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Building societies and other types of organisation
Introduction
Building societies date back to the late eighteenth century. The first known building society was set up in 1775. This was to enable people to pool savings together and to build their own homes. However, once they had built their houses, this particular society closed. In the 1840s, societies began to accept savings from members who were not necessarily potential home owners. It was then that the permanent societies that we have today were formed. In 1869, the Building Societies Association was set up to provide national representation for the industry. The Building Societies Association (BSA) is the trade association for all the UK’s building societies. It now has 59 members and together they have assets worth over £350 billion. Until the 1980s, only building societies, generally, could offer loans for houses. From the early 1980s, banks quickly became competitors. Following the passage of the Building Societies Act 1986 societies were also free to 'demutualise' to become banks. The members of each building society had to agree to this change. Several building societies offered windfall payments to members to persuade them and some big names became banks, for example, Abbey National, Halifax and Alliance & Leicester. People buy a house or flat to get a permanent home and a stake in the property market. Buying a house is usually the most costly purchase an individual ever makes. Very few firsttime buyers have enough cash to buy a property, so they take a long-term secured loan called a mortgage. A mortgage has two elements – the amount of the original loan (the capital) and the interest which is charged on the loan. A repayment mortgage means that each month's payment pays off the interest and a small part of the loan. By the end of the loan period, the borrower will have paid off the entire loan. When an owner buys a house he or she has a valuable asset. If the value of the house increases, this can give them a profit if they choose to sell the house. Loans typically last for 25 years and are secured on the property. This means that if buyers do not keep up the regular monthly payments, the bank or building society could take the property back to sell it to pay off the debt. There are two main providers of mortgages: • banks like Lloyds TSB, the Halifax or Bradford & Bingley. These are public limited companies (plcs) and are owned by their shareholders. • building societies like Nationwide and Britannia. A building society is a distinctive business form governed by the Building Societies Act 1986. Building societies are mutual 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.

CURRICULUM TOPICS • Types of organisation • Mutual organisations • Stakeholders • Sources of finance

STRATEGY

GLOSSARY Industry: a group of businesses involved in a set of similar activities. Competitors: other producers supplying similar goods or services. Demutualise: to convert from a mutual organisation into a public limited company (plc). Windfall: the payout received by members when an organisation demutualises. This can take the form of a cash sum, shares in the newly created plc, or a mixture of both. Secured loan: if a borrower does not repay as agreed the lender can take the security (in the case of a mortgage loan, the house) and sell it in order to repay the loan. Mortgage: a long-term loan secured against a property. Interest: the cost of borrowing money or the reward for lending money, depending on whether one is the borrower or the lender. Asset: something that is of worth to an organisation e.g. people, cash, financial claims on others, machinery, buildings. Public limited companies: companies with shares quoted (priced, bought and sold) on a stock exchange. Shareholders: persons owning or holding a share or shares of stock. Mutual organisations: Organisations with no shareowners traditionally established by groups of people to provide a range of services that serve the interests of their members. Sole trader: a business organisation which has a single owner.

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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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

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

Their level depends on interest rates in the economy (set by the Bank of England) and the rates and terms offered by competitors.uk GLOSSARY Stakeholders: individuals or groups with an interest in the decisions made by an organisation.thetimes100. shareholders are able to vote on major company decisions. approachable and more trustworthy than banks. Members collectively own the business and are entitled to information on the business and to vote on important issues. such as who is on the board of directors. This can mean a conflict of interest between the bank's shareholders and its customers. 2007 www.co. Most societies have a strong regional identity and many are committed to assisting community initiatives and local charities. Many banks have closed local branches or replaced personal. Building society rates are carefully set for each type of customer account. These include: Banks set their strategy to maximise profit to increase the share value and give shareholders the best dividends. other businesses and the wider public. employees. Customers of course would prefer high saving rates and low borrowing rates. The personal service gives customers a sense of value for money. Members want the highest possible interest rates on their savings and the lowest possible interest rates on their mortgages. Customer satisfaction survey -% customers extremely or very satisfied Savers Mortgages Building societies 71% Building societies 72% All other providers 56% All other providers 62% Source: GfK NOP Financial Research Survey. They aim to achieve this by giving lower interest rates for savers and taking higher rates from borrowers. building societies also have a focus on corporate social responsibility (CSR) that is integral to their business. An independent survey during 2007 found significantly higher levels of saver and borrower satisfaction with customer service in building societies. old Stakeh ers • Sta keh old er rs • Stakeholde olde rs • keh a t Sta S k s* Media Employees o eh rs • lde Competitors Community olders • S Stakeh t a k eh old er Suppliers Shareholders • ers old Government eh Members s• A building society's primary stakeholders are its members. Shareholders and stakeholders The shareholders in a plc own shares which pay dividends. Because they are run for their members. A business’ stakeholders include anyone with an interest in the company and its activities. rs • Stakehold olde e r s• keh Sta Sta k Customers Creditors Accountability Mutual status Owned by members No dividends to shareholders Better interest rates Corporate Social Responsibility More personal service ?? 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 . financial or otherwise. or whether to merge with another society. counter service with call centres.• Customers choose to do business with a building society because many find them more personal. to a range of stakeholders including the community at large. Shareholders may include customers. Corporate social responsibility (CSR): the responsibility of an organisation to wider society. • Borrowers often rely on advice about mortgages or other financial services.

Differentiate: to distinguish a business from its competitors. This allows them to compete for funds and continue to offer competitive rates to their members.bsa. They compete with banks for their share of the market in savings and mortgages by highlighting their advantages as mutuals. For example. Each has different levels of liability. Building societies keep the margin between saving and borrowing rates narrow. people depositing money as savings expect to be able to withdraw their money at short notice. Explain the difference between a shareholder and a stakeholder. building societies need to differentiate themselves from the high street banks. • As a mutual. In order to meet withdrawals from savings accounts. It rewards shareholders with dividends. they are able to provide more favourable interest rates and better terms for their members.Raising finance www. by law.co. which source funds from shares and pay dividends to shareholders. 2. Funds also come from savers who are not usually shareholders. supply funds Savers/ Shareholders repay interest/ dividends Bank or Building Society lend funds to buy property Borrowers repay funds plus interest In both cases. How does a mutual organisation differ from a public limited company? 4. may borrow only up to 50% of their total funding from money markets. Name three types of organisation and describe one advantage for each type. It faced collapse when the amount of credit available in the money markets dried up. Banks are typical plc organisations. in 2007 the Northern Rock bank had taken this ratio of borrowing to 75%. Whilst every effort has been made to ensure accuracy of information.org. Banks and building societies both raise money from wholesale money markets.thetimes100.uk ?? . personal service and locality in their brands. a building society’s owners and customers (members) are the same. To continue serving their members. Building societies. Savers provide the society's long-term capital and its main source of funding for its mortgage services. Their members are both owners and customers.uk Every business needs finance: • As a plc. Questions 1. The Times Newspaper Limited and ©MBA Publishing Ltd 2007. there must be enough cash readily available. Building societies are mutual organisations. By not paying dividends to shareholders. GLOSSARY Wholesale money markets: banks borrowing and lending money between themselves. Lending money against the security of a property is long-term. Conclusion There are different types of organisations. neither the publisher nor the client can be held responsible for errors of omission or commission. 3. The average amount societies fund themselves from the money markets is around 30%. www. Evaluate the benefits a mutual organisation provides to its customers. a bank raises part of its long-term capital from selling shares. risk and benefits. There is a growing emphasis on the values of participation. Banks are not constrained in the same way. 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. from sole trader to plc. This is where banks borrow and lend money between themselves.

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