While they had existed for centuries before, it was during the 19th century that access to banks was extended to virtually all classes. In Europe and America, new types of banks were formed, including credit unions, that sought to provide dependable financial services to ordinary people. The first of these credit unions were formed in Germany and among their founders was Friedrich Raiffeisen, a public servant turned charitable financial entrepreneur. Today, many credit unions in Germany and abroad can trace their heritage to what Raiffeisen created well over a century ago.
Friedrich Wilhelm Raiffeisen was born in the town of Hamm in the German Rhineland in 1818 to a family of farmers. His father was the town’s disgraced former mayor, dismissed the year after Friedrich was born for stealing poor-relief funds and was only spared prosecution because he was considered infirm, the result of either a neurological disease or alcoholism. He was apparently not too infirm to have been made mayor in the first place though.
In any case, Friedrich Raiffeisen built his own career in civil administration. After years of military service, Raiffeisen worked as a civil servant in Koblenz until 1845 when he was appointed mayor of Weyerbusch, a rural community not far from where Raiffeisen was born and just east of Bonn. In Weyerbusch, he founded a cooperative bakery in 1846, a year when crop failures plagued Germany and produced one of the last famines in Europe. He put this bakery to use feeding the poor. His development of cooperatives followed his early career. After Weyerbusch, Raiffeisen was transferred to Flammersfeld where, as mayor, he created an association sponsored by wealthy people which provided low interest rate loans to small farmers acquiring cattle.
In 1852, Raiffeisen was elected mayor of Heddesdorf and a credit union there, the Heddesdorfer Spar- und Darlehnskassenverein, was founded by Raiffeisen in 1862. This time, Raiffeisen retired from public service to develop this new organization having seen how his earlier project in Flammersfeld faded after he left. He wanted this organization, said to have been the first rural credit union, to be self-sustaining and so avoided relying on wealthy sponsors. After 1864, the credit union used members’ deposits to provide loans to other members.
While perhaps the first credit union in a rural economy, it was not the first credit union more generally, not even in Germany. Franz Hermann Schulze-Delitzsch, a contemporary of Raiffeisen, had formed credit unions in more urban areas before and the two were very conscious of each other’s work. However, Schulze-Delitzsch’s creations were not obviously extendable to rural economies. As urban institutions, his credit unions had the benefit of more members and greater resources.
Rural credit unions also differed in the use of loans since borrowers were far more likely to need credit for agrarian purposes which urban institutions hardly specialized in. This was unfortunate because Raiffeisen noticed that debt was a key problem for small farmers. Farmers were essentially entrepreneurs and so access to and understanding of finance was essential to their success especially since, in the modern era, farmers were more affected by market forces than ever before.
Raiffeisen’s rural credit union, and its imitations, limited membership to residents of very small areas. This was intentional and not only a byproduct of its rural origins. The reasoning was that all members would know each other and that this would improve solidarity and reduce losses to spendthrifts and frauds. Conservative lending was especially important since members did not benefit from limited liability if the bank failed; limited liability was not extended to cooperatives in Germany until 1889. This model of a small rural credit union was copied and transported elsewhere, beyond Heddesdorf, by Raiffeisen and others.
In addition to the options available to ordinary banks, credit unions have a further source of funding, the dues charged to members. This source of capital was appealing because it was permanent, unlike deposits or borrowings. However, Raiffeisen’s credit unions did not rely on membership dues to the same extent as those credit unions following Schulze-Delitzsch’s approach. Instead, money for lending came from borrowing.
By funding loans with borrowed money, Raiffeisen wanted to create a place where members could invest money. He believed that credit unions should also create opportunities for people to save and invest as well as to borrow. Relying on borrowings also reduced reliance on membership fees to fund lending, making it easier for credit unions to find willing members. Of course, borrowing to fund long term loans added liquidity risk so to handle this, credit unions employing Raiffeisen’s model maintained a reserve fund with part of their funding.
Of course, the original purpose of the credit union was to provide low-cost financing to members and only members were eligible to borrow from Raiffeisen’s credit unions. These loans went towards financing agricultural equipment and other improvements to farms. Since the prices of these improvements could be very high, loan terms could be as long as ten years. This contrasted with the loans offered by urban institutions which were usually only short term. That said, rural credit cooperatives also provided short-term working capital to farmers and these would be extended for just a year or less. Reflecting the rural origins of the cooperatives, loan maturities and amortization payments were initially fixed at November 1st to correspond with harvest time.
All loans required some sort of collateral and this security helped reduce losses, allowing for credit to be extended at lower cost to borrowers. Raiffeisen’s primary aim was to make sure that interest rates were meaningfully lower than those offered by loan sharks but they weren’t to be unreasonably low. He supported the idea that even within a credit union, interest rates should follow market dynamics and that money shouldn’t simply be given away. Five percent per year was a typical interest rate charged by the rural credit unions and this would have been supplemented by only a low ‘handling fee’ of usually no more than 1%.
For his work, Raiffeisen garnered recognition from government ministers, aristocrats, academics, and the clergy of both Catholic and Protestant churches who looked favorably on his credit cooperatives. Its support within these conservative circles shouldn’t necessarily be taken as obvious or natural. Various other co-operative organizations were founded by leftists and revolutionaries but by contrast, Raiffeisen tried to win the support of conservatives. This sparked a conflict with the other great founder of the credit union movement, Schulze-Delitzsch, but this support may also have helped credit unions spread across Germany.
In the decades after the first of Raiffeisen’s credit unions was established in Heddesdorf, thousands more of these ‘Raiffeisen Banks’ were established in Germany. He even went on to establish a central clearing house for credit unions in 1869 and a credit union federation in 1877. These sorts of centralized institutions organized a scattered movement. In practice, they helped smooth out individual credit unions’ liquidity needs and provided auditing services. Raiffeisen died in 1888 and in 1902, a memorial was dedicated to him in Heddesdorf; within a little more than a decade after that, credit cooperatives would hold 8% of all German banking liabilities.
Of course, credit unions are not a German peculiarity. The business model was imported to France by Louis Durand and copied in North America by Alphonse Desjardins. Today, banking groups as large and geographically dispersed as Crédit Agricole in France, Rabobank in the Netherlands, and Canada’s Desjardins Group are heirs to Raiffeisen’s creation in Germany. In addition to the small cooperatives, larger centralized financial institutions in Germany, like today’s DZ Bank are the product of Raiffeisen’s work.
The credit union movement was hardly the product of Friedrich Raiffeisen alone. He did not create the first of this type of financial institution nor the largest. However, he did extend them to rural economies which were most neglected by traditional banks and where they found the greatest success, at least in Germany. The model he created there inspired imitators elsewhere in Europe and North America and for that reason alone, it wouldn’t be unreasonable to consider him among the most influential men in finance.
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1. Aschhoff, Gunther. “The Banking Principles of Hermann Schulze-Delitzsch and Friedrich Wilhelm Raiffeisen.” German Yearbook on Business History 1982, 1982, pp. 19–41.
2. Fairbairn, Brett. “Raiffeisen As Social Innovator.” Annals of Public and Cooperative Economics, vol. 88, no. 3, 2017, pp. 425–448.
3. Friedrich Wilhelm Raiffeisen. International Co-Operative Alliance, www.ica.coop.
4. Friedrich Wilhelm Raiffeisen. The Power of an Idea. International Raiffeisen Union, 28 May 2018.
5. Guinnane, Timothy W. “Regional Organizations in the German Cooperative Banking System in the Late 19th Century.” Research in Economics, vol. 51, no. 3, 1997, pp. 251–274.