Unbankable: The Noble Birth of Credit Unions

Storyteller Paul Smith breathes life into two founding fathers of the movement.

December 25, 2013

Raiffeisen and Desjardins

If you’ve worked in the credit union business for long, you’re probably familiar with the names Friedrich Wilhelm Raiffeisen and Alfonse Desjardins, two of the founding fathers of cooperative lending in the mid-1800s.

You might even know where they lived and the names of the institutions they started. What you’re less likely to know, however, is why they did what they did.

What motivated them, and how did that lead to the most innovative and forward-thinking branch of the financial industry on the planet?

This, as they say, is the rest of the story.

Credit unions have great stories they must share because storytelling is a powerful tool. It’s contagious, demographic-proof, memorable, and inspirational.

Raiffeisen was born in 1818 in Hamm, Germany, the seventh of nine children in a farming family. As an adult, he served in the military, and then later in public service as mayor of several small farming towns.

He noticed as a youth, and again as an adult, that the rural communities in which he’d spent his whole life had a significant shortage of financial institutions compared to the cities.

Conventional wisdom in the banking world held that such rural communities didn’t make for profitable customers. They were actually referred to as “unbankable.”

After all, farmers need to spend money all year long. But they only have income for a few weeks at harvest time when they sell their crops. That doesn’t bode well for making monthly loan payments.

As a result, farmers often had to resort to borrowing money from loan sharks—hucksters that charged criminally high interest rates and used threats of violence as standard collection practice. This meant farmers were usually the poorest and most harassed people in the country.

Raiffeisen’s sympathy for these farmers peaked in the “starvation winter” of 1846, an unusually bad economic and crop year in Germany. He founded the Society for Bread and Grain Supply, which, through cooperative efforts, purchased flour and made bread in hand-built ovens to distribute to the poor.

But Raiffeisen also was a big believer in self-help. He was convinced that to eliminate poverty, one had to eliminate dependency—dependency on charity, politics, and especially on loan sharks.

So, in 1864, he extended the cooperative model from his bread charity to commercial lending, founding one of the earliest cooperative lending institutions in the world. He recruited local farmers to join the effort and loan money to each other at reasonable rates instead of relying on charity or loan sharks.

This, of course, represents one of the first credit unions ever established.

Desjardins' story

Across the Atlantic Ocean, Alfonse Desjardins was born in 1854 in Quebec, and became a journalist for French-language newspapers in Canada.

In 1897, while researching a story, he learned of a Montreal native who had borrowed $150 from a lender. A disagreement arose over the terms of repayment, and the matter eventually landed in court.

After hearing all the evidence, and considering the law, the judge ordered the borrower to pay the lender nearly $5,000 on that $150 loan—a 3,000% interest rate for one year.

After more digging, Alfonse discovered this travesty wasn’t unusual. Deeply disturbed by this, he spent three years researching the cooperative lending practices in Europe, including Raiffeisen’s, most likely.

In 1900, he and his wife, Dorimene Roy, opened the first credit union in Canada, and later the first credit union in the U.S. in Manchester, N.H.

By the time of Desjardins' death in 1920, more than 200 credit unions operated in the U.S. and Canada.

Thanks to these two men, and hundreds of other similar-minded men and women since, families all over the world—not just farmers—have enjoyed the benefits of credit unions.

By eliminating the middlemen, members enjoy lower interest rates on loans, higher rates on deposits, and in general get to do business with people that treat them like family, friends, and neighbors. Because that’s exactly who they are.

This is the noble origin of your business. You should be very proud of that, and of what you do.

PAUL SMITH is a speaker, trainer, and author of "Lead with a Story: A Guide to Crafting Business Narratives that Captivate, Convince, and Inspire." He spoke at the CUNA Community Credit Union & Growth Conference in Uncasville, Conn.