A credit union offers many of the same products and services as a bank. The major difference is that a Credit Union is owned and controlled by its members. Due to this ownership structure, motives other than generating profit can be substantial drivers.
Members of a Credit Union have a common bond, such as members of the same profession or religious affiliation.
The Board of Directors is elected by the members of the Credit Union.
The rules for Credit Unions vary substantially by country. On this site we detail the similarities and differences between Credit Unions in all the jurisdictions.
Credit unions are community-based banks organized according to cooperative principles.
Credit unions are best identified by their adherence to cooperative principles, especially related to membership and control. For example, after World War II many organizations were started by and/or controlled by governments in the developing world, and were described as “credit unions” or “cooperatives” by their promoters. However, government control, whether in a capitalist or communist political context, represents a fundamental repudiation of cooperative principles.
In spite of the word “credit” in their name, even the earliest credit unions usually offered both savings and credit services, and often payment and insurance services as well. And they were known by (and are still known by) a wide range of names, for example: “people's banks”, “cooperative banks“, “caisses populaires”, and “credit associations”.
In the early stages of development of a nation's financial system, unserved and underserved populations often rely on risky and expensive informal financial services from sources like money lenders and family savings. Credit unions meet demand for financial services that banks do not: from professional, middle class and poorer people. Those that served poorer urban and rural communities became an important source of microfinance.
The first working credit union models sprang up in Germany in the 1850s and 1860s, and by the end of the 19th Century had taken root in much of Europe. They drew inspiration from cooperative successes in other sectors, such as retail and agricultural marketing.
The first successful credit unions began in Germany under the leadership of cooperative pioneer Hermann Schulze-Delitzsch. These credit unions would be recognizable today, since they adhered to the basic aspects of the co-operative identity: that is, they were “based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.” Shulze is credited with developing the bond of association which still forms the legal basis for credit unions today.
Unlike many of his contemporaries, Schulze-Delitzsch recognized that the functions of retail lending and purchasing business inputs were best kept separate in the interests of sound cooperative management. In 1852 Schulze-Delitzsch consolidated the learning from two pilot projects, one in Eilenburg and the other in Delitzsch into what are generally recognized as the first credit unions in the world.
Schulze-Delitzsch was an excellent organizer and advocate for the credit union idea. “Wherever he went, new people’s banks sprang up … by 1859 there were 183 with 18,000 members in Posen and Saxony.”
Schulze focused much of his attention on developing federations or trade associations to help protect the brand of these small organizations, ensure their stability and link them to the global banking system. As a member of the Prussian House of Representatives and the German Reichstag he secured passage of a national credit union law in 1871. By 1912 the people’s banks he founded had 641,000 members.
While Schulze’s credit unions were situated in urban areas and served traders, shop owners and artisans, Friedrich Wilhelm Raiffeisen founded the first rural credit union in the village of Heddesdorf (now a suburb of Neuwied) in Germany. Raiffeisen’s approach built on many aspects of Schulze’s, but with significant modifications that had important implications for microfinance.
Most of these differences reflected the differences between the markets the two types of credit unions served. Members of Raiffeisen’s credit unions were generally poorer than their urban counterparts. Many were ex-serfs, freed in various parts of Germany between 1800 and 1848. They had smaller, more seasonal and less predictable income flows. This made it difficult to rely on standard loan repayment arrangements. The small size of the credit unions, combined with extremely low educational endowments among the people, presented important management challenges.
While Schulze could rely largely on a commercial approach, Raiffeisen’s approach addressed the unique problems of the rural poor largely by exploiting the strong bonds of solidarity (known today as social capital) and deep Christian values in the typical village. For example, to make up for the very small and irregular availability of cash in rural communities, credit unions expected their directors to serve in a voluntary capacity, with only the cashier receiving a small stipend. Priests, teachers and other educated villagers were often inspired to serve by the cooperative values advanced by Raiffeisen’s movement.
The two leaders and their movements squared off in several bitter debates. Schulze repeatedly argued that because the Raiffeisen credit unions relied on only one paid staff person – a cashier – they were unsafe. The evidence never supported this allegation, however. And Raiffeisen strongly opposed efforts by Schulze to limit the liability of credit union members, because he felt that such limits would dilute bonds of association and the power of the rural banks to fund their loans from the savings of local members.
- With some source material from Wikipedia