History of Credit Unions - Rural Credit Unions

Rural Credit Unions

Further information: Friedrich Wilhelm Raiffeisen

While Schulze’s credit unions were situated in urban areas and served traders, shop owners and artisans, Friedrich Wilhelm Raiffeisen founded the first rural credit union in the village of Heddesdorf (now a suburb of Neuwied) in Germany. Raiffeisen’s approach built on many aspects of Schulze’s, but with significant modifications that had important implications for microfinance.

Most of these differences reflected the differences between the markets the two types of credit unions served. Members of Raiffeisen’s credit unions were generally poorer than their urban counterparts. Many were ex-serfs, freed in various parts of Germany between 1800 and 1848. They had smaller, more seasonal and less predictable income flows. This made it difficult to rely on standard loan repayment arrangements. The small size of the credit unions, combined with extremely low educational endowments among the people, presented important management challenges.

While Schulze could rely largely on a commercial approach, Raiffeisen’s approach addressed the unique problems of the rural poor largely by exploiting the strong bonds of solidarity (known today as social capital) and deep Christian values in the typical village. For example, to make up for the very small and irregular availability of cash in rural communities, credit unions expected their directors to serve in a voluntary capacity, with only the cashier receiving a small stipend. Priests, teachers and other educated villagers were often inspired to serve by the cooperative values advanced by Raiffeisen’s movement.

The two leaders and their movements squared off in several bitter debates. Schulze repeatedly argued that because the Raiffeisen credit unions relied on only one paid staff person – a cashier – they were unsafe. The evidence never supported this allegation, however. And Raiffeisen strongly opposed efforts by Schulze to limit the liability of credit union members, because he felt that such limits would dilute bonds of association and the power of the rural banks to fund their loans from the savings of local members.

In spite of this acrimony, by 1913 over 2 million Germans were members of credit unions. Of these, 80% lived in communities with less than 3,000 people. Their participation contradicted the arguments of skeptics who argued that poor people couldn’t be relied on to repay their loans, and that no bank could make a profit serving poor Germans.