THE Educational Building Society (EBS) will be free to compete head-to-head with the banks, and Irish Nationwide building society will be allowed to demutualise without any bar on an immediate takeover, under proposals due to be presented to the cabinet on Tuesday.

The proposals, which have been prepared by Martin Cullen, the minister for the environment, are almost certain to be approved by his cabinet colleagues. A draft bill is expected to be published next February and could be made law by next summer.

EBS is currently in negotiations with Rabobank, Europe’s largest mutual bank, which could lead to a strategic alliance. The Irish building society, which is firmly committed to its mutual status, intends to offer a broad range of traditional banking and insurance products.

As well as allowing EBS to offer products other than deposit accounts and mortgages, the proposed legislation will free the building society to raise money from members to fund its expansion. The society is planning to issue member certificates. Broadly equivalent to a bond, these give a much greater return than deposit accounts and are particularly attractive in a low interest rate environment.

While EBS is committed to its current status, Irish Nationwide is generally understood to be preparing to abandon its mutual status. Under current legislation, building societies that demutualise are required to remain as independent institutions for five years.

Michael Fingleton, the managing director of Irish Nationwide, has been lobbying for a relaxation of these laws since 1992. Fingleton wants to be able to sell off the Irish Nationwide immediately after a vote by members to abandon mutual status. Any sale to a private concern is likely to lead to windfall payments for all Irish Nationwide members and to special payments to executives, including Fingleton.

The level of windfall is not known, partly because Irish Nationwide has consistently refused to reveal how many members it has. Although they are broadly split between those who favour Fingleton’s leadership and those who are opposed to him, the demutualisation is likely to be supported by a large majority.

It is understood that Cullen’s proposals may also mean that a former building society could only be taken over during certain preordained times of the year. This “window-of-opportunity” system for would-be suitors is expected to disappear after a number of years.

EBS poached Tony Moroney from Bank of Ireland earlier this year. Moroney, who during his time with Bank of Ireland was responsible for Ireland’s biggest home loan book, is now looking after EBS loans in a move designed to allow other executives to concentrate on developing separate areas of business. It is expected EBS will initially concentrate on new products which can be easily sold to its existing customer base.

Cullen’s proposals are based on the findings of an inter- departmental review group which has been looking at the existing legislation since autumn 2002. The relaxation of the building society laws was first proposed by Charlie McCreevy, the finance minister, in February 1997 when he was a member of the opposition.