Analysis: Vancity - Case Study Example

Case Analysis: Van Van is a community based, member owned financial that has over $13 billion assets and serves about 360,000 British Columbia residents in Great Vancouver, Squamish, Victoria, and Fraser Valley. The institutions day-to-day activities are investment services, lending, and banking. The institution is also runs the Citizens Bank of Canada, which serves its members by the internet, telephone, and ATM across the country. Citizens Bank and Vancity are led by a commitment made to drive change that is positive, and to better quality of life in the society and especially the communities in which they operate. Its community leadership committee is tasked, with the responsibility, to oversee and develop implementation of the institution’s strategy for community leadership. This paper aims to do a case analysis on Vancity and its problem that relates to its re-pricing of loans. Case Overview Vancity is an institution recognized for its social justice commitment and for community values that it cultivates. However, the financial crisis has forced the institution to consider the re-pricing of its offerings on line of credit. This move was expected to prove unpopular with the institution’s customers who also doubled up as the institutions owners, since Vancity has a corporative structure. Implementation of this decision was not possible without undoing the trust in the institution that the members had. If the board decided against re-pricing the loans, there would be a problem covering the $24 million shortfall. Vancity thus aims to balance the expectations of its members and the financial viability of the institution. While the immediate problem involves the re-pricing of loans, broader questions about the strategy that Vancity was to take going forward were also of concern. It was important for Vancity to be different from the rest of the financial institutions. Another question that the institution has to deal with is to what extent the institution should focus on profit making against sticking to its roots in the cooperative movement (Husted & David 218). Measures for the institution’s success going forward were also a concern. The financial crisis of late 2008 ended a speculative bubble that had been driven by prices of real estate exponential increase in most major markets. Together with shoddy practices of lending and financial engineering, the crisis undermined the whole financial system’s stability. Lenders, in the belief that the prices of real estate were on a never-ending upward trajectory, began offering consumers mortgage loans, even though some of them would be unable to make payments on interest on the exhaustion of initial discounts. The turmoil began in late 2008, in financial markets, globally and began to affect world economies. The bank of Canada, in response, dropped interest rates to 0.25%. Prime Canadian interest rates dropped to 2.25% by mid 2009, while other rates were pinned on the prime rate. Vancity’s interest rates were charged at prime minus or plus percentage points on credit lines. As lending rates went down, margins on loans outstanding also declined. The institution’s credit portfolio was approximated at $2.3 billion, with some $1.8 as secured debt. 83% was, however, debt that was either at or below prime rate. While most of the other financial institutions had re-priced their customer’s loans via raising by one percent all interest rates across the board, Vancity stood to loose $24 million at the end of the year if they did not go by this practice. There was a risk that if customers drew down, to the allowed maximum, their lines of credit, the institution would face a $45 million annualized loss. In this scenario, Vancity would be forced to fund these loans at other member’s needs expense. While the total number of affected customers was 80,000, 5,500 were considered to be a high priority since they were in possession of eighty percent of loans outstanding (Husted & David 218). Vancity is renowned for its long history concerning community support and social engagement. The board thus committed itself to the furthering of this agenda and the definition of a new kind of strategy to generate wealth within the limits of social finance. This principle is based on the social justice, the well-being of the society, and sustainability of the environment. Reacting to the conditions prevalent in the market, and concerns over the role of financial institutions and their encouragement of excessive debt and speculation, Vancity mission on social finance is oriented to the enhancement of asset creation, which is based on productive uses. This mission was aimed at taking established CSR initiatives and embedding them into Vancity’s core model of business for the generation of wealth via the improvement of the community’s well-being. The strategy on social finance aims to develop new products and focus on various segments of the market. An example is shifting of focus from real estate development in the traditional manner to real estate development of green and affordable housing and buildings. The institution would also search for new opportunities in enhancement of food security, pioneering the development of renewable and clean technologies, and banking those that were locked out of the system for one reason or the other. The new strategy and its implementation would be guided by these key ad vital principles: Operation in an atmosphere that fosters transparency, trust, and leadership that is transformational. The institution also aims to build on its longstanding legacy concerning community networks, relationship with members, and expertise in the field of credit line portfolio. Social finance is also a business model that is profitable as a model and has financial, environmental, and social outcomes. Social finance also performs a vital role in leadership in the institution towards the journey towards giving support to Vancity’s ethical standard, creation of synergies across the institution’s groups, and the journey towards the institution’s vision. The institution also aims to enhance the flow of cash to its members and the creation of assets in order to build sustainability in the community as well as for the members via a range of offerings financially. The institution’s commitment to innovation and research will give it an allowance in the identification and servicing of markets that are not served. Vancity could re-price their loans but this was a very contentious decision for the institution. Board members were expected to be divided on this issue, with some of them arguing strongly against it as a violation of trust, which could damage irrevocably the relationship between the institution and the members. It was also wrong, according to them, considering the high standards of fairness and ethics in the institution. However, it was also argued that the institution was without choice on the matter because of the context of competition, the unusual circumstances of finance faced by the institution, and their obligation to keep the members capital investments safe (Husted & David 218). Vancity also considered the possibility of maintaining prime rates that were above what other institutions of finance were offering. This could lead to the removal of credit line re-pricing strategy but it was expected to cause major problems for the rest of the institution’s products that were related to prime rates. These products would be uncompetitive priced, in this case too highly, and this would cause the rates to be out of touch with the trends prevalent in other financial institutions in Canada. In turn, this would lead to a perception that Vancity was charging higher interest rates than other financial institutions in the market. The institution also took into consideration the possibility of putting up a prime rate for the products in its credit line, which would be distinct and separate from the usual prime rates. However, since Vancity did not have any history in offering prime rates that were differentiated, and the fact that its customer’s promotional material and agreements gave any allowance for any such distinction made it a distant possibility. Asking the customers to sign, at much higher rates, new agreements was an inherent risk since it was a big possibility that the members would not accept terms afresh and thus there was a need for punitive action. If the customers began to see the institution as grabbing their money, there would be consequences of a much broader nature for relations with members and loyalty from customers. Work cited Husted, B and David A. Corporate social strategy : stakeholder engagement and competitive advantage. Cambridge: Cambridge University Press, 2010. Print. Read More