Credit unions

In developing countries, credit unions play an important role with regard to lending. In Asia, Africa and Latin America, their share in all microfinance institutions (MFI) is 12 percent (Lapenu & Zeller 2001 p. 19). The loan volume of credit unions amounts to 60 percent of all loans disbursed by MFI (Lapenu & Zeller ibid. p. 19).

The cooperative banking sector is also successful in many developed economies, for example, the Volks- and Raiffeisenbanken in Germany, the Desjardins system in Canada, and credit unions (CUs) in the USA (Pham-Phuong 2001). Examples of traditional CUs are the German CUs that emerged in the first half of the nineteenth century following the industrial revolution. German farmers in that period were in a similar position to farmers in transition countries today. The economic system changed from feudalism to capitalism after the abolition of serfdom. At the same time, farmers were granted economic freedom. To invest in their farms, they needed capital, but there was no opportunity for them to obtain loans because banks did not consider them

creditworthy. The only way out was to take loans from rich individuals, who charged very high interest rates. In order to alleviate the hardship of the poor population, Schulze-Delitzsch and Raiffeisen founded CUs (Zeller 2003), which were strictly separated into urban and rural unions (Pham-Phuong 2001). In 1864 Raiffeisen founded the first CU for farmers, which was called the Heddesdorfer Darlehensverein (‘credit association of Heddesdorf’) (Pham-Phuong 2001 p. 8). The concept of the CU was to group farmers together so as to enhance their creditworthiness and their ability to obtain favourable credit conditions. Members of the CU had to commit themselves to unlimited liability. To receive monetary inflow, the CU issued bonds. Only five years after its founding, the CU was responsible for the procurement of production equipment and the marketing of agricultural products. Fifty years later, in 1914, approximately every German village had a CU, and there were some 18000 CUs in the country as a whole (Pham-Phuong 2001 p. 8). Today, these institutions have full bank status, which is regulated by law.

The credit cooperative concept has been successful in numerous countries. One interesting historical example is Japan, where urban and rural self-help credit and savings associations (kou) have a history, dating back to the thirteenth century. While the original kou disappeared in the middle of the last century (Izumida 1992), these associations influenced the evolution of the formal rural associations that are involved in financial transactions today. Rural credit cooperatives emerged after the Industrial Association Law was enacted in 1901 (Izumida 1992 p. 177). Long before this law was in effect, however, the rural population had already acquired knowledge of group activities, cooperation, the benefits of saving, and the need for repayment of debts through their participation in kou. The formal cooperative structure only provided an institutional framework for their traditional financial activities. Based on the great success of the credit cooperatives, the Norinchukin Bank, which is the bank used by the agricultural cooperatives in Japan, has become one of the largest banks in the world (Izumida 1992).

The idea behind CUs or credit cooperatives is to help the rural population become independent from moneylenders and to increase their welfare through a financial institution owned and controlled by its members (Zeller 2003). Only through the integration of individual stakeholders can their individual strengths be combined in order to enhance their economic situation and the bargaining power of all participants

(Dzirkvadze 2008; Pham-Phuong 2001). One important feature of CUs is the reinvestment of profits, or their distribution amongst members (Dzirkvadze 2008;

Zeller 2003). Credit unions are for-profit organizations with a democratic governance structure that take into account the concerns of weaker members. This is expressed through the one-member, one-vote rule (Zeller 2003). The system of cooperative financial institutions is based on three principles (Pham-Phuong 2001): self-help, personal responsibility, and self-management. Self-help means that, through the organizational involvement of self-interested individuals in a cooperative banking system, the economic situation of all members improves. According to the principle of personal responsibility, all members are simultaneously both owners and customers of the cooperative bank, which implies that they are responsible for their organization’s success or failure. Self-management of the cooperative bank is conducted through boards, in which members of the cooperative formulate corporate policy. Kasarjyan &

Buchenrieder (2008) state that CUs have the potential to reach credit-constrained smallholder farmers and small businesses in rural areas. Credit unions are a suitable solution for rural credit problems in transition countries, but, if they use the joint-liability approach, the loans, with sums between US$50 and US$100, are too small to meet farmers’ credit needs (Lerman 2004 p. 475).

In a number of CEE countries, CUs have emerged that provide loans to small-scale farmers. A number of these cooperatives are very successful, which is reflected in their high repayment rates. Credit unions are an appropriate financial institution in countries with a strong cooperative tradition, like Albania and Romania (Swinnen &

Gow 1999). They offer two services to their members: the opportunity to save and access to credit. Loans can be disbursed with joint liability or with individual liability.

In the case of joint liability, the traditional form of physical collateral is replaced by social collateral, which means that credit union members who form a group are responsible for the repayment of any loan taken by one member of the group. In this way, screening, monitoring, and repayment enforcement is delegated to group members (Kasarjyan & Buchenrieder 2008).

3.1.4 Agricultural, service, and credit cooperatives/ credit unions in Georgia