When people think about banking, they usually think about commercial banks. Mutual banks rarely come to mind, even though they offer decent investment opportunities.
Since mutual banks are often overlooked, we decided to find out how they differ from commercial banks, and why you should invest in them.
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According to the Banking Association of South Africa (BASA), a mutual bank is owned by its depositors. It’s set up specifically to operate for the benefit of those depositors. Mutual banks were designed to uplift poor- and working-class citizens.
According to the Finbond website, mutual banks aim to encourage people to save by creating a safe place to deposit money, offering benefits such as interest on deposits and dividends on mutual bank shares, and enabling conservative investment for the purpose of generating profit.
On the other hand, explains Sindiswa Makhubalo, head of banks and payment providers at the Financial Services Conduct Authority, a commercial bank is a public company registered as a bank in terms of the Banks Act. It’s owned by shareholders who are not necessarily depositors or customers of the bank.
BASA adds, “Commercial banks tend to be subject to greater regulation and controls, and have a more comprehensive offering of products and services.”
Besides the liquidated VBS Mutual Bank, we have three mutual banks in South Africa – GBS Mutual Bank, Bank Zero, and Finbond Mutual Bank.
Why should you invest in a mutual bank?
A mutual bank offers its members a safe alternative to traditional banking at a reduced cost, notes Makhubalo.
When you deposit funds in a mutual bank, you’re buying an ownership stake. An example would be one share received for every R1,000 you invest. You're also entitled to vote at the shareholders’ meeting, and appoint directors.
Mutual banks invest conservatively, which means that these banks are able to avoid the risk, for example, of market volatility - unlike commercial banks.
You’re more likely to receive decent customer service because employees know they’re serving the owner. The smaller company size also potentially means you’ll receive individualised 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.
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