The ‘bond of association’ or ‘common bond’ is a basic building block of credit unions and co-operative banks. Analogous to the concept of joint liability through solidarity groups, the common bond is an important tool for delivering microfinance to poor people. A credit union is a cooperative financial institution that is owned and controlled by its members. ... This article, image, template or category belongs in one or more categories. ... Microfinance is a term for the practice of providing financial services, such as microcredit, microsavings or microinsurance to poor people. ...

Common bonds play a more important role in the early stages of financial system development than in more advanced stages. However, they remain a key building block of the strategic networks that underpin many of Europe’s co-operative banks.^[1] The Global Financial System refers to those financial institutions and regulations that act on the international level, as opposed to those that act on a national or regional level. ...

How Bonds Work

Hermann Schulze-Delitzsch, an early co-operative organizer, explained the concept of the ‘bond of association’ at credit union meetings in this way: Franz Hermann Schulze-Delitzsch (August 29, 1808 - April 29, 1883), German economist, was born at Delitzsch, in Prussian Saxony. ...

... your own selves and character must create your credit, and your collective liability will require you to choose your associates carefully, and to insist that they maintain regular, sober and industrious habits, making them worthy of credit. [2]

In his book People’s Banks (1910), Henry W. Wolff summarized the character of this ‘common bond’ based on his observations of credit unions all over Europe:^[3]

1. many individuals bring small amounts of share capital into a common pool, which collectively amounts to a significant collateral, Collateral could mean: Collateral in finance means a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay. ...

2. borrowers, lenders and guarantors live near one another (e.g., in the same village), making it convenient for the lender and guarantors to monitor the performance of the borrower, and manage any problems that may come up,

3. an ‘inter-connection of liability among members’ is created by the bond, which may either involve direct and unlimited ‘financial liability’, or ‘direct responsibility for good management’ (which once publicly established increases the sense of security of claim-holders), and

4. all operations of the credit union must be conducted along ‘businesslike lines’ based on a strong sense of collective responsibility.

Diverse Types of Bonds

There are several distinct types of bonds, corresponding to distinctive types of credit unions. For example:

• The Raiffeisen banks in Germany relied on parish-based bonds, as parishes were very small and people were in constant communication with each other through the central nexus of the local church.

• The bonds on the multi-ethnic Canadian Prairies were community-based, linking members through their common residency in small towns and villages.

• Common bonds in early United States credit unions were generally employee-based, and concentrated in the manufacturing and transportation industries, and among teachers and postal workers.^[4]

It has been suggested that this article or section be merged with Raiffeisen Zentralbank. ... A prairie is an area of land of low topographic relief that principally supports grasses and herbs, with few trees, and is generally of a mesic (moderate or temperate) climate. ...

Debate Between Schulze-Delitzsch and Raiffeisen

A bitter debate between two German credit union pioneers over the nature of bonds of association eventually ended in a tie, with Schulz-Delitzsch’s approach dominating in urban settings, and Raiffeisen’s dominating in rural ones.

The bond of association for Schulze’s larger, more urban ‘people’s banks’ required all members to contribute substantial share capital. He advocated that these banks should receive the protection of limited liability.

Friedrich Wilhelm Raiffeisen strongly opposed any share capital requirement. He argued that the principle of unlimited joint liability was "indispensible in small districts" because most farmers had too little cash to afford share capital. Unlimited liability was essential "in order to prevent the Unions from excess, since it makes the administrative bodies conscious of their moral and material responsibilities.”^[5] Friedrich Wilhelm Raiffeisen (May 3, 1818, Hamm - May 11, 1888, Heddesdorf, currently known as Neuwied, Germany) was a German cooperative leader. ...

References

1. ^ Martin Desrochers, Klaus P. Fischer & Jean-Pierre Gueyie. Managing contractual risk through organization: strategic vs. consensual networks. Développement International Desjardins, Levis, Quebec, May 2004.
2. ^ J. Carroll Moody & Gilbert C. Fite. The Credit Union Movement: Origins and Development 1850-1980. Kendall/Hunt Publishing Company, Dubuque, Iowa, 1984, p. 4
3. ^ Henry W. Wolff. People's Banks: A Record of Social and Economic Success. P.S. King & Son, London, 1910, pp. 37-38
4. ^ Ian MacPherson. Hands Around the Globe: A History of the International Credit Union Movement and the Role and Development of World Council of Credit Unions, Inc. Horsdal & Schubart Publishers & WOCCU, Victoria, Canada 1999, p. 23
5. ^ Friedrich Wilhelm Raiffeisen. The Credit Unions. Fifth (1887) edition, translated from the German by Konrad Engelmann. Raiffeisen Printing & Publishing Company, Neuwied on the Rhine, Germany, 1970, p. 46.

See Also

• Credit union history
• Microfinance