1.1.4 Building Societies

Around the time that the banking industry was starting to take its contemporary shape, another facet of modern-day financial services was emerging. Building societies were formed in huge numbers during the nineteenth century, particularly in the north of England, as a means for those on modest incomes to be able to buy their own house. They were formed as ‘mutual’ organisations with each of the building societies being owned by its mortgage and savings customers – its ‘members’. This ownership status compares with that of companies, which are owned by their shareholders, with those who are just customers having no ownership rights.

In the following video Martin talks about the origins and evolution of the building societies sector in the UK.

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MARTIN UPTON

Around the time that the modern banking industry was taking shape, another facet of financial services started to emerge in Britain.

Building societies were formed in huge numbers in the nineteenth century, particularly in the north of England. They were formed to enable those with modest incomes the ability to buy their own properties. Now building societies were and are 'mutual' organisations, they are owned by their mortgages and savings customers - known as their 'members'. This compares with the ownership status within companies, which are owned by their shareholders, whilst customers have no ownership rights at all.

So how did building societies start to operate? Well, members started to pay money into the societies in the form of savings and as these built up then at least certain of the members could apply for a mortgage to enable them to buy their own properties. As more money was paid in in the form of savings and as the original money was repaid by borrowers, then more money was available and could be advanced to other members to enable them to buy their properties. This form of business was actually a very secure business and still is to this day because the money which is advanced is secured against property and so the business is secure unless the value of property or land on which the money is secured, falls in value.

Now many of the building societies were only established on a temporary basis. Once all the members who wanted to buy their property had done so, the building society would be wound up and any residual savings repaid to members. By contrast, other societies were permanent, and that's why you find the term 'permanent' in the name of many building societies.

There were 2,286 building societies in the country at the start of the twentieth century, but this number had dwindled to only 44 in September 2015 - largely as a result of amalgamations and takeovers. The fact is that building societies were (and indeed many still are) very small organistions, and mergers have been essential to be able to deal with the overheads which arise from running a financial services business in the modern age.

Now additionally, many of the larger building societies converted themselves into banks at the end of the twentieth century (a process known as 'demutualisation') - now this had the effect of not only further reducing the number of building societies in total, but also the aggregate size of the sector within the financial services industry.

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