An argument that comes up from time to time is that credit unions have an advantage over other financial depository institutions in the sense that they are non-profit institutions and, therefore, are exempt from taxes on income that other private depository institutions pay. As a result, credit unions may be able to charge lower rates of interest to borrowers and pay a higher rate to depositors than these other institutions. What do you think of this argument?

What will be an ideal response?

The argument may have some validity as stated, however, whether credit unions are able to charge a lower rate of interest to borrowers or offer a higher rate to depositors is questionable. Most credit unions are smaller than most banks, partially due to their employer ties and/or other restrictions on membership, and as a result are not as able to exploit economies of scale and scope as larger banks. Also, credit unions may have better information to assess members' creditworthiness; on the other hand, they may make more questionable loans thinking that the borrower represents a better risk because of this membership. This is a form of adverse selection.