Building societies are mutual institutions owned by its members (savers and borrowers) to benefit the members. Consequently, the majority of persons with savings accounts or mortgage in these institutions are members with specified rights including voting, receiving information, attending and speaking at meetings.

Differences between banks and building societies:

The main difference between a bank and building societies is ownership. Banks are companies owned by shareholders, which make maximization of shareholders wealth the main objective of the bank. On the other hand, building societies are not under pressure to maximize the wealth of external shareholders. This goes a long way in enabling them to operate on lower costs besides offering more attractive interest rates on savings and cheaper mortgages.

The Building Societies Association (BSA):

Building societies associations key role is to represent members interest to external bodies including government, regulators and departments. Becoming a member of the BSA offers numerous benefits including recognition, networking and knowledge. The BSA of UK includes a savings bank, mutual insurance companies, representatives of cooperative sector, firms of solicitors, audit & accounting firms and suppliers of business services to the BSA members.

by: Martin Crowe

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