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Alternative Institutional Structures

Two major aspects stand out in thinking about the role of different types of financial institutions. The first is whether these institutions are focused on what should be the key roles of the financial sector, namely providing vehicles for savings and funding investment (as well as providing a payments system), and the effectiveness of their operations. The second is the ways in which loans are allocated, to whom and under what conditions. This second aspect is particularly important as different forms of financial institutions will take different allocation of funds decisions.

Financial banking institutions cover a range of different forms—clear- ing or commercial banks, savings banks, investment banks and universal banks. Banks differ substantially in terms of their ownership structures— private, public (State), mutual and co-operative. Depending on ownership and management structures, the objectives which could be said to be pursued by banks differ. The objectives of privately owned banks would generally be that of profits—though a range of objectives may be stated (providing employment, for example), and the effective decision-makers in a bank may pursue other objectives such as growth and size (as postulated in the managerial theories of the firm). The objectives of public and mutual ownership are often more difficult to state (at least on any universal principles) but would often include the provision of finance for stated aims—e.g., to support industrial development, to provide housing finance, to facilitate savings and provide housing finance etc. As the question arises for privately owned banks and whether their managers will seek to maximize profits, so the question arises for public and mutual organizations as to whether their managers will maintain the objectives which are set for them, or whether their interests will lie elsewhere.

Ayadi et al. (2010) and others have drawn the distinction between Stakeholder Value (STV) banks and Shareholder Value (SHV) banks. They “conceptualise SHV banks as those whose primary (and almost exclusive) business focus is maximizing shareholder interests, while STV banks in general (and cooperative banks in particular) have a broader focus on the interests of a wider group of stakeholders (notably customer-members in the case of cooperative banks, the regional economy and the society in the case of savings and public banks)” (p. 7). Another way of expressing a similar idea is to draw on the notion of ‘double bottom lines’—that is for financial institutions (in this context but can be extended to others) there is the bottom line of profits—at least the requirement to earn sufficient profits to survive and grow, and the second bottom line of other objectives which can include serving the local community, providing finance for specific groups etc. There are important differences between shareholder value institutions and stakeholder institutions. Two mentioned by Ayadi et al. (2010, p. 9) are the potential intermediation margin and how value added is distributed between the stakeholders.

Block (2014) views a good way forward is the introduction of “significant competition from financial intermediaries who are not seeking to generate profits. These could take the form of credit unions, community banks, nonprofit loan funds, or banks that are owned by government entities; but the key is that their mission is defined as facilitating economic development in a particular geographical area. With this mission, they have a reason to employ loan officers who develop the skill set needed to provide credit to individuals and firms who fall outside the parameters of the standard lending algorithms” (p. 16). He advocates a “a combination of governmental supports and grassroots entrepreneurial- ism to create an expanding network of non-profit financial institutions that would redirect household savings to finance clean energy, growth of small and medium-sized enterprises, and infrastructure” (p. 3). This would be an illustration of the general idea that local and mutual financial organization would make different lending decisions as compared with the large profit making financial institutions.

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