Chronicle of the Middle East and North Africa

Arab Financial Cooperatives: Great Opportunities Lost

The absence of Arab financial cooperatives is mostly the result of the legal framework governing savings and credit operations.

Arab Financial Cooperatives
Egyptian farmers harvest wheat in Bamha village near al-Ayyat town in Giza province. Khaled DESOUKI / AFP

Ali Noureddine

This article was translated from Arabic to English

Financial cooperatives play a significant role in the majority of European and North American countries, offering deposit and loan services, and effectively competing with major commercial banks.

In the United States, for instance, over 5,000 financial cooperatives, known as “credit unions,” serve more than 127 million members. In countries like France and the Netherlands, financial cooperatives control a significant portion of the market’s deposits – 45 percent and 40 percent, respectively.
Across Europe, a total of 3,874 financial cooperatives cater to more than 181 million members.

In essence, the financial landscape and savings institutions in Western countries are characterized by traditional investment and commercial banks operating as joint-stock companies, juxtaposed with financial cooperatives operating under the principles of the solidarity economy.

Each type of these savings institutions offers distinct advantages in terms of risks and returns, allowing savers to choose based on their preferences. The growth of financial cooperatives has been a result of a lengthy developmental journey in financial markets and regulatory laws, enabling these institutions to expand securely and in compliance with the law.

In contrast, the Arab region presents a different scenario in which it is mainly commercial banks that dominate savings and credit activities, with minimal exceptions operating outside the formal financial system. Monetary and financial laws have sanctioned this monopoly, implementing administrative and technical controls, and impeding the emergence of substantial markets for financial cooperatives.

It’s worth noting that this reality doesn’t diminish the existence of an active cooperative movement within agriculture, industry and the handicraft sectors in Arab countries. Workers in these fields benefit from cooperative memberships, acquiring access to vital services for their productive activities.

Throughout the Arab countries, a robust cooperative movement has thrived, dating back to the early 20th century in countries such as Lebanon, Syria, Egypt, Tunisia and Jordan, among others. However, unlike Western countries, this cooperative activity has not extended to include the financial services sector, resulting in the absence of financial cooperatives in the cooperative landscape of the Arab region.

The main challenge today lies in this absence of financial cooperatives, depriving Arab nations of numerous opportunities that could have otherwise been facilitated through these cooperatives. This void is especially notable in economic growth and social solidarity, and addressing economic issues in countries like Lebanon, Egypt and Tunisia could have been mitigated and remedied through an active and effective financial cooperative sector.

The difference between financial cooperatives and traditional banks

As is commonly known, commercial banks operate under the joint stock company model, wherein administrative decisions are controlled by shareholders. These shareholders elect the board of directors and approve annual budgets. Additionally, shareholders receive annual profit shares, distributed after accounting for operational costs and retained earnings. The primary source of financing stems from deposit holders, who receive a fixed and guaranteed share of interest. The commercial bank serves as an intermediary between savers and borrowers.

Advocates of the financial cooperative model contend that the commercial banking model has significant drawbacks. In this model, depositors lack influence in choosing the board of directors, determining work strategies, or the types of risks the bank will assume, despite being the primary source of financing.

Conversely, decisions in commercial banks are dominated by shareholders, who contribute a relatively small portion of the financing. This group is vested in increasing the bank’s profits to enhance returns, even if it means burdening the bank with additional investment risks or imposing more commissions on customers.

In fact, some attribute this loophole to major banking crises, like those experienced by Cyprus, Iceland and Lebanon. In these crises, bank owners hastily shifted risks onto depositors to achieve gains and profits for their benefit as shareholders. Consequently, depositors bore a significant portion of the losses, despite not actively participating in supervising investment and commercial bank activities or determining financial plans.

On the other hand, financial cooperatives do not differentiate between the source of funding, namely savers, and the institution’s owners. The actual owners of the institution are the deposit holders. Thus, similar to cooperatives in other sectors, depositors are considered members of financial cooperatives, granting them the right to vote and participate in decision-making and oversight.

This approach naturally leads the institution and its board of directors to prioritize reducing risks surrounding savers’ funds and minimizing the commissions they bear, as opposed to seeking profit and increasing risks for the benefit of shareholders, as observed in some commercial banks. Therefore, many describe the cooperative model as a tool of the participatory economy or the democratic economy.

For all these reasons, studies indicate that financial cooperatives are less exposed to the risks of major economic crises, such as the 2007 crisis and recent challenges faced by some Western banks. The commitment of financial cooperatives to reduce investment risks as a primary objective, rather than solely pursuing profits for shareholders, makes them more resilient to sudden and unexpected financial shocks.

Studies also demonstrate that financial cooperatives, on average, charge lower commissions to savers (i.e., members in this case) compared to those levied by commercial banks.

The absence of financial cooperatives in the Arab region

The absence of financial cooperatives in the Arab region can be attributed to various factors, with the legal framework governing savings and credit operations being paramount among them.

For instance, in Lebanon, the Money and Credit Law explicitly prohibits the acceptance of deposits from the public except by entities licensed as commercial banks. Moreover, the law restricts bank licensing to a joint-stock company model, effectively making it impractical to establish a financial cooperative that can compete with commercial banks in terms of savings and loan services.

Similarly, in Syria, the law mandates the formation of banks as joint-stock companies involving the public and private sectors, or wholly owned by the private sector. While agricultural cooperatives can secure necessary funding through loans from the Agricultural Cooperative Bank, a public institution owned by the state, they lack the legal provision to establish independent financial cooperatives owned by their members. This legal framework adequately facilitates financing for agricultural cooperatives but inhibits the emergence of a cooperative financial sector.

In 2022, the United Arab Emirates approved a modern cooperative law, expanding the horizons for cooperatives by allowing them to venture into new sectors like media platforms, digital products, and public services. Additionally, the law allowed cooperatives to be listed on financial markets, granting them access to financial services available in these markets. Despite these advancements, the law did not stipulate conditions that would foster the formation of financial cooperatives capable of competing with banks in providing savings and credit services.

As such, regulatory hindrances and deliberate administrative procedures hinder the proliferation of financial cooperative initiatives in the Arab region, despite the active cooperative movement prevalent in various sectors. The primary reason for imposing such restrictions stems from the perspectives of Arab regimes and governments regarding cooperatives, limiting their role to service provision in specific productive sectors, rather than recognizing them as a form of participatory and solidarity-driven economic activity capable of evolving to compete with traditional financial institutions.

At the same time, the vested interests of major commercial banks, wielding substantial influence over political decision-making centers in most Arab countries, do not align with the growth of cooperative endeavors aimed at competing for deposits and loans. This has resulted in a delay in the development of laws governing the financial sector and opening the door for the establishment of financial cooperatives capable of offering diverse financial products, mirroring the progress seen in Western countries.

Missed opportunities

It’s evident that the absence of financial cooperatives in Arab countries is impeding numerous vital opportunities.

Take Lebanon, for instance – financial cooperatives could have helped bridge the void left by the collapse of the traditional banking system, offering essential financial services. Despite the passing of nearly four years since the collapse in late 2019, the Lebanese banking sector remains unstable, underscoring the need for alternative financial mechanisms. Some argue that the presence of low-risk financial cooperatives might have mitigated the impact of the crisis on Lebanese savings, which were jeopardized by commercial banks’ involvement in high-risk endeavors.

Countries facing crises like Syria, Tunisia and Egypt could have also reaped benefits from expanded financial cooperative activity. These cooperatives could attract financial flows in hard currency, serving as a haven during turbulent times. With trust in commercial banks waning due to fears of repercussions of economic crises, channeling deposits toward financial cooperatives becomes a viable option.

At the end of the day, Arab nations should enhance their local legislation and financial systems to pave the way for broader operations of financial cooperatives. This expansion will primarily benefit local economies by stimulating growth within this sector and fostering a more inclusive and democratic financial framework. Importantly, Arab countries should adopt the well-established regulatory frameworks from Western nations, drawing upon their extensive experience in this domain to set the highest governance standards.