Recently, I’ve been writing a section about the history of microfinance for my dissertation. Having read around a bit, I feel the need to correct a myth that seems all too common among microfinance enthusiasts: that microfinance follows in the footsteps of German cooperative banking. I will admit this is becoming something of a pet peeve. But in fact, microfinance and the cooperative movement have very little in common. Here’s an explanation.
At least not all microfinance histories follow the simplistic story which casts microfinance as an invention of Muhammad Yunus in 1976, essentially saying microfinance has no history. But there is also an account of microfinance which I would call the over-historicised account, which sees microfinance as part of a very long history of credit. Mainly, the idea is that pilanthropists have been using credit to “do good” for aeons because the poor have always needed credit, so microfinance is just the modern iteration of this idea. Muhammad Yunus has even been compared to Friedrich Wilhelm Raiffeisen (by Bernd Balkenhol at the ILO).
Can you tell the difference? Muhammad Yunus; F. W. Raiffeisen
But I don’t think the poor have always needed credit (definitely not before the monetised economy), and I don’t believe microfinance really follows in the footsteps of, say, the Irish loan societies or the German cooperative movement. The particular for-profit financialised “social business” commercial enterprise which is modern microfinance bears very little resemblance to anything before it; it is distinctly a product of the financialised capitalism of our time.
Nevertheless, microfinance enthusiasts try now and again to establish a direct link between modern microfinance and European cooperative banking. My guess is they are trying to associate the former with the successes of the latter. Thankfully, that view isn’t very common in academically-produced literature, but I’ve seen/heard the comparison between the German cooperative banks and microfinance organisations made informally all too often; for instance at conferences, along the lines of “We need to create a Raiffeisen for the poor of the 21st century” – the way to do that being, of course, through microfinance.
The British did it, once again
It is true that microfinance shares a very distant relation with the German cooperative finance movement of the 19th century, thanks to – of all people – the British; but really very distant. The first Genossenschaften in Germany were founded simultaneously in 1847 by Friedrich-Wilhelm Raiffeisen and Herrman Schulze-Delitzsch as a response to famine. Among other things, they gave credit to small businesses and farmers. In the early 20th century, when the British identified rural poverty and dependence on moneylenders as a serious social problem in Indian colonies, they were inspired by the German successes and sought to tackle the problem via cooperative credit. These credit cooperatives were a “transplant of a German idea, with English characteristics, slightly modified to suit conditions in British India”.
Henry W. Wolff, an ardent British promoter of cooperative credit, compared the cooperative systems around the world in 1910, and specifically applauded the Indian cooperative societies. In what can only be regarded as historically ironic, he believed their independence and capitalist outlook would make them more advanced and prosperous than the German cooperatives.
Compare the eagerness and the good practice of the non-State aided Indian rayats with the listless indifference and sluggish backwardness of the French and Italian peasantry now being urged by government officers to array themselves in State-fed banks against their will! You will quickly come to a conclusion which of the two systems is the better. And, large as the results of State-assisted agricultural co-operation in Germany and Austria have been – where people are systematically drilled into obeying State orders – they can still not compare in degree with what has been accomplished, in little more than four brief years, in India…
For complex reasons, in the 1920s and ’30s, the cooperatives in British India went into decline, but they left a heritage in how they influenced the development of the Comilla model cooperatives in post-independence East Pakistan (Bangladesh). That model, in turn, influenced the development of microfinance by Grameen, BRAC, and others.
A world of differences
Prof. Hans Dieter Seibel of the University of Cologne (for whose knowledge of the Indian Self-Help Group (SHG) model I have the greatest respect) sadly also makes a false connection when he claims that “microfinance is not a recent development, and neither is the development of regulation and supervision of microfinance institutions (MFIs). Every now developed country has its own history of microfinance.” I believe that this reverse sourcing of modern microfinance (by saying older models are microfinance) is misleading. Why, becomes clear if one looks at the ways the thing known today as “microfinance” is practiced.
The commonalities between the Raiffeisen model and the standard microfinance model are very few, and the specific strengths of the German cooperative financial institutions were never taken on board by the microfinance industry. The group aspect is perhaps where the closest resemblance between MFIs and the German cooperatives could be imagined, since borrower groups and “centers” (as Grameen Bank and its replicators call their groupings of groups) could perhaps be misunderstood as something like a cooperative. But the groups and centers in microfinance do not assume an organisational and legal identity, like German cooperatives.
As Seibel himself outlines, from the outset, the Raiffeisen cooperatives did far more than organise credit: for instance, setting up purchasing and sales cooperatives for inputs and produce, transmitting technological changes, and organising famine relief. A full list of differences between modern microfinance and Raiffeisen’s/Schulze-Delitzsch’s cooperatives (later Volksbanken) would be extensive, but some key divergences are easy to note:
- German cooperatives, from their inception, provided longer-term and much larger loans (relative to clients’ incomes) at lower interest rates than MFIs. Both were based on local savings, rather than on foreign investment, commercial borrowing, or donations. The German cooperatives were structured through regional supervision and auditing associations, which the cooperatives themselves owned, which smoothed seasonal fluctuations and acted as “lender of last resort”.
- MFIs, on the other hand, often operate on a credit-only basis. They sometimes sell products through affiliates, but never organise consumers or producers. They make far smaller loans – average loan size in South Asia is only 15% of GNI – and charge interest rates aimed at more than simple cost recovery. MFIs are controlled top-down, most have only recently begun to focus on savings, and are usually owned by shareholders instead of cooperative members. Their profits can be extracted.
Ownership & control matter
These differences are highly relevant. Who owns and controls a financial institution takes the decision on the type of lending it should make, and in turn the relations of production it promotes. Longer-term larger loans from cooperative banks – which were owned and controlled by local small and medium-sized businesspeople – contributed to the making of today’s German Mittelstand. The small short term loans from today’s MFIs – owned and controlled by a potpourri of philanthrocapitalists, Wall Street bankers and development finance organisations – on the other hand are contributing to the establishment of bazaar economies, full of business activity but hollow in terms of job-creation, innovation and capital accumulation.
The cooperatives in Germany (and elsewhere) in time became formal local banks; microfinance groups still meet for the sole purpose of accessing loans from the external MFI source, for whom they represent little more than a risk management tool. This group structure compels them to share losses on the downside, but not gains on the upside. (One rare exception to this pattern is the route taken in recent years by India’s SHGs, which Prof. Seibel has been involved in, where SHGs are registering as independent cooperatives.)
Thus it becomes clear, at the level of organisational philosophy and culture, that the motto which became synonymous with the Raiffeisen movement “one for all – all for one” has never applied to microfinance. Expecting one to perform like the other is a mistake.