History of Credit Unions - Federations and Auditing Associations

Federations and Auditing Associations

The federating approach marked a distinctive departure from conventional thinking about economies of scale in business. Traditional businesses achieved scale through a single, centralized head-office with power delegated to branches.

The cooperative model inverted this method, instead scaling up one of its founding principles: individual cooperation between members. Individual credit unions delegated specific powers for specific purposes to a federal body, with residual powers remaining in local hands. By respecting the principles of democratic control and subsidiarity credit union leaders were able to achieve vast economies of scale without surrendering local autonomy.

Compared to Schulze’s urban credit unions, the village banks of Raiffeisen were smaller and had to rely on much more limited human resources. This made them very vulnerable to fraud and mismanagement, and (independently of any actual problems) very vulnerable to public skepticism.

To address these problems the credit unions formed auditing associations. “Some of the auditor’s responsibility was simply auditing, but much took a more constructive role, providing the local cooperatives with helpful materials and eventually setting up formal training courses for cooperative managers.” This dual role emerged from private sector incentives and was funded from within the movement, by user fees charged to the credit unions.