The reluctance of formal financial service providers like banks to fund small enterprises is not a recent
phenomenon. Official concerns about it sounded throughout the nineteenth and twentieth century. This
is because the revenues of lending to such enterprises are easily outweighed by the costs of monitoring
and administration plus the risk of ...
(Show more)The reluctance of formal financial service providers like banks to fund small enterprises is not a recent
phenomenon. Official concerns about it sounded throughout the nineteenth and twentieth century. This
is because the revenues of lending to such enterprises are easily outweighed by the costs of monitoring
and administration plus the risk of default. Under certain conditions, societies can however find new
solutions, such as credit cooperatives, to small enterprise funding issues. This research contributes to
this literature by showing that, at least in case of the Netherlands, even these specially tailored financial
institutions were not a sustainable solution.
Dutch credit cooperatives were relatively successful at first: by the early-1900s there were almost 20
independent institutions with over 60 branches spread across the Netherlands. Their total membership
exceeded 35,000, and they accounted for approximately 25% of Dutch bank loans. By the late-1910s
however their importance rapidly dwindled, and by the mid-1920s they all but disappeared.
Via a detailed historical analytical narrative, I show that this pattern of growth and decline can be
explained by so-called mission drift. As credit cooperatives grew in size they increasingly catered to
clients who were better off than their original target group. Due to this mission drift, credit cooperatives
became increasingly akin to universal banks. After World War I the largest cooperatives were taken
over by regular commercial banks; the smaller ones gradually disappeared. Credit cooperatives lost out
because they could no longer rely on the efficiency advantages usually associated with cooperatives
while at the same time, they lacked the economies of scale of universal banks.
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