Why cooperative banking is better than microfinance: ownership and control matters!

‘Phil’ disputes the myth that Yunus’ microfinance proceeds from the German cooperative banking system. Though there is a tenuous historical link (excerpt 1), microfinance fails to empower the poor (excerpt 2).

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A new systematic review of the evidence on microfinance, published last week, is dynamite for the world’s most popular development policy. Madeleine Bunting of the Guardian has already referred to it as “microfinance’s sober reckoning”, likening the findings to a “hangover after a big party”. Bangladeshi news calls it a “damning report”.


“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.”

2.: Differences between microfinance and the (German) cooperative model

“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.”

More Information:

* Book: Lamia Karim, 2011: Microfinance and Its Discontents: Women in Debt in Bangladesh. Minneapolis: University of Minnesota Press.(review)

2 Comments Why cooperative banking is better than microfinance: ownership and control matters!

  1. AvatarMike Riddell

    I don’t think it matters who started what, particularly. If Phil wants to be pedantic, the British Co-operative movement started in Rochdale, Greater Manchester, in 1844.



  2. AvatarVezi

    Yes the member ownership and control attribute influences the sustainability and affordability of capital and credit in a co-operative financial institution. It also ensures good governance and management of the institution where members take responsibility in ownership and control.

    South Africa

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