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From Microfinance to Inclusive Finance: Why Local Banking Works


Once praised as a panacea to overcome poverty microfinance has had to face harsh criticism because of painful failures and unfulfilled expectations. Still many people in particular in rural regions do not have any access to formal financial services, many microfinance institutions are weak, and others rather exploit their clients driving them into over indebtedness than helping them out of poverty. What should microfinance achieve? Can it help to build up inclusive financial systems allowing access to basic financial services for everybody?
The historic templates for this book are the German Sparkassen and Cooperative banks that have a strong track record of development and growth spanning over 200 years. For obvious reasons their results cannot be transferred directly into specific solution options to today's challenges in developing countries. Nevertheless the coming into existence of Sparkassen and Cooperative banks can well be seen as part of a period of revolutionary developments in the European economic and social landscape, which can be viewed as analogous to the transformation that emerging economies are undergoing today. While Europe faced dramatically changing living conditions during the period of industrialization these newly creatd banks made change possible by unequivocally including the lower class population in the transformationby providing access to savings and loans. And it is this is parallel - even in the face of the many differences - which is why their development and success deserves careful consideration today.
The authors' approach differsfrom other explorations by specifically adopting an interdisciplinary strategy. They take into account past developments as well as current global ones from a historical, social science and economic point of view. Analysis and the interpretation of data is supported by case studies to illustrate their considerations. The authors identify general parameters both for failure and for success and also indicate how to optimize existing potentials - both for institutions and policy makers.
As a result of this interdisciplinary work the authors advance an inclusive stylised facts based model. The will to build up institutions, to adhere to corporate social responsibility and creating conducive legal frameworks form the basic conditions for success. More specifically, the guiding principles of these successful business models are a fair savings and credit policy, the promotion of capital transfers without reference to class and gender, a focus on business activities in a well defined region, decentralized organizational structures combined with national networks which avoid regional capital drains and the securing of economies of scale and scope. Llast but not least is the centrality of objectives beyond that of the sheer maximisation of profits.

Reinhard H. Schmidt is a professor of finance at Goethe University in Frankfurt. He has 30 years of experience as a consultant in development finance for various national and international organizations, has been the chairman of the supervisory board of one of the world's largest microfinance support institutions for five years and has published extensively on microfinance and development finance issues. In all these capacities he has strongly influenced the recent development of modern microfinance.
Hans Dieter Seibel is a professor emeritus at Cologne University and a board member of the European Microfinance Platform. He has also taught at the Universities of Monrovia, Princeton NJ and Dortmund. In 1988-91 he was team leader of Linking Banks and Self-Help Groups in Indonesia, a joint project of GIZ and the central bank of Indonesia, which has also served as a model for SHG banking programs in India, the Philippines, Thailand and other countries. In 1999-2001 he was Rural Finance Advisor at the International Fund for Agricultural Development, a UN agency in Rome, and author of its Rural Finance Policy.
Paul Thomes is Professor of Economic and Social History and History of Technology at the School of Business and Economics of RWTH Aachen University. He studied English, history, and economics at the Universities of Saarbrücken in Germany and Edinburgh in the UK. He received a doctoral degree in 1984, following his dissertation on the history of the Prussian savings banks, and a post-doctoral habilitation degree in 1992, following his work on the economy of the early modern town.
List of Abbreviations IX

List of Figures XIII

List of Snapshots  XV

List of Tables XVII

Foreword XIX

Preface XXI


1 Microfinance - banks - savings and cooperative banks  3

1.1 Microfinance: From humble beginnings to hype and disenchantment 3

1.2 Banks as providers of microfinance services 7

1.3 The relevance of savings banks and cooperative banks 8

1.4 Conclusions and consequences 10

2 Basic definitions 13

2.1 Why precise definitions are desirable but difficult to provide 13

2.2 Terms that need to be defined 14

3 The broader context of social and development-oriented banking 21

3.1 How new forms of financial institutions emerge and survive 21

3.2 The role of the state and other “third parties” 23

3.3 The art of financial institution building 25

3.4 The objectives of socially-oriented, inclusive financial institutions 31

4 Does history matter? 35

5 Our main propositions 39


1 Objectives - Why a historical perspective? Why credit cooperatives and savings banks? Why Germany?  43

2 Saving and borrowing - A socioeconomic historical approach 49

2.1 Satisfying needs - A vital challenge 49

2.2 Saving and borrowing - An everyday exercise 53

2.3 Winds of change - Pawnshops, widows’ and orphans’ funds, and savings and loan societies as innovative inclusive instruments of change management 55

2.4 Savings as a fundamental condition for change and growth 56

3 “Out of the box” - An international comparative survey of 19th century savings-based microfinance trends  59

4 The emergence of the German savings bank model - Inclusion from the beginning 65

4.1 Divergence and convergence - Comparing the early savings banks 68

4.2 Diffusion in the wake of early industrialization and growing incomes 72

4.3 The Prussian Savings Bank Regulations of 1838 - A legal template for future development 77

4.4 Urgent need for profound change - Towards the economic takeoff 81

4.5 The savings business around 1900 - Cradle-to-grave incentives 84

4.6 The credit business - A fluctuating and attractive combination of microfinance features 95

4.7 Debit and credit - Reserves and non-profit appropriation 107

4.8 Administrative and organizational success factors - Supervision, skill enhancement, and networks 108

5 Case study - The Aachen Association for Promoting Industriousness [Der Aachener Verein zur Beförderung der Arbeitsamkeit]: A holistic local inclusion approach  111

5.1 “Money and Intellect” - An integrated welfare concept combining insurance, savings, and education 112

5.2 The savings bank of the Aachen Association - A successful experiment 116

5.3 The end - The disastrous consequences of World War I 124

5.4 Evaluation - The holistic concept as a role model? 125

6 “Out of the box” - An international comparative survey of 19th-century credit-based microfinance trends 131

7 The emergence of the German credit cooperative model - Tradition meets innovation 135

7.1 The liberal approach - Schulze-Delitzsch and his “Volksbanks” (People’s Banks) 137

7.2 The Christian charity approach - Raiffeisen and his fight against rural usury 144

7.3 Dispute over principles - Jockeying for position and an optimization process 147

7.4 Wilhelm Haas and other agents of change - Salt in the soup? 150

7.5 Case study - The Hachenburg Credit Cooperative [Vorschussverein Hachenburg] 153

7.6 Volksbanks and Raiffeisen cooperatives - A remarkable success story 158

8 Savings banks, credit cooperatives, and commercial banks - Complementarity versus rivalry  163

9 Summary, conclusions, and outlook - Are there lessons to be learned from the History Lab? 169

9.1 Organizational findings 169

9.2 Practical findings 171

9.3 Connecting past and future 174

9.4 Overview - Constitutive elements of local banking in Germany: From microfinance to inclusive banking 177


1 An overview of institutions, concepts, and approaches 183

2 The spectrum of microfinance institutions 187

2.1 A typology of microfinance institutions 187

2.2 Informal microfinance 190

2.3 Community-based microfinance, or village “banks” 198

2.4 Cooperative microfinance: What role for government? 212

2.5 Microfinance banks 226

3 Sources of data on access to finance 265

3.1 Self-reporting by individual institutions 266

3.2 Global reporting by networks of financial institutions 269

3.3 Global data sets 274

3.4 Market saturation 280

4 Microfinance as a field of international aid and cooperation 283

4.1 Early forms of development finance and the emergence of microfinance 284

4.2 The turn towards modern microfinance 292

4.3 Strategies for creating efficient and sustainable microfinance institutions 296

4.4 Commercial microfinance and its challenges 308

4.5 Why microfinance is losing its clout 314


1 Summing up the historical survey 321

2 The general relevance of the historical survey for the design of development projects 325

3 The direct relevance of the historical survey for the design of development projects 331

4 A concluding comparative remark and a plea for diversity of banking structures 337

5 Summing up: Insights and recommendations for national and international decision makers based on 200 years of inclusive microfinance and local banking history 343

References 347