When people think about banking, they usually think about commercial banks. Mutual banks hardly come to mind, even though they offer decent investment opportunities.
Since mutual banks are often overlooked, Justmoney decided to find out how they are different from commercial banks and why you should invest in them.
Tip: Compare savings accounts here to find the one that best suits your needs.
According to the Banking Association of South Africa (BASA), a mutual bank is owned by its depositors. It’s set up specifically to be operated for the benefit of the depositors. Mutual banks were designed to uplift the poor and the working class.
According to the Finbond website, its aim is to encourage people to save by creating a safe place to deposit money and to offer benefits, such as interest on deposits and dividends on mutual bank shares, and to invest conservatively for the purpose of generating profit.
On the other hand, a commercial bank is a public company registered as a bank in terms of the Banks Act and owned by its shareholders, who are not necessarily depositors or customers of the bank, says Sindiswa Makhubalo, head of the department for banks and payments at the Financial Services Conduct Authority.
“Commercial banks tend to be subject to greater regulation and controls and have a more comprehensive offering of products and services,” says BASA.
Mutual banks tend to have a more limited offering of products and services, with a corresponding level of regulation. Besides the recently liquidated VBS Mutual Bank, we have two mutual banks in South Africa – GBS Mutual Bank and Finbond Mutual Bank.
Why should you invest in a mutual bank?
A mutual bank is an alternative to commercial banks – taking into account business plans or activities to be undertaken by either form. Presumably this also takes into account some of the stringent legal requirements put in place for establishing a commercial bank, says Makhubalo.
The option of opening a mutual bank can also be advantageous to its members because it reduces the costs for providing services, which isn’t the case with commercial banks, she adds.
When you deposit funds in a mutual bank, you’re buying an ownership stake in the bank and you're entitled to vote at the shareholders’ meeting and appoint directors. For instance, you can receive one share for every R1,000 you invest.
Mutual banks invest conservatively which means these banks are able to avoid some risks, such as market votality, which commercial banks face.
You’ll receive decent customer service because workers know they’re serving the owner. In addition to this, mutual banks are always smaller and therefore you're more likely to receive individual attention.
Because you’re a shareholder you’ll also receive dividends if the bank is doing well. However, this depends on the types of shares you hold. Your dividends can be paid monthly, quarterly, bi-annually, or annually.
And finally, you’ll get higher interest rates on your savings and lower interest rates on loans because the profits made by the bank are invested back into the bank.
If you’re looking for more investment options, click here and find out how fund managers can help you.