15 December 2014 – by Jeroen Geelhoed, &samhoud consultancy
Cooperatives are hot and hip. Existing cooperatives such as Rabobank and Achmea are reassessing their ‘roots’. Various new cooperatives are emerging, especially within the financial sector. The New B initiative in Belgium, the Bread Fund (Broodfonds) or Credit Unions are just some examples of cooperatives that are springing up. Dutch MP Eddy van Hijum (CDA) recently called for the further promotion and support of credit unions. The cooperative philosophy is far from new, however. Friedrich Wilhelm Raiffeisen, the founder of the credit cooperative, was born a long time ago. What can we learn from the business model of Raiffeisen’s first credit cooperative?
A man with ideas
Friedrich Wilhelm Raiffeisen was born in 1818 in the German town of Hamm. At the age of 27 he was appointed mayor of Weyerbusch, a small group of villages in a terribly impoverished farming area called Westerwald. A major crisis at the time required him to take immediate action. Failed harvests had caused both famine and a lack of money. The population was at the mercy of loan sharks, from whom they had borrowed money at extremely high interest rates. Raiffeisen obtained grain through the government, but it had to be paid in cash. Raiffeisen had an idea to solve this problem, which was known as the Bread Society (Broodfonds). He asks wealthy town residents to provide their surplus money to the association at a reasonable rate. The association then lent the money to poor farmers for bread. All farmers who borrowed money were able to repay their small debts after a year and their needs were alleviated. After Weyerbusch (Bread Association), the towns of Flammersfeld (Cow Association) and Heddesdorf (where the first credit cooperative was established) followed suit. The underlying principle was “Help through Self-Help”. What was the business model of the cooperative, and what can we learn from it?
The town as a target group
It will not come as a surprise to learn that Raiffeisen focused on the local community as a whole. He was, after all, the mayor and therefore concerned with the well-being and prosperity of all ‘his’ citizens. With regard to the cooperative, however, there is a lot more to say. Raiffeisen’s cooperative focused specifically on both the wealthy and the poor. He asked the rich to make their excess money available at a reasonable rate. He was then able to lend money to the poor so that they could get by. The geographical demarcation was an important choice: the town of which he was the mayor at that moment. This is how cooperatives sprung up in many different places, each operating within their own area. The cooperative grew, but did not become a Moloch. Instead, the idea spread, creating new, small cooperatives everywhere that were positioned in the heart of the community.
The cooperative: win-win for rich and poor
What did a wealthy person stand to gain from becoming a member of the cooperative? And what would it cost him? Firstly, the rich lender received a reasonable interest rate (3%) for lending his surplus money. He also knew that the money would be well spent as it would benefit the community. That made him feel good as he was not only helping others rebuild their livelihood, but also supporting the community during difficult times. The wealthy did not have to pay a price for this, but were most certainly at risk. He was obliged to become a member and therefore jointly and severally liable. Raiffeisen nevertheless knew that he could mobilise the wealthy by appealing to their Christian sense of charity. After a number of years the risk diminished because all loans would be repaid properly, profits would remain within the cooperative and personal capital would remain abundant.
And the borrowers? They received money to rebuild their lives, even in times of hunger, harvest failures and everything else. The interest rate was reasonable: 3.5% and a charge of 0.25%. They were also given plenty of time to repay the loan, albeit with a ‘zero tolerance’ approach if repayment agreements were not observed. On the one hand, this evoked the difficult feeling of needing to ask the cooperative for assistance, but on the other hand, it gave the feeling of: “I can do it myself now. I am no longer at the mercy of loan sharks.” Although borrowers had to pay a fair rate of interest, it was significantly lower than that demanded by loan sharks. They also had to demonstrate creditworthy behaviour. Those with a reputation for not spending money wisely and wasting it would not be qualify for a loan from the cooperative. This was an important self-correcting mechanism of a human dimension.
Frugal, yet nearby
The distribution and sales channels of the Raiffeisen cooperative were dominated by frugality. Initially it had no offices whatsoever. Instead, clergymen had a room in their home for the credit cooperative that contained nothing else except a strong box. Teachers took care of bookkeeping, which made the cooperatives smaller and frugal. Although this did little to boost the bank’s profile, it did help keep costs to a minimum. The cooperative was located nearby, within the local community. Raiffeisen worked closely together with ‘distribution partners’ such as the church. This organisational method also provided the social control necessary for determining whether people were creditworthy and spent their money appropriately. The connection between the local church and the mayor also inspired trust in the cooperative.
Cooperative associations and ‘focus on culture’
Raiffeisen attached great importance to the way in which everything was done. People who worked for the cooperative – most of whom went unpaid – had to embody the vision. The long-term existence of the Raiffeisen cooperative was ensured by the right people alone and not through articles of association. That is why Raiffeisen organised annual meetings or Verbandstagen, during which he always informed his audience about charitable ideas and moral upliftment that formed the cornerstone of the cooperative. Doing so ensured that cooperative associations did not become ones that focused purely on finance. Raiffeisen was also a principled man in another respect. People who became involved with loan sharks (regardless of whether they were lenders, borrowers or employees) were thrown out of the cooperative immediately. It was about building the community and assets were based on community money. The cooperative’s capital had been built up carefully by keeping profits within the cooperative and adding them to its reserves instead of paying them out.
Supervision: hard on the soft things
The lending process was another key aspect of the cooperative’s business model. Every single loan request was scrutinised. The cooperative looked at the potential risk first, but also primarily at the borrower’s behaviour and attitude. Was the person concerned creditworthy? Could he be trusted to handle the money properly and repay the loan? The local nature of the cooperative also facilitated this. People knew one another and could call each other to account for their behaviour. And to crown it all, the cooperative also examined how people would spend the money they wished to lend. The loan had to be for a sensible investment or expense and not for the purpose of excessive consumption. That is how you can avoid a credit crisis… This was not important not only to Raiffeisen but also to members themselves since they were personally liable. Although they truly desired to help others out of their sense of charity, they were averse to taking any unnecessary risks. It is also worth noting that the cooperative was an association of members. Members were subjected to risks and liable, but also had a say. They could chose an own board from within their ranks.
Cooperatives help each other
An umbrella organisation was established. Small cooperatives in all of the various towns were vulnerable and also at risk of running into difficulties. But Raiffeisen also had an idea how to deal with that. A central cooperative was created, of which the different credit cooperatives were members. The cooperatives could therefore jump in and help each other when required.
The results of the cooperative business model?
The results of Raiffeisen’s cooperative business model were breathtaking. Karl Marx, a contemporary in the same region, would be envious. Prosperity and welfare increased throughout Westerwald. Villages and towns flourished, and people were once again able to determine their livelihoods. In Flammersfeld, for example, those farmers who had succumbed to loan sharks became free farmers again within a decade. Within a few years there were 75 cooperatives, and in no time the cooperative idea had spread throughout Germany, across its borders and, yes, around the world. Things also progressed well on a financial level. Within less than a decade the cooperative had a turnover of 40,000 Thalers, with 20,000 Thalers offered as loans and a reserve capital of 1,500 Thalers. And in just over thirty years some three thousand local cooperatives were affiliated to the central cooperative. These results were long term given that cooperative banks nowadays usually have the highest level of creditworthiness and provide stability within the financial sector.
Lessons from Friedrich Wilhelm Raiffeisen
- A brilliant business model is not created in one go. On the contrary, the concept is created by trial and error. A Bread Society was created first, followed by a Cow Society and then a Charitable Society, eventually culminating in a cooperative. The lessons learned in the meantime were constantly incorporated within the new idea.
- The human dimension is a prerequisite for the cooperative. Since mutual connection is an essential part of the business model, the cooperatives must remain relatively small so that people know each other, can trust each other and can help each other. Social control, mutual trust and the human dimension are important cornerstones of the cooperative’s business model.
- The cooperative structure is inherently scalable, without losing its human dimension. Local cooperatives can be duplicated easily, allowing them to grow whilst retaining local autonomy.
- The idea of helping people to help themselves is a powerful philosophy. It is a fair concept for everyone and creates win-win situations. Mutual dependence and joint ownership reinforce this.
- Preserving the core of an organisation requires you to constantly share and maintain the backgrounds, philosophy and ideas. This can be done in various ways, such as hiring policy, annual meetings, etc. Failure to do so means that the organisation runs the risk of becoming a soulless entity that no longer makes a difference. In other words, constantly sharing the business model and underlying philosophy will make the various stakeholders understand your aim, and they will also act accordingly.
- Raiffeisen was both a mayor and an entrepreneur. It was therefore not about the dilemma of ‘market forces’ versus ‘government control’, but about utilising entrepreneurship to realise social goals. Civil society organisations can learn from this by thinking and acting like a social entrepreneur to foster prosperity and well-being within a community.
It is wonderful to see that new initiatives such as the modern-day Bread Fund and Credit Unions are harking back to the original ideas of the cooperative. These new small-scale initiatives are often even closer to the cooperative’s roots than the ‘big boys’, such as Rabobank (originating from the Raiffeisenbank), DELA, PGGM and Achmea. At the same time, it is extremely valuable that precisely these ‘big boys’ are consciously busy further shaping and reinventing the cooperative philosophy. The lessons of Raiffeisen are still immensely useful for this purpose. They are ideas that have proven to be successful and that have created value for entire communities.