History of credit unions

Credit unions are not-for-profit financial cooperatives. In the early stages of development of a nation's financial system, unserved and underserved populations must rely on risky and expensive informal financial services from sources like money lenders, ROSCAs and saving at home. Credit unions proved they could meet demand for financial services that banks could not: from professional, middle class and poorer people. Those that served poorer urban and rural communities became an important source of microfinance.

The first working credit union models sprang up in Germany in the 1850s and 1860s, and by the end of the 19th Century had taken root in much of Europe. They drew inspiration from cooperative successes in other sectors, such as retail and agricultural marketing (see history of the cooperative movement). Similar institutions were independently developed somewhat earlier in Japan, in the early 19th century, by agrarian reformer and economist Ninomiya Sontoku. In this village unions, known as gojōkō (五常講^?)each person of the village union could borrow fund interest free for 100 days, while the entire membership shared the cost in case of default. These did not have any influence on developments in Europe, as at the time Japan was isolated from the world under the policy of sakoku.

The language related to credit unions can be confusing. In spite of the word ‘credit’ in their name, even the earliest credit unions usually offered both savings and credit services, and often payment and insurance services as well. And they were known by (and are still known by) a wide range of names, for example: 'people's banks', 'cooperative banks' and 'credit associations'.

Credit unions are best identified by their adherence to cooperative principles, especially related to membership and control. For example after World War II many organizations were started by and/or controlled by governments in the developing world, and were described as ‘credit unions’ or ‘cooperatives’ by their promoters. However, government control, whether in a capitalist or communist political context, represents a fundamental repudiation of cooperative principles.

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