Mutual and Social Efficiency in Co-operative Banks: Empirical Evidence from Italy

This study aims at better understanding the significance of this “positivist” representation of reality, contributing to a better informed assessment of the socio-economic impact of mutual organizations. We particularly analyze the efficiency of co-operative banks (CBs) from the points of view of the mutuality and sustainability of business. CBs are small financial institutions providing financial services in various local geographical areas; they play a fundamental role in various banking systems in many countries worldwide (Battaglia et al., 2010) and are important for the stability of the overall financial system at regional level (Fonteyne, 2007; Hesse and Čihák, 2007). Even though these small financial institutions present a homogeneous business model, their performance is strongly influenced by the economic conditions of their local markets and by the constraint to satisfy their customers, who are, at the same time, shareholders. When measuring their efficiency one must account for the heterogeneity of social and mutual commitments in favor of their members and of the local community. In this sense, from an economic point of view, CBs are often less efficient than non-co-operative ones, but the reason for this apparently higher inefficiency is strictly correlated to their statutory commitments, that is, fostering responsible behavior by implementing democratic principles of governance and by focusing on retail banking (Stefancic, 2010). In the light of the above, the purpose of this paper is to verify if a particular type of Italian CB called “Banche di Credito Cooperativo” (BCC) (Di Salvo and Lopez, 2010) is less or more competitive compared to non-co-operative ones by using and adapting two main financial indicators: the financial value added and the cost-income ratio (CIR). The literature shows how the selection of performance indicators affects performance results and the evaluation of an organization’s performance (McNamara and Mong, 2005; Tange, 2003). The characteristics of the customers and the peculiarities of the relationship between customers and local CBs make these intermediaries out of the ordinary, with respect to the overall financial system (Gutiérrez, 2008). These differences can be identified not only in their better customer-monitoring capability, but also in their debt-recovery capacity: in fact, due to their close relationship with the local market and the area in which their borrowers work or live, they have higher strength in controlling debtors (Berger and Mester, 1997). For this reason we decided to adapt the already mentioned indices by taking into account and incorporating in the process of their determination and calculation the statutory duties of the Italian co-operative banks in favor of their member-customers and their local community with particular reference to the constraint of mutuality. The study was based on the following assumptions. Firstly, when banks pursue mutual goals, they will appear less efficient than non-co-operative institutions. Secondly, the usual system used by banks and financial institutions to evaluate the efficiency of credit institutions doesn’t take into the account the mutual commitment of co-operative banks. Thirdly, mutual commitment is a social and economic value that should be safeguarded and enhanced by financial authorities and public actors. Based on these assumptions, we conducted an empirical analysis on a judgmental sample of Italian BCC particularly committed, because of an explicit statutory commitment, towards their members and the local community. Using a sample of 33 BCC 2009 financial statements, we estimated the levels of added value created and distributed to the main stakeholders and of CIR, making some corrections to these indicators according to the Italian Federation of Local CBs (Federcasse) sustainability reporting criteria and guidelines. Main findings show that by implementing appropriate corrections to the value-added indicator and to the CIR, BCC appear efficient and mission-oriented, with a significantly reduced performance gap with non-co-operative credit institutions. The practical implications of our results are that the simplistic and insufficiently reasoned application of efficiency indicators – such as added value and CIR – leads to unsatisfactory valuation of banks’ performance (Favero and Papi, 1995). In a certain sense, it could be said that efficiency levels of co-operative banks are too often evaluated, both at national and international levels, without considering their mutual nature. Furthermore, the socio-economic impact of CBs can be judged only by measuring the results obtained against the situation that would have occurred if bank services and activities had not been provided.