3.2.8 Loans and deposits
A society must have rules stating whether it will allow members or others to hold deposits or make loans to the society and, if so, under what terms and conditions. The rules must also state the maximum amount that can be borrowed.
The distinction between loans and deposits is crucial. Deposit-taking is a regulated activity, whereas accepting loans for the purposes of the business is not regulated. Debt securities are normally exempt from prospectus requirements, and a society is allowed to make non-real-time communications about its own debt securities without complying with the financial promotion rules, which would otherwise require an authorised person to approve the material communicated.
Most societies adopt rules that expressly forbid deposit taking, but allow the society to borrow from members as well as from other sources such as banks, commercial lenders or institutional investors. Some societies have rules that fix the maximum amount that can be borrowed and/or the maximum interest rate that can be paid on loans. Borrowing can be an important way of raising additional capital, especially from members who already have the maximum permitted shareholding.
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