MICROCAPITAL PAPER WRAP-UP: Building Social Capital Through Microfinance by Benjamin Feigenberg, Erica Field and Rohini Pande

By Benjamin Feigenberg, Erica Field and Rohini Pande,; Harvard Kennedy School Working Paper no. RWP10- 019; available at: http://dash.harvard.edu/bitstream/handle/1/4449105/Feigenberg_BuildingSocial.pdf?sequence=1

Social capital, defined as “features of social organization, such as trust, norms and networks that can improve the efficiency of society by facilitating coordinated actions”, is built up as a result of repeated interpersonal interactions.

Yet, does accumulated social capital provide a tangible economic return? In this paper, Feigenberg et al argue that the answer to this question is “yes”, based on their study of the relationship of group meeting schedules to the loan default rates recorded by the Indian microfinance institution (MFI) Village Welfare Society (VWS). The results suggest that building up social capital through frequent meetings associated with group lending has a statistically significant effect on reducing loan default rates.

The authors selected 110 first-time borrowers and randomly assigned them to groups that met either every week or every month. The loan cycle was ten months, and each group member was given an individual liability contract, i.e. group members were responsible for repayment of their own loans only. Using a measurement called the “social contact index”, the authors measured the amount of social capital accumulated throughout and after the loan cycle. The authors found that a higher level of social contact was associated with borrowers assigned to a weekly meeting schedule, a relationship that continued even after the loan cycle was over; though the increase in social contact was stronger among people with preexisting social ties, such as distant relatives or close neighbors.

Sixty percent of the original 110 first-time borrowers borrowed again from VWS. The authors studied data on those repeat borrowers to determine whether the social capital built up during first loan cycle had an effect on loan default rates during the second loan cycle. They found that borrowers assigned to a monthly meeting schedule for the first loan cycle were four times more likely to default than were borrowers assigned to a weekly meeting schedule.

To strengthen their argument that it was indeed the increased social contact that lowered the default rate, the authors continued their work with surveys and a field-based lottery game. The survey showed that borrowers on a weekly meeting schedule were more likely to report transfers to people outside their immediate families. When asked hypothetical questions about helping particular group members, the weekly clients were also more likely to extend a helping hand.

For the lottery game, the authors randomly selected 432 clients and offered each the opportunity to increase the probability of someone winning from her randomly assembled group, knowing that this choice would reduce her own chances of winning the lottery. The results showed that borrowers who were on a weekly meeting schedule were more likely to undertake this act of altruism. In conclusion, the authors argued that, despite the cost of moving to a higher frequency repayment schedule, the expected lower default rate justifies the investment.

By Trevor Kwong, Research Associate

Additional Resources:

[1] MICROFINANCE PAPER WRAP-UP: Does Microfinance Repayment Flexibility Affect Entrepreneurial Behavior and Loan Default?, by Erica Field, Rohini Pande and John Papp:

https://www.microcapital.org/microfinance-paper-wrap-up-does-microfinance-repayment-flexibility-affect-entrepreneurial-behavior-and-loan-default-by-erica-field-rohini-pande-and-john-papp/

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