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237 Chapter Thirteen Banking on the Difference Credit Unions as Superior Local Financial Institutions for the Poor Jessica Gordon Nembhard Introduction In 2005, the United Nations’ “Year of Microcredit,” the International Co-­ operative Alliance (ICA) used the occasion to highlight the important role that cooperative enterprises have played for more than a century in providing small-­ scale finance and supporting sustainable microenterprise development throughout the world. Launching the theme “Microfinance is our business— Co-­operating out of poverty” at the International Day of Cooperatives on July 2, 2005, the ICA (2005, 1) claimed that “co-­ operatives are amongst the most successful micro-­ finance institutions.” This statement was an important milestone in a number of ways. It represented an attempt by the cooperative movement to link itself with the then very popular microfinance movement. This was an especially ironic move given that the leading light in the microfinance movement , Dr. Muhammad Yunus, had always been very critical of the cooperative model compared with his own model of a “social business,” exemplified by Grameen Bank and its affiliates (see Bateman and Novković, chapter 6, this volume). Above all, however, this move by the ICA was an attempt to highlight the fact that cooperative and community-­ based financial institutions have very successfully and equitably served the small-­ scale credit needs of poor communities for many years, well before the recent and much-­ trumpeted arrival of the microfinance model in the 1980s. This chapter compares the services offered by the commercial banking and microfinance sector to those provided by the credit union and cooperative bank movement. I explore ways in which the rise of microfinance eclipsed cooperative and community-­ based forms of finance. While financial cooperatives and credit unions have a long history of financing small-­ scale economic activity, 238 Jessica Gordon Nembhard providing financial services to the underserved, and helping members take advantage of social capital in situations where financial capital is scarce, they are not best known for these activities. Instead, they are better known for building solidarity, trust, and mutual support within a community and for providing a foundation that promotes even greater equality, fairness, and social justice. Perhaps it was this additional “social transformation” role that microfinance supporters saw as invalidating the cooperative and community-­ based finance movement. And yet so many elements that made the microfinance movement look successful, such as cohort lending circles and shared responsibility for repayment, are cooperative and collective behaviors. I address these issues as I attempt to explain the often-­ complicated relations between two movements both claiming to be the best at providing small-­ scale finance. Background Credit unions operate as democratically managed institutions, both consumer cooperative financial organizations and community-­based financial institutions (in some countries not for profit).They originated during the early to mid-­1800s in Europe, notably in Germany and Austria, with the general objective of creating a local financial structure to support and benefit the rural and urban poor. Credit unions provide access to affordable financial services and loans, as well as opportunities for savings and investment, because their mission is to best serve their members.The philosophy behind credit unions is that people should be able to pool their money and make low-­ cost loans to each other for a variety of productive purposes, but also for simple consumption purposes (Birchall 1994). Any returns generated by such activities will be distributed to members of the credit union through lower interest rates on loans and higher interest rates on savings products. Membership in most credit unions was meant to remain affordable to all, with any initial membership fee paid off over a period of time thanks to the financial benefits accruing to members. In addition, credit unions were initially required to consist of people who shared a “common bond,” such as affiliation with a church, employer, union, neighborhood, or other community. This bond was important in creating and strengthening the relations of solidarity and mutual support that join individuals within particular communities of interest (Gordon Nembhard 2013). Finally, credit unions were set up, and continue today, to deliver low-­cost financial services, affordable Banking on the Difference 239 loans, financial literacy, and home-­ ownership education, particularly to underserved and marginalized communities.1 The gradual growth of credit unions across the world has sometimes been hindered by world events, such as wars and financial crises. Nonetheless, they became very important local financial institutions in North America and in many developing countries, such as Africa and Southeast Asia (Birchall 1994, 174...


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