Credit is important for nearly all businesses. Even for companies without a need to finance large projects, like small businesses in capital-light sectors like retail, capital is still tied up in inventories and receivables. Banks can be one source of credit but banks are often disinterested in serving small businesses, as was the case in the Netherlands at the start of the 20th century. Filling the void were special banks called middenstandsbanken which were backed by associations of small businesses and often by governments as well. The middenstandsbank experiment ended without achieving resounding success but their very creation was a testament to the seriousness with which small businesses treated the issue of credit, even a century ago.
Dutch Banking
From the 1890s to the First World War, the Dutch banking sector expanded as the number of banks and their average size rose. The combined balance sheets of the three largest banks grew to 380 million guilders in 1913; twenty years earlier, the sum was not even 100 million guilders. There was also growth further down the industry. The Rijkspostspaarbank (the Dutch postal bank) and other savings banks also grew, managing 184 million guilders and 130 million guilders respectively in 1913.
At the smallest end of the market, there were other kinds of banks as well. Starting at the very end of the 19th century, new agricultural cooperative banks were formed to serve the countryside. Their number grew tenfold in the period from 1900 to 1910. By 1913, another 53.5 million guilders were managed by these banks.
Generally, Dutch banks remained some of the most conservatively arranged in Europe. The ratio of equity capital to total assets of the five largest banks stood at a very conservative 27% in 1913, even after years of decline. Modern banks would appear far more aggressive by comparison. Until the First World War, the Dutch banking system was also relatively small compared to the money markets. Many firms raised money by tapping the capital markets rather than the banks.
Dutch banks also largely specialized in providing short-term credit for mercantile purposes. This form of lending seemed safe since loans could be secured by a merchant’s inventories or receivables; it was thus a form of short-term collateralized lending. This meant that banks could lend safely without assessing a borrower’s profitability. If a company failed, its inventories or receivables could repay a loan. However, only a few types of borrowers had the forms of collateral that banks demanded.
Middenstander
Among those who were left out were the middenstander, or small entrepreneurs, often shopkeepers and artisans. At the turn of the century, many of them felt squeezed by the growth of large corporations on the one hand and the demands of labor unions and the cooperative movement on the other. The middenstander formed lobbies to address the problems facing small businesses. While questions like fair competition were discussed at their conferences, no issue received so much perennial attention as credit. Chief among the lobbies’ concerns was a lack of credit for small- and medium-sized enterprises (SMEs).
Without credit, shopkeepers were forced to tie up their own capital in sales credit to their customers all while their suppliers demanded quicker repayment. This meant that beyond inventories, there were other factors increasing small business’s credit needs. Artisans needed capital as well to invest in new tools or equipment. These small businesses usually lacked the collateral demanded by the large banks and they were also unserved by credit unions and agricultural cooperatives; the latter specifically barred non-agrarian small businesses. In the very early 20th century, there were no financial institutions in the Netherlands well suited to serving the middenstander.
One of the middenstander lobbies, the Nederlandsche Bond van Vereenigingen van den Handeldrijvende en Industriëele Middenstand (NBVHIM), was formed in 1902 to unite SMEs of different political and religious affiliations. The early 20th century Netherlands was deeply divided along political and religious lines. Catholics, Protestants, Liberals, and Socialists had different political parties, trade unions, newspapers, universities, sports leagues, hospitals, youth organizations, etc.. While the NBVHIM did not succeed in becoming a ‘big tent’ for all middenstander, as Dutch society was far too divided for that, cooperation did exist between the different lobbies.
Middenstandsbanken
In 1904, an SME focused bank, the Hanzebank, was formed by the Algemeene Winkeliers Vereeniging, one of these middenstander lobbies affiliated with the Catholic Church in the Netherlands. Members of the organization funded the bank by buying shares, and ownership of at least one share was required to be a customer of the bank. In the case of default, one’s shares in the bank could be seized. After an underwhelming start to the share sale, the Dutch government provided 4,000 guilders for the establishment of the bank.
The SME banks, or middenstandsbanken, were formed, often as cooperatives, to provide credit to small and medium sized firms using the surplus funds of other SMEs. They required little to no collateral. SME banks in operation grew from just three in 1905 to twelve in 1910 and 59 in 1914. The number of middenstandsbanken grew considerably up to 1920. More generally, Dutch banking’s boom, already strong before the First World War was accelerating during the war years as the freezing of the money markets meant banks were left to fill the financing void.
The SME banks provided small loans, an average of 755 guilders among middenstandsbanken loans in 1912. This was an amount not very different than an average Dutch household income at the time. Most middenstandsbanken prohibited loans of over 3,000 guilders. After all, these were small banks; the average middenstandsbank had just 230,000 guilders of capital. Still, they tended not to support the very smallest of businesses and this created some tension within the middenstander movement. Some felt that the lobbies ignored the smallest SMEs.
Government Support
State support for the middenstandsbanken accelerated during the First World War under the leadership of the Dutch Minister of Finance, M. W. F. Treub. Besides the inevitable disruption, the war increased the working capital strain on small businesses as suppliers demanded cash for deliveries.
A central bank for SME banks, the Algemeene Centrale Bankvereeniging voor den Middenstand (ACBM), was established in 1914 to support the middenstandsbanken. The state guaranteed a one-million-guilder loan to the ACBM. National and local governments also directly supported individual SME banks. In 1915, a state commission for small business credit was formed which screened potential borrowers and guaranteed 55% of the default risk for the middenstandsbanken, guaranteeing 1.2 million guilders across 1,412 firms.
No doubt helped by this support, the number of middenstandsbanken in operation grew from the 59 in 1914, to 67 in 1915, and 95 in 1918. The middenstander associations sponsoring the banks also grew; one particular organization, the Catholic Hanze of Haarlem, grew from five hundred members in 1910 to ten thousand around 1920.
1920s Recession
Despite all the attention and support, the SME credit movement was about to face a grave challenge, the post-war recession. Many SME banks had undiversified clientele, themselves undiversified in their markets or products, and the banks largely failed to achieve great scale in the preceding years. Collectively, the middenstandsbanken made up just 0.5% of Dutch bank assets in 1918. Some were also not particularly well-managed, employing poor accounting practices that made risk management more difficult.
In the early-to-mid-1920s, Dutch banks went through a financial crisis that saw bank runs, illiquidity, and insolvencies. The crisis was caused by global post-war declines in demand and prices along with expectations that the Netherlands would return to the gold standard at pre-war rates. For the banks, all this came after decades of strong growth.
The recession of the early 1920s damaged the most recently formed and fastest growing banks most, and that meant many of the middenstandsbanken, which were an entirely new concept. Even one of the older SME banks, the Hanzebank, went bankrupt in 1923. Many middenstandsbanken would fail in the early-to-mid 1920s. Perhaps counterintuitively, government assistance was not as forthcoming in the crisis as it was in the boom years. When it did come, years of crisis had passed. It was absent in the early years when it could have made the largest difference. Further, because many SME banks were established as cooperatives and not limited liability corporations, member-shareholders were personally liable for their banks’ losses.
The central bank for the middenstandsbanken, the ACBM, took over many of the failing lenders. In turn, the ACBM itself experienced losses that exceeded its state guarantee. The Dutch government then assisted in the creation of the Nederlandsche Middenstandsbank in 1927, which combined the largest surviving middenstandsbanken remaining after the crisis. In the decades since, Nederlandsche Middenstandsbank was incorporated into what is now ING Group. Other local banks were acquired by the larger commercial banks and assumed their more short-term, conservative approach to lending.
After the end of years of prosperity, Dutch banks followed a more conversative management through the 1920s and so the country’s financial system was largely unaffected by the depression of the 1930s. However, the struggles and consolidation of the middenstandsbanken in its infancy also meant that the vision of creating a large flourishing financial ecosystem for small firms had failed. Small business’s concerns about the inaccessibility of capital returned. In any case, the extent of state support received by the middenstandsbanken revealed the political influence of the Dutch SME credit movement in the early 20th century.
Lesson
Banks may periodically expand into new markets and products only to retreat when the economics or regulations change. Be that as it may, banks have generally become more accessible over the centuries. That most people in wealthy countries today have at least one relationship with at least one bank cannot be taken for granted. However, at no point have banks served everyone.
As the Dutch example illustrates, even in an era of tremendous growth in banking, some still felt left out. So, even in that deeply divided society, small businesses found common cause in establishing a new SME-oriented financial system and secured large government support for their ventures. Yet, it failed to take off. As for so many financial endeavors, it is usually a matter of timing, at least in the short run.
More from the Tontine Coffee-House
Read about the role of Friedrich Raiffeisen and his agricultural cooperative banks in providing rural credit. Lastly, consider subscribing to this blog’s newsletter here.
Further Reading
1. Colvin, Christopher L. “Organizational Determinants of Bank Resilience: Explaining the Performance of SME Banks in the Dutch Financial Crisis of the 1920s.” Business History Review, vol. 92, no. 4, 2018, pp. 661–690.
2. Colvin, Christopher L. “Religion, Competition and Liability: Dutch Cooperative Banking in Crisis, 1919-1927.” London School of Economics and Political Science, 2011.
3. Hart, Marjolein ‘t, et al. A Financial History of the Netherlands. Cambridge Univ. Press, 1997.
4. Peeters, Ruben. “Getting a Foot in the Door: Small-Firm Credit and Interest Group Politics in the Netherlands, 1900–1927.” Enterprise & Society, vol. 23, no. 2, June 2022, pp. 1–37.
