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In the 19th century, Germany had a relatively underdeveloped economy as compared with the rest of Western Europe, especially Britain. Late in the century, Germany put in place a system of universal banks in order to finance its rapid industrialization and to manage liquidity arising from its advancing economic development. This system did not, however, address the financing needs of farmers and small enterprise. The two main institutions that developed in Germany to respond to these needs were the savings banks (Sparkassen) and cooperatives (Raiffeisen institutions). Initially, these focused on small savings and were not a significant source of capital for farmers and entrepreneurs. Also, the postal savings banks came into being to facilitate savings and also to intermediate these funds to other sectors of the economy.

Thus, these institutions provided what amounted to small-scale development finance in the mid to late 19th century. The thrift and cooperative institutions were able to innovate and grow in large part because they were self-regulated. Also, since they had no access to other sources of capital, they were forced to manage deposits and member shares carefully. In the modern era, these institutions have become much more integrated into the banking system and its capital flows, and many of them became large universal banks. Today, the large German banks operate in a separate sphere of national, EU, and global financial services markets, having a prominent role in the traditionally bank-dominated corporate finance system of the European continent. The main development-oriented banks are still the community savings banks or Sparkassen, now under the Landesbanken or state (Land) level banks that provide wholesaling and central banking services. Both types of banks have, until recently, been entirely government-owned, i.e. owned by the respective Laender and localities.

In the last decade, there have been moves to bring in private capital, although the community bankers have tended to resist this. It appears that private initiatives, lawsuits, and the standards of the European Union will force gradual opening to commercial capital. Further, government removed its blanket guarantee of liabilities, thus prompting a wave of savings bank consolidation and streamlining. Still, the German savings banks thus far have kept their commitment to their local communities, focusing on small business and low to medium-income households.

The Sparkassen are viewed as agents of local self-government. This political arrangement, with the decentralized structure imposed by the German constitution, has kept the Sparkassen from being absorbed by the commercial banks, thus preserving Germany’s three-pillar banking system (commercial banks, credit unions, savings banks). Moreover,

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Sources for this discussion: www.dsgv.de, Hagendorff et al. (2007), Maalouf (2007), Seibel (2005), European Association for Banking History (1994). This discussion is drawn from prior work (for ADB) by the author.

state ownership of the savings banks brings with it political pressure to ensure that local financial services needs are met as fully and fairly as possible. On the one hand, this approach to community banking has drawn criticism for reducing efficiency, competitiveness, and sustainability in the interest of financial inclusion. On the other hand, it has underlined the savings banks’ commitment to meeting the financial needs of their local communities.

Indonesia146

A distinctive model arose in Indonesia with the move away from state-run development banks. This produced a hybrid system well-adapted to the needs of a large, populous Asian country with significant rural poverty. Key transformations occurred in the role of Bank Indonesia (BI – the central bank) and especially that of Bank Rakyat Indonesia (BRI, the major state-owned commercial bank, now with some private ownership). As BI shifted away from a direct role in development finance, BRI increasingly took over this niche.

BRI hosts one of the world’s largest networks of microfinance providers. This network was created in the 1980s as a result of the transformation of a troubled public sector agricultural credit program. A dozen years later, BRI’s village unit (unit desa) banking system had a return on assets of 5.7% and a profit of US $177 million. BRI units weathered the monetary crisis of 1997-2000, while BRI corporate lending was severely affected by the crisis. The units surprisingly experienced a rapid increase in savings during the crisis, as did BRI as a whole, benefitting from a “rush to safety” after several private banks were closed down or taken over.

The success of the unit desa system was based on a few key design factors. Loans were made available to all creditworthy applicants for any productive purpose. This required a complete re-design of the products and services being provided by the units in order to meet the needs of economically active poor and lower-middle-class people. Also critical to success was the absence of subsidy in the credit program. Accordingly, interest rates were set at a level that would cover all the costs of the products, plus return a profit to the institution. The units choose their own customers, and hire well-trained staff. Loan terms are negotiated to correspond to the needs of each borrower, and incentives are given to borrowers who repay on time. Also, financial liberalization and a flexible approach to the prudential governance of microfinance operations made success possible.

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