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.
(phil)
28 comments
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September 14, 2011 at 20:35
Zvi Galor
Hello,
I would like to commend your above presentation-blog.
If you look at the archive of the MF list you would find that for years, I an[m tired now to repeat it, I was against, as you are, for the approach of MFis and cooperatives.
Only a comment: if you are trying to say that cooperatives are owned by their members, I will have to differ from this view.
Cooperatives in Germany or in other parts of the world are not belonging to their members, thanks to the third ICA principle.
Regards
Zvi
September 15, 2011 at 10:36
philmader
Dear Zvi,
Thank you for this comment, which I read as a point of accuracy and principle. You are right: the difference isn’t about ownership in the (standard) sense of being able to sell or do as you please or an entitlement to surplus payouts, so what I wrote above was in that sense a gross oversimplification.
Rather, as I understand from reading some of the texts on your site now (which has been very illuminating for me), the member, by paying in, becomes part of the cooperative (and not, as in the case of share capital, it part of him). Thereby the distinction between cooperatives and their members (as external holders of entitlements) is moot; is that correct? At least as long as the cooperative remains in the business of serving its members, what matters is that surpluses (if there are any) should be used to lower the costs / improve the value of the services rendered to members, so large surpluses should in theory not accrue.
In fact, surprisingly, in the case of MFIs this same argument is made as well, in theory! But for different reasons. Only in theory of course there is a perfect market, where competition will ensure surpluses are reinvested to benefit clients because they would go elsewhere otherwise … In reality, the “market” for microfinance is anything but a neoclassical market, and creates sufficient opportunity for profit appropriation, and would not exist otherwise. MFIs are out to make money not for the clients but for shareholders who are in search of the highest-possible return on equity, as the case of India shows all too well; a growth path which has been promoted as the best possible path for MFIs by the World Bank.
If you have any knowledge about the Indian Self-Help Groups, which are increasingly transforming into associations registered as cooperatives under the MACS act, I would be very interested to hear what you think.
Best
Phil
September 16, 2011 at 04:57
Wolfram Hiemann
Dear Zvi,
you may argue that it is not a cooperative if it is owned by its members. Just by definition. But, please, recognize that your position is not shared by everybody and anywhere. I am sure that this is not new for you but I think it is fair to inform the community about different approaches.
Indonesia has tens of thousands of cooperatives with tens of millions of active members. And these members insist that they are owners of “their” cooperative.
The Law 25/1992 on Cooperatives in Indonesia states very clearly:
KEANGGOTAAN/MEMBERSHIP
Pasal 17/Article 17
(1) Anggota Koperasi adalah pemilik dan sekaligus pengguna jasa Koperasi.The members of the cooperative are owners and at the same time users of the services of the cooperative.
I enjoy your valuable contributions though!!
Kind regards,
Wolfram Hiemann
Member of Savings and Credit Cooperative
September 18, 2011 at 12:12
Zvi Galor
Dear Wolfram,
I do not think that I have to inform the majority of the people about views which are not mine, and are, anyway, theirs. I am representing my views.
You may present the Low of majority as a proof, but see what a surprise. One of the specialists of cooperatives in Indonesia has decided to translate a critical paper I wrote regarding the third ICA, into Indonesian.
http://www.coopgalor.com/i_publications-in-.html
BTW, it is one of the most downloadable paper from my website.
Even in your saving and credit cooperative you are not the owner of the equity of the cooperative, I assume.
Please, take my remark and comments on on personal level, which may be heard so, as my English not sufficient for all nuances. I am discussing cooperatives. Even in the great USA the Oklahoma Food Cooperative was almost alone in its success, and without following the ICA way, and today, more and more new germinated cooperatives of this model are springing around in other state of the USA.
Cooperatives, the real ones, do not need any reserve funds, and if yes, it should be funded from all members equally, so it avoid cooperative directors to utilize them in case of annual deficit. Annual deficit should be covered by all members according to participation, since annual deficit is a wrong calculation of the total operation expenses of the cooperative,.
It time that cooperative leaders stop to look for profits or surpluses, and rather start to look for the cheapest possible cost of the service to members. In the case of SACCO, the best (cheapest) possible cost in paying to members fixed deposits the highest possible rate of interest, and for sure highest than what bank are paying on fixed deposits, and charging members loans with the lost possible rate of interest, and for sure, lower that the rate charged by the banks.
Sorry to be long,
Best and kind regards
Zvi
September 22, 2011 at 18:02
Zvi Galor
Dear Wolfram,
You mention that you are a member of a saving and credit cooperative. You did not mention to which Sacco you are affiliated, and in which country. I will attempt to assume some ideas, and I am hoping you will react on them.
a. I assume you, and the other members, are not, individually, the owners of the equity of your cooperative, since the bylaws of most cooperatives, as well as the 3rd ICA principle, stipulate it clearly. If I am mistaken, can you describe how you are individual owner of your cooperative.
b. I wish to know if you are having, at your cooperative, the best possible service.
The best possible service in the cooperative = the lowest possible cost for the members = the highest possible rate of interest on fixed deposits and on what you call shares, and which are practically, very long term deposits in the cooperative, and nothing else. And, the lowest possible rate of interest on credit to members by the cooperative.
I would like to present you an example of a case study of this kind of the best possible service to members. It refers to the Moshav Kfar Yedidia. The secretary-treasurer of this Moshav described me the policy he applies in his Moshav, which works as well as a saving and credit cooperative. So, the Moshav pays to members on their deposits in the Moshav a rate of interest higher at 2 % than what is the usual rate of interest the banks pay to their clients on fixed deposits. At the same time, the Moshav charges the members who in need of credit with a rate of interest, lower at 2 % than the one charged by the banks on commercial credit to clients. In so doing the Moshav is able to covers the total operational cost of this department, and serves the members at the best possible way.
I am interested to know to what extent your cooperative is really best serving the members.
Thanks in advance and regards
Zvi
September 15, 2011 at 12:15
Zvi Galor
Dear Phil,
First cooperatives: I think a cooperative is an economic enterprise established by its members, individuals, since each one of them was not able to achieve what s\he has been looking for individually. When realizing that alone the search is creating nothing, then the person is ready to give up part of her/him individuality, only part of it, and to collaborate with other individuals who have decided also to give up part of their individuality, and together to establish a cooperative. They expect that this cooperative would render them the best possible product, or service, or employment, at the lowest possible cost, and at the best possible quality.
If we are together until now, we may understand that a cooperative is created not to create surpluses, but to sell to members at the lowest possible cost of operation of the cooperative. This is something that most cooperatives have forgotten including the ICA.
If you wish an example of what I am speaking about try to look here:
http://www.coopgalor.com/realization/Oklahoma.html
I have helped to create this cooperative in Oklahoma. Try to read here:
http://www.oklahomafood.coop/articlesofinc.php
Now to MFIs. They have been established with the old sickness of establishing upside down. This is something which has characterizing coops in developing countries and their failure. This is something which characters the MFis everywhere, including the SHG “coops” in India. I rarely believe their viability and sustainability.
And to our Dr. Yunus. I personally believe he is master in PR. I personally believe that he has not helped the poor in Bangladesh as he was highly successful to build up his headquarter building in the capital of that country. The replication of his model gave development to many employment in the organizations dealing with the transfer of fonds from governments and rich organizations to hardly being useful to the poor.
To the idea of Yunus about mutual guarantee. In the twenties, the Moshav in Israel started with the mutual help and mutual guarantee among members. The Moshav has been established by its members and in the down-downside approach. In the eighties the mutual guarantee in the Moshav has ceased to exist, for various reasons, not to be mention here, and at that time Yunus started his business. I don’t know to which extent he knew the Israeli experience, but this is unknown to me. Anyway, mutual guarantee and mutual help didn’t started in Bangladesh.
I have made it long, and I hope you will understand my English.
Best regards
Zvi
September 15, 2011 at 12:43
Zvi Galor
Only to complete an idea: A cooperative is created by its members and belong to them entirely and equally. So the share of each member in the cooperative is equal in value. The share is kept in the books of the cooperative in its real value, and not in the nominal value, as the practice in most cooperatives worldwide.
The cooperatives, worldwide, and not according to my understanding, are grown up in their fixed assets, paid by the members, according to their participation in the economic life of the cooperative, so the members pay for the fixed assets not equally, but are considered, by the ICA principles, to be the owners of the cooperative equally. Injustice created by the 3rd ICA principle.
If a cooperative need to increase its fixed assets, it collects the money from members in equal measure, and not from surpluses, as the practice in most cooperatives worldwide.
Regards
Zvi
September 15, 2011 at 16:49
philmader
Thank you Zvi,
I guess this confirms the essential differences which I’ve tried to outline in my post. It is interesting to hear about the case of mutual guarantee in Israel in the earlier 20th century; by all means it is clear that mutual guarantee was not invented in Bangladesh by Dr. Yunus. My guess, as I explained above, is that the idea came from Europe via the cooperatives, but was appropriated and adapted (to not say bastardised) by microfinance experimenters as a means for taking (social) collateral from those who had none, and as a means to lower transaction costs for lenders by shifting them onto borrower groups. Collateral absolutely is something different from mutual support!
As you can see in some other posts on this site, indeed the usefulness of microfinance (for anything apart from surplus generation) is severely in doubt.
As I mentioned, the SHGs in India have been organising into “cooperatives” for some time now, under the direction of NGOs like APMAS, but given the way you have made it clear cooperatives really function, I wonder whether they actually really are cooperatives. The SHGs exist as groups to get people, who alone would be too poor to get one, a group bank account and usually also a loan through the group, and federations of these SHGs are being registered as cooperatives. There is some paid-in capital for the SHG federation cooperative to be established, but it is my impression that beyond that, the cooperative merely functions as a vehicle for individual financial dealings. There appears to be none of the mutuality which you have pointed out is the essence of cooperatives.
Best
Phil
PS: Your English has been perfectly clear, it might be better than you think!
September 15, 2011 at 18:02
Zvi Galor
Phil, I would like to add few more words about MFis.
Everybody is trying to speak about the importance of delivering and channeling finance to the Poor.
I think you know better than me how much of this finance has been swallowed on its way, by various organizations and federation and what not, but the real question, which I am not aware if it was asked, is why transfer the money to the poor.
Some the answers were in large: The problem of the poor is that the poor is not bankable, and can’t reach sources of finance. If finance is available to the poor, would it be effective to change his/her life.
My experience, probably not rich enough, is that entrepreneurship and ability to be an employer with self-employment, and which is sustainable on the long run, is rare. Most people, including poor, are not so good and efficient entrepreneurs.
Even if we find the very small percentage, among the poor, who are benefitted of these qualities, how e are doing to help them overcoming the difficulties of being self employed. Statistics in the western world show that most of these small business are dying on the short run. Late alone in the developing world with all its natural difficulties.
If we tale an example of a traditional farmer, exploited by the moneylenders, as well as by private traders selling him/her the necessary inputs with too high price, and when crops are ready for market the yield is sold to middlemen paying to the farmer too low price. In most of the cases the three functions are done by the same person. Practically, the person which deliver money, inputs and marketing to the small farmer, and exploits the farmers deeply, is closing to the farmers the Essential Triangle of Production (ETP). Where any MFI did this for the farmers, or for small scale artisans or for petty traders. Where a MFI did a business plan to a woman who wish to establish her small business, beside supplying her with finance.
This ETP can be created, as it was in the Moshav in Israel, by the multi-purpose cooperative in the Moshav and assists the members farmers to get the highest results from its work.
May be, we should take an example from the development of South Korea and Taiwan, where the success was clear. Most of the poor need employment with remuneration where they are living, and not to be self employed without any assurance for their economic future.
Best regards
Zvi
September 16, 2011 at 10:43
philmader
Zvi, why is finance understood as the solution to poverty? My thoughts exactly. I consider the idea that most poor people are just “bonsai” (Yunus) entrepreneurs, actually destined to be businesspeople but stunted in reality by a lack of credit, to one of the central microfinance myths. If you do not know it yet, you will surely enjoy this article by Aneel Karnani: Romanticising the Poor. Perhaps the even more fundamental version of this myth is the one that poor people are essentially portfolio managers, trained by life to be far more skilful than you and me at minimising risk while maximising returns, but simply just not endowed with the necessary capital. This is what I call “financialising poverty” – understanding it as a problem of finance, which can only be solved by finance.
I agree with you that, because of these assumptions (which are grounded, make no mistake, in a philosophy of complete individual responsibility), microfinance does nothing to change the economic structures which work at micro and macro levels to keep the poor in their place. Ha-Joon Chang and Milford Bateman wrote a great paper two years ago explaining why microfinance does not – and cannot – create the kind of scale economies which led to success in East Asia, and therefore does not create the jobs and value chains necessary for development in a capitalist model.
Finally, I think Wolfgang Hiemann has raised an interesting point. There seems to be a fundamental ambiguity about ownership of cooperatives. Is this perhaps central, even essential, to the idea of cooperatives?
Regards,
Phil
September 16, 2011 at 12:43
9/16/2011 Blogs Update « AbolishPoverty
[…] False Histories: Microfinance and its non-Lineage of German … […]
September 16, 2011 at 17:00
Zvi Galor
Thanks Phil,
I can’t but being frustrated to see that ideas and thinking I have expressed on both list serves (MF. and Dev,Finance archives) almost ten years ago have been grounded on the academic landing field of the micro-finance.
And to think how many people and how much money was spent to run the UN declaration of the MF decade, which brought prosperity to the hotels and to the restaurants in Canada, where the convention took place.
I think that the issue of ownership in cooperatives is essential. Most people, most members of cooperative and most leaders of cooperative do not really understand that their cooperatives are not really theirs.
I think that a real cooperative is standing two legs:
a. The equal ownership of members on their cooperatives. The idea is very simple. A cooperative is created by individuals who wish to achieve something, a product, a service or an employment. To achieve these at the best possible quality and at the lowest possible cost. These individuals wish to achieve these as individual, since no one like to collaborate with others, and would prefer to achieve what ever is, by him/herself. When the reality presents itself and people realizes that alone they would never be able to achieve what they wish, they are ready to give up part of their individuality, and then to collaborate with other individuals, who wish the same, who have come to understand that alone nothing would be possible. Then, all these individuals are ready to collaborate together and create a cooperative, an economic enterprise where the individual would be able to achieve what the one is looking for.
They are paying, in cash or in part of the needed credit to establish the cooperative, The part of each individual in this cooperative is equal, so the member pays one share capital equal in value and, the most important, they were always be in real value.
The formula is very simple: the share capital in the cooperative = the total real value of the equity of the cooperative divided by the number of the members in the cooperative. In this way, the number of shares is equal to the number of members, and that the value of the share is fluctuating as the value o the equity of the cooperative.
b. The second leg is the participation of each members in the cooperative business. The member participates in the economic life of the cooperative, and in most of the time unequally. The member wishes that this participation would be the less costly possible. The member wishes to pay the lowest possible price for the participation. The members do not care about surpluses or reserve funds, or buildings out of surpluses. They wish to pay as low as possible, and this is their right.
The formula, for consumer cooperative, is very simple: the total cost of the purchasing of all items to be sold by the cooperative + the total operating expenses EQUAL the selling price of the items to members. You can evaluate that this formula enables the cooperative to sell at the lowest possible cost to members.
The current idea of the cooperatives in the world that a good cooperative manger is the one who has been able to generate plenty of surpluses in the cooperative, without the understand that these surpluses came for the pockets of members.
Well, I hope that my view about cooperatives is understood.
Best regards
Zvi
September 17, 2011 at 12:42
9/17/2011 Blogs Update « AbolishPoverty
[…] False Histories: Microfinance and its non-Lineage of German … […]
September 18, 2011 at 06:57
Peter van Dijk
Often I think that the definition of what Micro-Finance is and what it is supposed to do is not deeply analysed before discussing it.
In general one can distinguish between two definitions:-
1. Lending to people for different socio-political objectives and
2. Building an inclusive financial sector in which all people have effective access to professional services providers whose professionalism is guaranteed through regulation and effective supervision.
In the 2nd definition providers are held liable for their performance.
Undertaking socio-political services is difficult to pinpoint and the providers, promoters and supporters avoid being held financially and legally responsible for what they said and promised.
Cooperatives played and are still playing an important role in a process that ensures that a society and its economy are indeed inclusive and where the part of marginalised, excluded people who depend on charity (organised by government or private charities) is small (and where government can thus afford managing a social welfare state funded by tax income).
Consequently, it is indeed too limited to argue that cooperatives are responsible for inclusive financial sectors. Government strategies, public-private collaboration as well as business initiatives are also important, illustrated by government owned postal banks, savings banks and municipal credit banks which have and are in many countries still playing an important role.
Arguing that Micro-finance is providing micro-loans to people determined with poverty measurement indicators, is a political decision that ignores reality and evolution (for instance, since 2004 GrameenBank is a deposit-led profitable retail bank, certainly not a social micro-credit NGO).
Cheers, Peter
September 18, 2011 at 14:12
philmader
Interesting point Peter, thank you for clarifying. I guess at the most basic level, it confirms that comparing cooperatives with MFIs is comparing apples and oranges. My point exactly in this blog post.
However, when comparing MFIs with MFIs, things seem to get more complicated; there is a tradeoff between taking all MFIs to be different, and thereby never reaching any generalisable assessments, and treating all MFIs as the same, but thereby ignoring their different strategies/models/etc. I don’t know which side to err on; on the one hand there is a standard model promoted by CGAP (for-proft, tapping international financial markets, emphasis on lending), but on the other hand every time I generalise on the basis of that standard model, I am put in my place for ignoring the actual diversity in the field. Perhaps there is a need for better terminology in the microfinance field to distinguish different categories of MFI based on their real objectives, their strategies, their onership, their results, etc.
September 19, 2011 at 12:42
9/19/2011 Blogs Update « AbolishPoverty
[…] False Histories: Microfinance and its non-Lineage of German … […]
September 19, 2011 at 13:22
Peter van Dijk
Dear sir philmader,
My guess is that it would make your life a lot easier if you have a clear definition of what Micro-Finance is. From your comment it is not clear to me.
You seem to say that MF covers all financial services that everyone and poor people even more so, need, to manage the money they have (even the poorest, otherwise they would be d…) safely (thus by institutions that can effectively be held accountable). If this is the definition you support then also cooperatives are a fruit (apples or oranges I don’t mind) that with other legal statutes (companies mainly) demonstrate(d) their (potential) success (in many countries coops were failures for mainly 3 reasons: 1. Government determined programs, 2. Credit-focused, 3. Profit-sharing among members as one of main objectives from the start) in supporting building inclusive financial sectors.
So if we are still on the same level, please relax by accepting that “MFIs” don’t have a “general” or “standard” model. It strongly depends on the local context and the local process and whether there is a coherent framework of National Strategy, Policies, Regulations, Effective Supervision (ensuring full compliance) and integration of all parties (including civic societies and foreign donors). In my view that also means that social NGOs (with their donors) that define MF as Micro-loans for all kinds of purposes (poverty, youth, income generation, micro-enterprise, elderly, women, left-handed plumbers etc.) have an important role to play, BUT outside the financial sector and not undermining the process of building an inclusive financial sector (i.e. social welfare, market-preparation, awareness building, etc.).
Cheers, Peter
September 20, 2011 at 19:20
Phil Mader
Dear Peter,
I agree with you on this: there is diversity in the field of “small financial services” for the poor. There are very different traditions – cooperatives, moneylenders, MFIs, SHG bank-linkages, government credit, etc. – and I realise that they are often subsumed under the label “microfinance”; but I would not accept a broad definition of microfinance which seeks to call all the above microfinance. I would advocate a definition which differentiates the others from MFIs. MFIs have the specific history of being funded and promoted by international development organisations, and are shifting funding to the private sector, and have been undergoing a process of institutional isomorphism – not ordained, but incentivised – under the lead of organisations like CGAP, explained for instance in the “Pink Book” of Microfinance Consensus Guidelines, to become a rather homogeneous and distinct type of organisation.
I see that there is still a significant organisational difference between many NGO-type and the shareholder-type MFIs, and various shades in between, however in practice they are usually evaluated along the same criteria and often are funded and operated in the same way. This does not mean there is one completely standard MFI type, but there is certainly a general model along which they are aligned, which makes them different from other finance providers. Even in the case of McDonalds, national strategies, regulations and cultural differences are reflected, and every restaurant looks different in accordance with local expectations, but McDonalds franchises are still run roughly along the same business principles and along the same general model.
My original point is that it is worthwhile to differentiate between cooperatives and MFIs, since their different histories have created different modes of operation and different aims – perhaps the same way McDonalds will always be different from company cafeterias, though both do fast food.
Best, Phil
September 21, 2011 at 08:53
P2P Foundation » Blog Archive » Why cooperative banking is better than microfinance: ownership and control matters!
[…] disputes the myth that Yunus’ microfinance proceeds from the German cooperative banking system. Though […]
September 25, 2011 at 10:37
Zvi Galor
Dear Phil,
I wonder if something misfortune has happened to Wolfram.
He asked me questions. I answered him once, and then the second time, but no echo from him. I hope he is well. I hope that my questions to him did not cause him any trouble.
Looking forward to hearing from you.
Regards
zvi
September 26, 2011 at 20:22
Phil Mader
Dear Zvi,
Perhaps Wolfram did not activate the “Notify me of follow-up comments” function, in which case he would be unaware of your comments.
While I am now aware than ever that I must learn more about the principles of cooperatives so I can compare them with microfinance, I gather that there are different kinds and varying understandings. I gather that the “Moshav” is a specific Israeli type, somewhat related to the Kibbutz movement, but less collectivist. Perhaps this is where some of the differences lie between the different understandings expressed here?
I know that my girlfriend holds shares (“Anteile”) in the small German cooperative bank where she worked until recently, which can be sold and which do give a yearly payout when the members vote to do so. However, in Germany there seems to be a wide range of very different cooperative models, with everything from housing to the country’s largest supermarket chain being operated on a coop basis; perhaps this diversity makes it impossible to generalise in an empirical sense.
Regards, Phil
September 26, 2011 at 22:16
Zvi Galor
Dear Phil,
Moshav is a cooperative village, and it is not Kibbutz. The Moshav and the Kibbutz, both rural community villages ha ve been changed and modified significantly.
As for the cooperative in Germany. They have very long tradition and history. They share another feature, and that they are not belonging to their members individually, and obviously, they are not rendering members the best possible service at the lowest possible cost.
Regards,
Zvi
February 24, 2012 at 20:18
saman from galle
“The first Genossenschaften in Germany were founded simultaneously in 1847 by Friedrich-Wilhelm Raiffeisen and Herrman Schulze-Delitzsch as a response to famine”
In the very beginning this was not in the category of cooperatives.
Can you please explain how this method or system or anything absorbed in to the Cooperative Movement basically founded by the Rochdale Pioneers.
February 27, 2012 at 13:21
Phil Mader
Hi Saman. You raise an interesting question, about which I sadly do not know enough. The Rochdale Pioneers cooperative society was founded in the same era as Raiffeisen and Volksbanken, which I know, but I do not know to what extent they influenced each other. In any case, the German and British cooperative systems have taken profoundly different routes in the meantime. Perhaps you know something about how the different systems institutionally learned from one another? Phil
March 3, 2012 at 14:23
saman from galle
Thank you for your reply. The Question came into my mind when I read Henry W. Wolff’s ‘The Peoples Banks’.I’m a writer in Sri Lanka. The Language I write books is Sinhala. Its a pity to say that there are hardly any books on Cooperatives. I am working on a book on Cooperative Credit and I am looking for an answer for that question.
March 7, 2012 at 19:42
Phil Mader
Saman, I would be keen to know what you find out! I also found Henry Wolff’s book to be illuminating. If you like, I can send you the historical chapter of my dissertation, in which I draw on the book, once it is ready. Phil
March 15, 2012 at 12:22
saman from galle
Yes Phil, If you do that I appreciate it as a big help.
April 23, 2013 at 19:51
Okafo
I have enjoyed the philosophical approach of Zvi to the meaning of coops and the sad way Phil has changed positions. Coops belong to their members, period. One wrong practice cannot change the principle or the spirit behind it.