BUILDING SOCIETY 9/5/08 12:52 Page 1

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Building societies and CURRICULUM TOPICS

• Types of organisation

other types of organisation • Mutual organisations

• Stakeholders
• Sources of finance STRATEGY

Introduction GLOSSARY
Industry: a group of businesses
Building societies date back to the late eighteenth century. The first known building society was set involved in a set of similar activities.
up in 1775. This was to enable people to pool savings together and to build their own homes. Competitors: other producers
However, once they had built their houses, this particular society closed. In the 1840s, societies supplying similar goods or services.

began to accept savings from members who were not necessarily potential home owners. It was Demutualise: to convert from a
mutual organisation into a public
then that the permanent societies that we have today were formed. In 1869, the Building
limited company (plc).
Societies Association was set up to provide national representation for the industry. The Building
Windfall: the payout received by
Societies Association (BSA) is the trade association for all the UK’s building societies. It now has members when an organisation
59 members and together they have assets worth over £350 billion. demutualises. This can take the form
of a cash sum, shares in the newly
Until the 1980s, only building societies, generally, could offer loans for houses. From the created plc, or a mixture of both.

early 1980s, banks quickly became competitors. Following the passage of the Building Secured loan: if a borrower does
not repay as agreed the lender can
Societies Act 1986 societies were also free to 'demutualise' to become banks. The take the security (in the case of a
members of each building society had to agree to this change. Several building societies mortgage loan, the house) and sell
offered windfall payments to members to persuade them and some big names became it in order to repay the loan.

banks, for example, Abbey National, Halifax and Alliance & Leicester. Mortgage: a long-term loan
secured against a property.
People buy a house or flat to get a permanent home and a stake in the property market. Interest: the cost of borrowing
Buying a house is usually the most costly purchase an individual ever makes. Very few first- money or the reward for lending
money, depending on whether one
time buyers have enough cash to buy a property, so they take a long-term secured loan is the borrower or the lender.
called a mortgage. Asset: something that is of worth
to an organisation e.g. people,
A mortgage has two elements – the amount of the original loan (the capital) and the cash, financial claims on others,
interest which is charged on the loan. A repayment mortgage means that each month's machinery, buildings.

payment pays off the interest and a small part of the loan. By the end of the loan period, the Public limited companies:
companies with shares quoted
borrower will have paid off the entire loan. When an owner buys a house he or she has a (priced, bought and sold) on a
valuable asset. If the value of the house increases, this can give them a profit if they choose stock exchange.
to sell the house. Loans typically last for 25 years and are secured on the property. This Shareholders: persons owning or
means that if buyers do not keep up the regular monthly payments, the bank or building holding a share or shares of stock.
society could take the property back to sell it to pay off the debt. Mutual organisations:
Organisations with no shareowners
traditionally established by groups
There are two main providers of mortgages:
of people to provide a range of
• banks like Lloyds TSB, the Halifax or Bradford & Bingley. These are public limited services that serve the interests of
companies (plcs) and are owned by their shareholders. their members.
• building societies like Nationwide and Britannia. A building society is a distinctive business Sole trader: a business
form governed by the Building Societies Act 1986. Building societies are mutual organisation which has a single
B U I L D I N G S O C I E T I E S A S S O C I AT I O N

owner.
organisations. This means that its borrowers and savers have membership and are joint
owners of the society. The building society receives deposits from savers and then uses the
funds to make loans for its members for house purchase.

This case study outlines different types of business organisations and their purpose. It highlights
the similarities and differences between other types of business and building societies.

Types of organisation
There are several different types of organisation:
• The simplest way to start up a business is to be a sole trader. One person provides the
funds, takes the decisions and keeps any profit. The owner is also the boss and controls
the business. The main disadvantage is that the owner is also totally responsible for any
debts and has unlimited liability for these debts.

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GLOSSARY
Partnership: a business
organisation usually owned by
between 2 and 20 people.
Risks: a financial term that
describes variability associated with
investment returns.
Limited liability: responsibility
to meet a debt of an organisation
is limited to the investor’s original
investment.
Private limited company:
where shares are only available
privately.
Capital: money, buildings,
machinery, equipment and tools
used in the course of production.
Shares: equities or part
ownership in a company.
Dividends: a share of the
company’s profit paid to
shareholders.
Public Limited Company (plc):
a business whose shares can be
bought from share dealers and
resold on the Stock Exchange.
Stock Exchange: Marketplace in
which stocks are bought and sold.
Economies of scale: reductions
in average costs that stem from
operating on a large scale.
Margin: the difference between
the interest rate paid to savers and
that charged to borrowers.
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• An alternative is to form a partnership. This involves between 2 and 20 people
combining their finances and expertise. They run the business with joint powers and
responsibility. They take decisions and share profits according to the legal terms of the
partnership. The advantages are that the responsibilities are shared and more capital can
be released to invest in the business. The owners can specialise in their area of expertise,
improving the efficiency of the business.
The disadvantages are that partners can disagree on important decisions and consulting
all partners takes time. All partners have unlimited liability for debts and so selecting a
partner needs to be done carefully. Many partnerships break up because the partners
cannot agree.
If a business expands, it needs more capital. The opportunities for profit grow but so do the
risks of failure. The solution to these challenges may be to form a company. A company
enjoys privileged status in law. It exists as a legal entity that can own property and be named
in legal actions. It also enjoys the privilege of limited liability. This means that only the
company's assets are at risk to settle debts, not the individuals employed by, or the investors
in, the company.
• A private limited company (Ltd) involves a group of between 2 and 50 people
supplying capital finance and sharing in the management of the organisation. This
capital is divided into shares. These represent units of ownership units (for example £1
shares) that individuals in the company can hold. Shareholders elect directors to run the
company according to their wishes. Shareholders hold voting power in the company's
decision-making process depending on the number of shares they hold and receive profits
in the same proportion in the form of dividends.
• Some enterprises outgrow this format and need access to much wider sources of share
capital. This may mean becoming a public limited company (plc). This involves offering
shares to the general public and to financial institutions. Shareholders enjoy voting rights on
a 'one share, one vote' basis, so larger shareholders have more power. The directors employ
professional managers to run the business. The company may retain profits or distribute it as
dividends for each share held. The selling of shares in a private company needs the directors'
approval. The shares in a plc can be bought and sold on the Stock Exchange where their
value will rise or fall according to the performance of the market.
A mutual organisation is organised differently to this.
Benefits of mutual organisations
A building society is a mutual organisation. This means that instead of having shareholders, it
has members who collectively own the business and are also its customers. The main
examples of this type of organisation in the UK are co-operative societies, mutual insurance
companies and building societies. Members have the right to vote for directors regardless of
how much or how little money they have with the society.
To compare the scale of mutual organisations, the assets of the UK’s top five building
societies amounts to £250 billion. Lloyds TSB, a bank, alone has assets of £350 billion.
Rank by Group Assets Name of society Group assets £million
1 Nationwide 166,027
2 Britannia 36,827
3 Yorkshire 20,498
4 Coventry 14,909
5 Chelsea 13,087
Large businesses like banks may enjoy economies of scale. By having more customers and
so lower unit costs, they might appear to outperform building societies in attracting
customers. However, this is not the case. So why do people choose a building society over a
bank?
• Each building society invests its profit back into the society's business. Unlike banks,
mutuals do not pay dividends (for example, Lloyds TSB pays out nearly £2 billion each
year in dividends).
• This enables the building society to offer competitive rates of interest on both savings and
mortgages. It sets the rates it pays savers just less than the rate charged to borrowers. This
margin gives the society a profit.
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• Customers choose to do business with a building society because many find them more
personal, approachable and more trustworthy than banks. An independent survey during
2007 found significantly higher levels of saver and borrower satisfaction with customer
service in building societies.
• Borrowers often rely on advice about mortgages or other financial services. Many banks www.thetimes100.co.uk
have closed local branches or replaced personal, counter service with call centres. The
personal service gives customers a sense of value for money.

GLOSSARY
Customer satisfaction survey -% customers extremely or very satisfied
Stakeholders: individuals or
groups with an interest in the
Savers Building societies 71% All other providers 56% decisions made by an
organisation.

Mortgages Building societies 72% All other providers 62% Corporate social
responsibility (CSR): the
Source: GfK NOP Financial Research Survey, 2007 responsibility of an organisation to
wider society, to a range of
Shareholders and stakeholders stakeholders including the
community at large.
The shareholders in a plc own shares which pay dividends; shareholders are able to vote on
major company decisions. Shareholders may include customers, employees, other businesses
and the wider public.

A business’ stakeholders include anyone with an interest in the company and its activities,
financial or otherwise. These include:

Banks set their strategy to maximise

Stakehold
lders • ers profit to increase the share value and
keho •
Sta Sta give shareholders the best dividends.
s* Media Employees
k
They aim to achieve this by giving lower
eh
er
old

o lde

interest rates for savers and taking

keh

rs •
Stakeh ers • Sta

Competitors Community higher rates from borrowers. Customers

Stakeh

of course would prefer high saving rates

and low borrowing rates. This can mean
old

olders • S

Suppliers Shareholders
a conflict of interest between the bank's
shareholders and its customers.
Government
tak
•

Members
ers

eh

A building society's primary stakeholders

old

old
eh

er

are its members. Members collectively

s•
Sta Customers Creditors tak
•S
keh
olde erown the business and are entitled to
s
rs • Stakehold
information on the business and to vote
on important issues, such as who is on
the board of directors, or whether to merge with another society. Members want the highest
possible interest rates on their savings and the lowest possible interest rates on their
mortgages. Building society rates are carefully set for each type of customer account. Their
level depends on interest rates in the economy (set by the Bank of England) and the rates and
terms offered by competitors.

Because they are run for their members, building societies also have a focus on corporate
social responsibility (CSR) that is integral to their business. Most societies have a strong
regional identity and many are committed to assisting community initiatives and local
B U I L D I N G S O C I E T I E S A S S O C I AT I O N

charities.

Accountability Corporate Social

Responsibility
Mutual status
Owned by members
No dividends to
shareholders
Better interest More personal
rates service

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Raising finance
Every business needs finance:
• As a plc, a bank raises part of its long-term capital from selling shares. It rewards shareholders
www.thetimes100.co.uk with dividends. Funds also come from savers who are not usually shareholders.
• As a mutual, a building society’s owners and customers (members) are the same. Savers
provide the society's long-term capital and its main source of funding for its mortgage services.

GLOSSARY
Wholesale money markets:
banks borrowing and lending supply funds lend funds to
buy property
money between themselves. Bank
Differentiate: to distinguish a
Savers/ or
Shareholders Building Borrowers
business from its competitors.
Society
repay interest/ repay funds plus
dividends interest

In both cases, people depositing money as savings expect to be able to withdraw their money at
short notice. Lending money against the security of a property is long-term. In order to meet
withdrawals from savings accounts, there must be enough cash readily available. Building
societies keep about 20% of all money they raise in cash or in assets they can easily sell so that
they can repay any savers who need to withdraw their savings.

Banks and building societies both raise money from wholesale money markets. This is
where banks borrow and lend money between themselves. Building societies, by law, may
borrow only up to 50% of their total funding from money markets. The average amount
societies fund themselves from the money markets is around 30%. Banks are not constrained
in the same way. For example, in 2007 the Northern Rock bank had taken this ratio of
borrowing to 75%. It faced collapse when the amount of credit available in the money
markets dried up.

Building societies keep the margin between saving and borrowing rates narrow. This allows
them to compete for funds and continue to offer competitive rates to their members.

Conclusion
There are different types of organisations, from sole trader to plc. Each has different levels of
liability, risk and benefits.

Banks are typical plc organisations, which source funds from shares and pay dividends to
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of information, neither the publisher nor the client can be held responsible for errors of omission or commission.

shareholders.

Building societies are mutual organisations. Their members are both owners and customers.
They compete with banks for their share of the market in savings and mortgages by
highlighting their advantages as mutuals. To continue serving their members, building
societies need to differentiate themselves from the high street banks. There is a growing
emphasis on the values of participation, personal service and locality in their brands. By not
paying dividends to shareholders, they are able to provide more favourable interest rates and
better terms for their members.

Questions
1. Name three types of organisation and describe one advantage for each type.

2. Explain the difference between a shareholder and

a stakeholder.

3. How does a mutual organisation differ from a

public limited company?

4. Evaluate the benefits a mutual organisation

provides to its customers. www.bsa.org.uk

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