Trusted Lending Circles in Japan: The Kou
With Ethereum DevCon 5 happening in Osaka this past week, we wanted to talk about a type of Trusted Lending Circle known as “Kou” that have been used in Japan for centuries. These Kou were first mentioned in documents dated back to 1275 AD, and in their earliest form involved members using a drawing to determine who would receive the regularly scheduled disbursement of funds. Just like with more modern lending circles, members of a Kou would be excluded from a group if they did not meet their regular payment obligations. By the 14th and 15th centuries, the fund rotations in Kous had evolved to be determined by bidding (similar to how the distribution of funds in WeTrust’s TLC is determined by a reverse Dutch auction). Farmers used Kous for operating expenses or investment capital, while leaders of feudal clans used them to fund public finance.
During the Edo period (1603–1867), new forms of Kous were created with new methods to vary the payments into the Kou or the total funds pooled in the Kou, rights to transfer Kou membership, the buying and selling of shares, as well as Kou based mortgages. By the time of the Great Depression, it was estimated that there were 350 thousand Kous throughout Japan with roughly 5 million people participating. A survey conducted at the time noted that Kous designed to help someone in desperate need of funds were more common in towns and villages, indicating that they were an important form of mutual help in rural areas. By 1900, the National Diet of Japan passed an act which allowed the formation of large industrial associations, which often took the form of credit associations in rural areas. Through their widespread participation in these Kous, farmers in Japan understood the benefits of cooperation and saving, and had developed the discipline necessary to participate in these large scale credit associations. As a result, these credit associations were wildly successful; from 1905 to 1925, they jumped in number from about 600 to over 12,000. Eventually, the majority of Japanese farmers participated in these credit associations to access deposits and loans. Some of them have even evolved into banks which continue until this day, such as Norinchukin Bank, one of the largest institutional investors in Japan.
As important as Kous were in rural Japan, they had an even more direct impact on urban areas. There, Kous evolved into mujin companies which provided financial services to small businesses. The first of these mujin businesses started in Tokyo in 1901 with capital of ten thousand yen, and by 1912 had grown to 27 branches with a capital of a million yen. Many other mujins followed, with over one thousand throughout Japan by 1913. Most of them evolved from situations in which a single individual was managing multiple Kou at the same time. As these Kous grew, the problem of establishing mutual trust and creditworthiness became a problem. To enhance the respectability of the Kous, at least one rich merchant or landlord would be an active participant. These prominent individuals would help enforce the proper payment norms necessary for the Kou to function. Eventually the larger Kous formed what were known as mujin-companies, which did away with some of the more archaic rules governing Kous and functioned more like modern banks. By 1915, mujin-companies were institutionalized by the Mujin-Business Act, which required all such businesses to obtain a license and abide by certain rules. One of these mujin businesses, Tokyo Shokusan Mujin Mutual Loan Company, even survives to this day as Tokyo Star Bank.
Kous in Japan benefited their communities in three primary ways. They promoted savings, including educating people on the importance of saving and emphasizing the way in which deposits and loans are linked. They also provided low interest rates compared to the rates charged through informal lending. Finally, by emphasizing social relationships, Kous lowered transaction costs and enabled ease of access for people who usually did not have access to funds. While these Kous have largely disappeared from modern Japan, many of them have evolved into credit associations and banks that still play an important role in the Japanese economy. Like so many parts of the world, Trusted Lending Circles have played a key role in Japan’s financial evolution.
Published at Tue, 15 Oct 2019 06:37:43 +0000
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