Paul Rippey noted in an earlier post a gap or ‘sour spot’ composed of organizations that are neither large enough to afford professional controls, nor small enough to benefit from social controls or social capital. Paul estimates that this sour spot ranges from about 50 to 5,000 clients or members. In recognition of the risks of crossing from one side to the other, we might envision this as a wild ocean frontier, replete with storms, the dragons of medieval cartography, and of course no shortage of mutineers.In 10 minutes we won’t be able to see a thing!

Can this frontier be crossed? Struggling with an identical issue in the 1860s, the German social entrepreneur F.W. Raiffeisen settled on the parish as the maximum size for a credit union in Germany. Two parishes meant two credit unions – there could be no exceptions. The larger distances, combined with the fact that the members did not gather every Sunday on the steps of the same church, reduced transparency and deepened control risks. Credit unions today often have tens of thousands of members, but in 1910 the average size of these savings-led village institutions in Germany was only 95 members (based on a sample of 12,797 credit unions with average capital of £6,482 each). Each one commanded just enough resources to pay a treasurer on a piece-work basis. Boards were fairly large (about 9-15 members), ensuring that work got done and duties were separated.

Many experts in microfinance and in the wider development field argue that community-based institutions like savings associations or credit unions are too small to generate economies of scale or scope. Like the ocean Columbus was warned not to cross, the ocean faced by Raiffeisen certainly proved wild. In addition to a few absconding treasurers (the equivalent of mutineers), he faced very heavy weather. His rival Hermann Schulze-Delitzsch, who founded the urban credit union movement and was a German parliamentarian, never tired of publicly pronouncing the Raiffeisen banks ‘unsafe’ (though he was never able to prove it).Are these things big enough?

Raiffeisen guided credit unions across this wet frontier by networking — a bottom-up approach to achieving economies of scale and scope. If an institution relies solely on its own savings for capital, and is not receiving outside subsidies, its members will know when growth has become too risky. They will either stop saving there, or step up the pressure for stronger controls. It was that pressure that triggered federations in Germany, and the work of the federations was oriented around meeting that demand for safety, for seasonal liquidity, and deeper capacity for control. From the beginning of his career to the end, Raiffeisen’s approach was methodical and relied on empirical results. This is why he avoided the missteps so common in later generations, who often could not resist imposing a top-down, theoretical template on village-based financial institutions.

In a system where externally subsidized organizations don’t exist, such as the German case, the ‘wild ocean’ is evidenced by the gap between the larger credit unions and the smallest federations. One shore – the top end of the range for healthy un-networked institutions was in the range of 200-1,000 members. The other shore – the bottom end of the range for larger institutions was in the range of about 10,000 to 25,000 individual members. But this range can be lower or higher, depending on certain factors in the enabling environment such as human education and skills, the maturity of institutions responsible for rule of law, and technology. Supervision and support by a healthy federation increases the top end of the range for its member institutions, offering them scope for additional growth. 

Reader Comments (2) 

As Brett correctly points out, "certain factors" can change the upper and lower boundaries of the sour spot. I was told by some staff in CARE NIger that as a general rule, their federations of savings groups had worked when they contained all the savings groups in a village, and they hadn't worked when they tried to put savings groups from separate villages together in the same federation. Well, not surprising, is it?

Savings groups in some countries are aggregating themselves spontaneously, and I trust them to know the limits of whom to include and whom not to include. I'd bet dollars to donuts that those choices depend on kith and kin. I am not so naive as to think that people always know what is best for them, or whom to trust - but they do relatively well, compared to governments, consultants, NGOs and movements.

Sat, April 9, 2011 | Paul Rippey

Paul, on the topic of multi-village financial networks, it is essential to have a working system of democratic elections (secret ballot etc.) at the primary society level. While this may not be foolproof, it drastically reduces the risk that 'kith and kin' will dominate.

Wed, April 13, 2011 | Brett Matthews