There is yet another type of depository institution in the United States that is very close in function and services to savings cooperatives. These are called credit unions. These are associations of members of a community that are bound together either because they live in the same neighborhood, work in the same company, or worship at the same place of worship. These institutions usually gather assets by selling shares in the credit union and lending to its members at a spread over the dividends paid back to the members. The spread is usually lower than that of larger banks, which yields higher dividends for depositors (credit union shareholders). This is because of the smaller size of most credit unions, the lower overhead, and the very low loan losses because the community knows each other and is close to each other. That was the original concept on which the credit union movement started. By the end of the twentieth century, as it is now, the credit unions are performing depository and financing services that are very close in nature to community banks but with the tax exemption advantage given to the credit unions because it is classified as a not-for-profit organization. However, with the lack of in-depth experience in financing and credit extension, many credit unions have suffered significant losses especially during the 2008 financial meltdown.
Another important arm of banking in the United States is a category called investment banks. They differ from, but complement, the role of depository institutions (i.e., banks). An important role of the investment banks is that they gather funds that are considered “excess liquidity in the hands of the public and other institutions, like pension and retirement plans” and reinvest this money prudently on behalf of the public, mainly in the United States, but also to capture business opportunities worldwide. It is very important to understand this role, because most of the Islamic RF banking discussions, especially concerning attempts to operate in the West, mix the roles of depository institutions — banks — and investment banks together. This has been a major source of confusion and a major problem in developing RF banking and finance services in most if not all of the developed Western world. The lack of an active, sophisticated investment banking institution and investment bankers who understand the intricacies of reinvesting surplus funds in local economies prudently is an important reason for the flight of capital away from many developing countries.
Investment banks are regulated by another U.S. government entity, the SEC, to make sure that the financially uneducated and unsophisticated citizen is not conned out of his/her precious savings, that the process of selling securities (shares of companies, mutual funds, and bonds) is closely scrutinized, and that these activities abide by government rules and regulations.