A Study on "Area" Designation of Cooperative Financial Institutions (Japanese)

Shozo Kanki

Policy Discussion Papers (Japanese) from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Cooperative-type financial institutions are required by law to specify a certain geographic "area" in the articles of association and the members of each institution must have a certain degree of association with its designated area such as being a resident of the area. As such, the designation of such an area serves as a factor that effectively restricts the qualification of members, thereby indirectly restricting the area in which each cooperative financial institution can operate. It is often pointed out that local financial institutions' loan portfolios are prone to concentration in a specific business sector. In this regard, the way in which cooperative financial institutions operate - providing financial services within or to those associated with their designated areas - can potentially be seen as problematic in terms of maintaining safe and sound management. This paper attempts to make clear why cooperative banks were made subject to the requirement regarding area designation in the first place, seeking clues in documents on the now-defunct Industrial Cooperatives Law enacted in 1900. The reasons have two aspects: (1) organizational factors inherent to cooperative financial institutions and (2) factors related to administrative and financial supervision. The first type of factor can be further classified into two types, namely, factors related to the need to secure personal links as a cooperative organization and factors related to the need to implement strict control over loan management. The Industrial Cooperatives Law sought locality connection as a basis for personal links by mandating cooperative banks to set their respective designated areas. With this, the law aimed to enable cooperative banks to collect qualitative information necessary to properly extend unsecured loans and to assure ex-post loan management. In the light of these reasons, this paper argues that the necessity of area designation has ceased to be relevant to many cooperative financial institutions operating today.

Pages: 40 pages
Date: 2006-06
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