The Origins of Community Banking

There are differing accounts for how the concept of a Savings Bank came about and in which country it originated. Ruthwell, a small village on the North bank of the Solway Firth (Scotland) was the home of a Church Minister called Dr Henry Duncan who is claimed to have opened the worlds first commercial Savings Bank and therefore the birthplace of modern banking.

There had been other savings institutions previously, so it is difficult to lay claim that Dr Henry Duncan invented the concept of a local Savings Bank but other schemes had been private or excluded the common people. Indeed his motivation for establishing a Savings bank may not be the original invention but it certainly was the first savings bank pen to the public in the UK, although only intended for local parishioners.

Indeed such an idea of a savings arrangement had been circulating for a long time, Daniel Defoe had written of such an idea in 1697. However the earlier visions of savings arrangements had been along the lines of modern financial tontines when several parties jointly finance an arrangement for such purposes as say opening or purchasing a factory. 

Background conditions

Dr Henry Duncan was appointed to the Parish of Rothwell in a time of great austerity following many years of European wars in which the UK had exhausted all available currency to engage in a long war with France only to be followed by a need to defeat Napoleon. Consequences of such long military engagement were a depletion of the economy with grain prices rising by 358% in fifteen months; prices soared but wages did not meet the increase in costs.

Rural communities, such as Ruthwell, were in decline due to the Industrial Revolution but small local farmers could not afford necessary investment in machinery to replace lost workers and increased crop demands. Land workers earned at t he most 5Lsd a day (5 pennies) and work was insecure and erratic. Add to this equation the several years of poor harvests and you have a picture of the conditions in Rothwell and the UK in general at the time of Dr Henry Duncan introducing a Mutual Savings Bank concept                                                                                                              .

However Dr Henry Duncan was not, as would seem, approaching the problem from a philanthropic stance. Although he ironically, he restored the local Friendly Society; which operated on benevolent principles. Duncan did not support the concept of “Hand Outs” to those in need, preferring to inspire parishioners to organise themselves against the ravages of hardship by their own thrift and enterprise. However he did believe in collective endeavours against hardship such as those encountered by those confronted by such cost as a funeral, medical costs or financial exclusion during periods of unemployment.

Duncan believed that people’s sense of dignity was to be valued and was a strong motivator in all worthy actions. Such thinking made Duncan oppose a poor rate believing it to be degrading and an erosion of peoples self pride, sense of worthwhile and actual independence. Indeed it was in response to the imminent establishment of the poor rate in his parish that Duncan pioneered the erection of an “Economical Bank for the Savings of the Industrious." to preserve the self respect of common people. Rothwell’s Parish Bank opened doors for business on May 10th 1810. This was bold and an imaginative alternative solution the parishioners hardship offering them secure investment with a return on their savings.

Duncanhad persuaded the Rothwell community to deposit whatever cash they could into individual accounts held in the Bank. Both wealthy and poor used the service equally and all benefited by an arrangement of available loans from the capital held within the bank which they repaid over a duration at affordable amounts that included payment of interest. A motivating factor was that each account received a share of surplus generated from loans made so the more wealthy people were happy to invest into a scheme that provided for all.

In the first year of operation the Bank acquired a fund of £151.00; this is truly a remarkable achievement considering the poverty of the time when the maximum wage was only £00.05 pence a day at a time when people were employed on a day-to-day basis. Put this into perspective, if employed at the maximum wage for a full 365 days you would earn £18.25 a year, which in those times was highly unlikely.  Within 5 years the Duncan bank model had been adopted by other communities across the UK and the Penny Savings Banks had arrived in Britain.                                                                                                                                                 

Banking became established as a global industry and has become the foundation of International enterprise. However, the principles of local community banking remain as important now as in Dr Henry Duncan’s time. Credit Union’s are the modern manifestation of community banking providing opportunity for local people to save small regular amounts and obtain loans when needed. Credit Union’s charge the most affordable rates of interest with all monies generated by business been paid directly to their members as a dividend without any other bodies taking profit from their work.

History of Credit Unions

It is alleged that a group of weavers in Rochdale established the world’s first Credit Union. As a collective they issued and sold shares to a membership in order to raise the capital required to purchase goods at wholesale prices to deliver vast savings for the membership. This is of course the principle of Co-operative societies and is still in operation today.

The principle remains the same today; a Credit Union is a collective of members forming a financial pool recourse form which loans can be made. In simple terms this means that a group of people with a “Common Bond”, all working or living at the same place, can add money to a central pot. Let’s say a group on 100 people save only £1.00 a week.                                        

After a year that pot has become a fund of £5,200.00.

Each member has saved £52.00 over a year and can now take a loan of up to 5 times their savings; which would be £260 whenever they needed it. The more a member saves the larger the loan they can obtain. However the principle is that you are only expected to save whatever amount you can afford, regardless of how small an amount this is.

This principle or idea soon spread.  The history of credit unions began in 1844, with a group of weavers in Rochdale, England, who established the Rochdale Society of Equitable Pioneers. They sold shares to members to raise the capital necessary to buy goods at lower than retail prices, and then sold the goods at a savings to members. In doing so, they became the first credit union.

Credit unions are financial institutions formed by an organized group of people with a common bond. Members of credit unions pool their assets to provide loans and other financial services to each other.

Credit unions differ from other banks in several ways:

                               Credit Unions

                       Other Financial Institutions


                  Not-for-profit Local cooperatives

  Owned by outside profit generating organisations

                            Owned by members

   Owned by outside shareholders possibly abroad

        Operated by mostly volunteer boards

       Controlled by paid boards seeking returns










These factors allow credit unions to pay dividends to their members and offer them lower loan rates, higher savings rates rather than service fees. 

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