Building Society Profitability

  • Leigh Drake

Abstract

Traditionally, maximising profitability has not been the dominant objective for building societies for a number of reasons. Firstly, as mutual institutions they have not been under the immediate pressure to adopt profitability as a central objective as in principle they have sought to balance the interests of all their customers. A second reason why profitability has been less of a central consideration with building societies compared with other sectors in the financial system is that because of their mutual status and regulation, building societies have not raised external capital on the capital market in competition with others. They have, therefore, not been required to perform according to the criteria applied by the suppliers of equity capital. Finally, the combination of mutuality, an effective cartel, a cohesive industry, and the absence for decades of an effective competitor in the mortgage market, meant that building societies collectively and individually had a degree of discretion over their objectives. They chose not to be avowedly profit maximising and any target with respect to surplus (profit) was set with a view to satisfying prudential capital requirements and as a by-product of growth objectives. While building societies collectively, through the operation of the Recommended Rate System, attempted to protect the interests of their borrower and investor members, individual building societies tended to use asset growth as a criterion for assessing their performance.*

Keywords

Income Expense Conglomerate Glean 

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Copyright information

© Leigh Drake 1989

Authors and Affiliations

  • Leigh Drake
    • 1
  1. 1.Banking CentreLoughborough University of TechnologyUK

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