Building Societies: Definition, Example, and FAQs
Building societies are a type of financial institution that are owned by their members, rather than by external shareholders. This structure means they operate as a mutual organization, with profits typically reinvested into the business to benefit members through competitive interest rates on savings accounts and mortgages. Their primary purpose is to help members save money and buy homes through lending.
History and Origin
The concept of building societies traces its roots back to 18th-century Britain. The first known building society, Ketley's Building Society, was established in Birmingham in 1775 by Richard Ketley. These early societies were "terminating" organizations, meaning they were set up for a specific group of members to pool their resources, build homes, and then dissolve once all members were housed.5 As the Industrial Revolution progressed, the movement expanded, and societies began accepting deposits from individuals who did not necessarily intend to build a house, leading to the emergence of "permanent" building societies. Legislation, such as the Building Societies Act 1874, provided a formal framework, allowing the sector to grow significantly, with hundreds of societies operating across the UK by the early 20th century.4
Key Takeaways
- Building societies are financial institutions owned by their members, operating on a mutual basis.
- Their core business involves taking member deposits and providing mortgages.
- Unlike banks, they do not have external shareholders to pay dividends to.
- Profits are typically reinvested to offer better rates or services to members.
- They play a significant role in the housing and savings accounts markets in certain countries.
Interpreting Building Societies
Understanding building societies primarily involves recognizing their distinct ownership structure. As a cooperative, a building society's focus is on member benefit rather than maximizing profit for external investors. This often translates into more favorable rates for savers and borrowers compared to traditional, publicly traded banks. When evaluating a building society, one might consider its financial strength and its commitment to its mutual principles.
Hypothetical Example
Consider Sarah, who is looking to buy her first home. She has saved a down payment and is now researching mortgage options. She visits "Mutual Home Building Society." Instead of simply being a customer, Sarah becomes a member when she opens a savings account or takes out a mortgage. This membership often grants her voting rights on significant society decisions, such as the election of directors or proposed rule changes, which is different from a typical retail banking experience. Mutual Home Building Society reinvests its surpluses, allowing it to offer Sarah a slightly lower interest rate on her mortgage than some conventional banks.
Practical Applications
Building societies are central to the provision of financial services, especially in the housing and personal savings sectors. They operate alongside commercial banks, offering a range of products including savings accounts, mortgages, and sometimes other services like current accounts or insurance. In the UK, building societies significantly contribute to the mortgage market; for instance, they accounted for a substantial 89% of all UK mortgage market growth between January and September 2024.3 Their mutual structure means they are often perceived as having a strong community focus and a long-term commitment to their members' financial well-being. They are subject to stringent regulation to ensure their financial stability and protect customer deposits, with bodies like the Prudential Regulation Authority (PRA) overseeing their operations in the UK.2
Limitations and Criticisms
While building societies offer unique benefits due to their mutual structure, they are not without limitations. Their ability to raise capital can be more constrained than publicly listed banks, as they cannot issue new shares to investors. This can limit their capacity for expansion or acquisition. A significant period of criticism arose during the wave of "demutualizations" in the 1980s and 1990s, when many large building societies converted into banks. This move often involved cash payouts or shares to members, but many of the institutions that demutualized, such as Northern Rock and Bradford & Bingley, later faced significant financial difficulties or collapsed.1 Critics argued that the pursuit of shareholder profit, inherent in the bank model, superseded the member-focused ethos of the mutual. While not a criticism of the mutual model itself, the pressure to conform to broader financial market dynamics and the complexities of regulation can present ongoing challenges.
Building Societies vs. Credit Unions
The terms "building society" and "credit unions" are often confused, as both are member-owned financial institutions. The primary distinction lies in their typical scope and focus. Building societies traditionally concentrate on providing mortgages and savings accounts to the general public within a specific geographic or national area. Credit unions, on the other hand, are typically formed around a common bond, such as employment within a particular company, residence in a specific community, or membership in a professional association. Their services tend to be broader, often including small loans, current accounts, and basic financial services for their defined membership.
FAQs
What is the main difference between a building society and a bank?
The main difference is ownership. A building society is a mutual organization owned by its members (savers and borrowers), while a bank is typically a public limited company owned by its shareholders.
How do building societies benefit their members?
Building societies often benefit members by offering more competitive interest rates on savings accounts and mortgages, as they do not have external shareholders to pay dividends to. Profits are typically reinvested to serve members better.
Are building societies safe for my money?
Yes, in many jurisdictions, including the UK, deposits with building societies are protected by government-backed compensation schemes, similar to those for banks. This provides a level of security for members' deposits.
Can anyone become a member of a building society?
Generally, yes. Becoming a member typically involves opening a savings account or taking out a mortgage with the society. Unlike credit unions, they usually do not require a specific common bond.