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Seemingly, a credit union may look like a commercial bank, but it is somewhat different. Credit unions have been established for a different reason than banks. They have a different structure, are governed differently, raise capital differently, offer different services to a different demographic and are taxed differently than banks. These differences are what credit unions stand out as a unique financial alternative for underserved clients, small and medium size companies. In general, credit unions are not-for-profit cooperative financial institutions owned and operated by their members. These members, who are united by a common bond of employment, association, or community, democratically operate their credit unions under the Credit Union Cooperative Act and its regulations. Credit unions have only one purpose such as the satisfaction of the financial needs by their member-owners. Due to the sole focus on serving their member-owners, credit unions have furnished excellent personal services and members often earn higher returns on their savings while paying lower interest rates for lendings. Credit unions are based on a one-member, one-vote structure, which gives members the power to direct credit union policy to meet their needs. This structure is quite different from the private business sector where shareholders vote according to the number of shares they own. The largest difference between credit unions and commercial banks is that credit union members own their credit unions. The benefits of ownership are returned to their members in the form of lower loan rates, higher dividends, and lower cost financial services. However, these differences seem to disappear recently, since credit unions and commercial banks are convergent forms from the perspective of their relative sizes, business areas and membership bases. At present, however, most of credit unions and their central office in Korea remain relatively small ones especially in their credit business areas unlike those of other countries. This article aims at analyzing the main reasons of this phenomenon and trying to enhance their competitiveness and effectiveness modeled on the advanced credit union system in other countries. The principle of functional regulation is the norm that our credit unions should pursue when comparing with other comparable financial institutions, such as community credit cooperatives and agricultural cooperatives. Pre-existent business regulations should be clearly removed because they have been too burdensome and discriminatory against credit unions compared to other financial institutions. Instead, safety and soundness regulations should be reinforced according to the Model Law enacted by the World Council of Credit Union.


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credit union, credit business, financial institutions for the underserved, common bond, functional regulation, safety and soundness regulation, the World Council of Credit Union, Model Law