THE BLOG
11/02/2012 07:17 pm ET Updated Jan 23, 2014

The German Financial Inclusion Story

October 31 was World Savings Day. Some 40+ years ago on that date, the local savings bank in the town I grew up in gave me my first savings passbook and endowed it with the princely sum of five Marks (then $20). Only now I realize how much that act and the prevailing thinking and role-modeling of that time shaped my financial outlook and acumen for life. (Incidentally, I still am an active customer of that savings bank, even though I moved away after high-school graduation. Note the long-term business case.)

Globally, half of working-age adults do not have such access to formal financial services, be it a savings or credit account, insurance or formal means of low-cost payments. This does not mean they don't use financial services. It means that they have to rely on the age-old informal mechanisms: family and friends, the rotating savings club, the moneylender, the pawnbroker, cash under the mattress and long-term savings in the form of livestock. These mechanisms are incomplete, and can be very unreliable, risky and expensive.

At a recent event in Berlin, I learned about the German Financial Inclusion story. In a nutshell, a new type of local, community-based financial institution started popping up in the very late 18th-century for the same reasons we saw micro-finance institutions and other non-conventional providers emerge much more recently in developing countries: because the predominant commercial banks of their time pretty much catered to big business and wealthy patricians, leaving the vast majority of the population excluded.

The German Sparkassen (loosely translated savings and loans institutions) and somewhat later the Genossenschaftsbanken (cooperatives) introduced a safe way for artisans, low-income workers, domestic employees, budding entrepreneurs and everybody else to deposit money and get credit. They early on introduced long-term savings to help provide for older-age in the absence of the yet-to-be introduced public pension systems. They accompanied the industrial revolution throughout the 19th century, built trust and capital through three regional wars, predating modern German unification in 1871. Laws were written, regulations introduced and by 1913, before the outset of World War I, every single German family had a savings and transactions account.

At the Berlin event, senior German policymakers and industry leaders spoke about the importance of decentralized inclusive financial systems, anchored in the community, understanding their customers, lubricating the local economy. They pointed to the historic economic success that this system had brought and to the recent, relative stability it ensured. About 70 percent of German retail deposits today remain with these local, community-based institutions that continue to be at the center of economic life in small towns and municipalities.

The world has of course changed since the rise of the German Sparkassen. New institutional set-ups and technologies allow for new ways to reach people faster and more cheaply. But, the underlying imperatives to understand and serve customer needs, to be trusted in the community and to serve the larger purpose of helping people improve their lives and realize their economic potential remain the same.

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