Credit unions are controlled by their members and to eliminate the principle-agent problem the owners of a credit union are also its members. Commonly known as cooperative financial institutions credit unions are unlike banks and other companies that provide financial services to earn profit out of the customers. The difference that is most prominent is that credit union members own it and that is not the case with banks. The members of the union choose and select some members to form the volunteer board of directors.
Depositing money, taking loans and other credit union services are only allowed to members. These unions are established not only to help their members at the time of need but also to improve their financial conditions. The credit unions in different areas are basically non-profit organizations and they work to earn profits for their members. The interest rates charged by these unions are lower then most banks and they pay more dividends to their members then any bank would on similar investments.
These institutions are not allowed to accept donations and they should be able to sustain and survive in the highly competitive market economy. The services that these unions provide are similar to those of a bank but the names or terminology used is different. A credit union is not limited by size or number of members they can have only a few members and can also have as many as hundreds and thousands of members. The first credit union was established in 1852.
Government regulations require credit unions to have restricted membership that can be restricted using a number of criteria. The membership can be restricted to a group of people working together called workers credit union for example teachers credit union, living together in a certain geographical area called the city credit union, state credit union or the community credit union, attending school together called schools credit union and worshiping together called forum credit union etc in a certain geographical area. Employees working in a company can also form such groups.