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Building societies


Building societies were bom of thrift and self-help. The cost of housing has always been a substantial multiple of average annual earnings. For this reason, back in the earlier days of the industrial revolution, groups of artisan combined their funds in order to acquire land and build houses thereon. For this purpose they formed mutual or friendly societies, non-profit-making in structure, by means of which they used pooled resources to house each member in turn. When this end was accomplished many were wound up, but some expanded into providing service to the general working public. They accepted the savings of a large part of the nation, paying good interest rates thereon, and used the funds so acquired to lend to persons wishing to buy houses in return for a mortgage on those houses until repayment was made in full The tendency was to remain non-profit-making and to balance the interest received from borrowers against the interest paid out plus the costs of administration.

Because of the immense amounts of money involved in house purchase the suecessful building societies became very large institutions and in time, through the processes of amalgamation and survival of the fittest, were reduced in number to the relatively few major societies that exist today, most with assets amounting to many millions of pounds. Again, as they grew in size and responsibility, they became subject to regulations by the State for the greater protection of the public. The main governing statute today is the Building Societies Act 1962. There is also a measure of selfregulation, in particular the Building Societies Institute, formed in 1934 with the object of promoting the education, development and efficiency of those engaged in the work of the societies.

Interest rates paid to persons depositing money in building societies will vary considerably with the nature of the account opened, but in order to obtain higher interest rates the investor must normally be prepared to commit his funds for longer periods. Some of the high interest accounts are only available if a minimum sum is invested. The obligation to leave money in the account for a long period in order to earn the higher rates does not prevent the depositor from withdrawing it at wifl, but if he does do so without the prescribed notice he forfeits the relevant amount of interest. One important attribute of interest paid by building societies is that it is treated as having been paid out of taxed income and is therefore exempt from standard rate tax in the hands of the recipient. This makes building society investment particularly attracfive to taxpayers but not necessarily to nontaxpayers, because the latter cannot reclaim the tax paid as it is not regarded as having been deducted from the interest itself.

The contemporary building society is itinually seeking to extend its area of activity, and as the clearing banks have moved into the field of house purchase finance so the building societies are edging into the preserves of the banks. The major uilding societies are now offering cheque book facilities, handling standing order nents and providing such facilities as 'schequesandforeign exchange. As they move further into the general areas of banking, however, they risk attracting a greater degree of State regulation and stand to lose many of the privileges they have hitherto enjoyed, particularly in the application of the tax laws as applied to the interest that they pay and receive. Meanwhile, building societies remain in the category of friendly societies, mutual associations of which both investors and borrowers are de facto members.


Reference: The Penguin Business Dictionary, 3rd edt.