Social Capital and Micro Credit Lending

Via Matt, the topic of Social Capital (SC) was recently raised, with some emphasis placed on recognising its oft-ignored “dark side”. Now, I am by no means an authoritative voice on SC, but I have done a bit of work in the past looking into specific Microfinance Institutions (MFI’s) who employ an SC based approach to their micro credit lending strategies. To this end, Matt has kindly invited me to briefly blog about SC within this context, and hopefully, get us thinking a little more about how the drive for increased SC may not always result in sunshine and rainbows at the end of the day for all involved.

Just a bit of conceptual grounding first as I’m well aware that a universally accepted definition of SC is an elusive beast, and from my own experience that this non-specificity often leads to confusion both within and between the social science disciplines when discussing the perceived value of SC (why it’s of worth (or not), or if it’s even a thing at all).  As this is an economics blog, and not a sociology journal, I don’t really want to get into this debate. Instead, I will rely on how MFI’s themselves (by in large) equate SC for framing purposes– namely that social networks between individuals within a community hold implicit and explicit economic value.

With this is mind, It’s easy to see why so many MFI’s value SC from both an aspirational and operational standpoint, and this paradigm has significant influence over micro lending strategies. In Bangladesh for example, the Nobel Peace Prize winning Grameen Bank’s (GB) micro loans are not distributed to individuals. Instead, a group lending model is employed, with all micro loans shared between a four or five person collective group. Per loan conditions, weekly meetings between the group to discuss the loans use(s) (individually) and repayment (collectively) are demanded. GB argues this increases SC among its borrowers, and this consequently, is good for business. This thinking meets with some empirical backing; with many researchers (mainly anthropologists) noting that the weekly interactions demanded of borrowers by GB has provided a forum for “horizontal” relationships (new associations, networks, and friendships) to blossom. This is especially pertinent of female borrowers (who make up 97% of GB clients, a trend mirrored by many MFI’s) who are often otherwise prohibited from engaging in such relationships because of various societal, cultural and religious normative barriers. This further assists (ostensibly at least) the exchange and dissemination of “scarce resources” (for example, business acumen and related technical skills) among the borrower group, facilitates both social and financial prosperity, and better enables the collective repayment of the loan. Sunshine and Rainbows for all!

But this is simply way too simplistic. Putting aside the proposition that this is actively encouraging a form of artificial social engineering that undermines traditional landscapes (perhaps another time), it would be disingenuous to assume that “horizontal” relationships will magically materialise whenever you stick five people into a room together – especially when it is a “vertical” relationship (the power imbalance between loan provider and borrower) that is dictating terms of them being there. Synchronously, research by the likes of feminist economist Katherine N. Rankin suggests that vertical relationships are also highly prevalent within borrower groups themselves. This factor, perhaps somewhat conspiratorially, lends itself to the accusation that SC is being pushed predominantly by MFI’s for its utilisation as a “self-regulating” loan collection mechanism.

The ability of all group members to successfully utilise their share of the collective loan for entrepreneurial gain (at least in terms of making enough to repay their individual loan share) is not likely to be homogenous (this problem is tied to the widely evidenced hypothesis that a substantial number of borrowers use their loan shares for consumption smoothing purposes, as opposed to any profitable investment), and the divide which results between members of the group who have made enough to repay their loans and those that have not is exacerbated by the collective need to settle the debt (and quickly, repayments are often expected by MFI’s only a month or so after a loan is distributed). This is where the “dark side” of SC comes into play as it is only the MFI’s that reap a positive return by pushing an SC based lending strategy. As the debt is held collectively there is incentive for those within the group who have profited enough to repay their loan shares to coerce less successful members of the group to stump up their cut by any means (often by selling their homes and possessions, or taking on further “less legitimate” loans). At the end of the day, the MFI is repaid (so all looks rosy in terms of the repayment rate measurement) but many of those that the loans are (quite legitimately) directed at helping, are certainly a lot worse off.

Whether this is an unforeseen side effect of MFI’s grounding their lending models with too much blind belief in the positive powers of SC, or whether it is in fact a deliberate ploy to improve debt collection by making borrower groups “self-regulating” is up for debate. I personally lean toward the former, as I truly believe that most MFI’s hold honourable and legitimate intentions in regards to alleviating severe poverty, but wider consideration of the limitations and possible pitfalls of driving home SC based micro credit lending strategies is warranted based on what is currently being observed in the communities affected.

  • http://tvhe.co.nz/ Matt Nolan

    If I am reading this right, the push to structure loans on the basis of a group of borrowers – to allows calls of social capital – creates a form of free rider problem between borrowers.

    This is interesting. However, I have to be a little more cynical about MFI’s. Surely part of the reason they try to push grouped borrowers and “social capital” stems from marketing – they can gain more finance at lower rates from Western borrowers by promising such things, thereby increasing their return even if default rates were unchanged.

    Cool stuff.

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