Profit from (and with) Your Neighbor: The Case of a German Credit Cooperative

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. These cooperatives are generally believed to have succeeded because of their ability to capitalize on superior information and effective low-cost enforcement to provide small long-term loans to borrowers traditionally underserved by the financial sector. This paper utilizes the business records of the first rural credit cooperative founded in Germany to provide some support for these assertions.