Document Type

Paper

Publication Date

4-2010

Abstract

Over the last two decades, the rise of microcredit has cast new light on the age-old question of how to provide credit to the poor. The attention paid to microcredit organizations however, tends to ignore the deeper historical legacy of microfinance, a legacy with important implications for designing successful future lending institutions. German credit cooperatives, which became popular in nineteenth-century Germany despite an already highly developed banking system, are one such example.

This paper examines the social and political context which inspired the development of credit cooperatives before turning to arguments about why cooperatives were able to provide small long-term loans to borrowers without collateral. These arguments center on efficiency advantages cooperatives’ possessed over traditional institutions because of: (1) an ability to capitalize on superior information, and (2) an ability to effectively impose low-cost sanctions on members who have defaulted. Testing these hypotheses against the data yielded by the business records of the first rural credit cooperative founded in Germany, the Heddesdorf cooperative, this research provides qualified support for both efficiency arguments and reveals important considerations for current microfinance efforts.

Comments

Special thanks to Professor Kirsten Wandschneider, who first introduced me to the topic, provided me with invaluable advice and guidance throughout my research, and finally, who also supervised the writing of the final paper.