Optimal Interest Rates in Cooperative Banks with Non-member Customers

Previous attempts to understand the functioning of cooperative banks have often considered them as being similar to credit unions. However, we argue that credit unions are only a subset of cooperative financial institutions and the models used to describe their behavior cannot be generalized to all cooperative banks. Additionally, there is an important factor that characterizes cooperative banks’ behavior and outcomes, which does not apply to credit unions: the role of nonmembers and their contribution to the members’ overall welfare through bank deposits and interest earnings. In this paper, we move from the Smith et al. (1981) model developed to describe credit unions’ pricing policy on interest rates and we propose a more general model by incorporating nonmember depositors and borrowers, who play a key role in determining cooperative banks’ interest rates.