Does microfinance build lasting relationships among borrowers?

Whether microcredit alleviates poverty or not is a hot topic. And although this undoubtedly is a very important question, other potential consequences of microfinance should not be overlooked. One example is found among the results from a recent field experiment led by researchers of J-PAL (the Abdul Latif Jameel Poverty Action Lab) where it is suggested that access to credit can increase social capital among the borrowers.

Social capital, according to political scientist Robert Putnam, is the collective value of social networks. In the standard microfinance model, which in large part was developed by the Grameen Bank of Bangladesh, a key component is that borrowers form groups of five people and meet on a regular basis. These constellations are intended to put social pressure on borrowers to repay their debt on time. Most research has hitherto focused on whether the meetings with other group members increase the probability of timely repayments. The J-PAL researchers now take the issue in a different direction by instead asking whether these formal meetings lead to the creation of new relationships among borrowers living in urban communities.

In the study, member of 174 different microfinance groups in urban India were interviewed. To see what impact group meetings may have on formation of social capital, the researchers randomly assigned the groups to a different meeting frequency where some borrowers would see each other on a weekly basis whereas others did so only on a monthly basis. Social capital was measured based on how many interactions of both professional and personal nature that the group members had with each other as a result of the meetings.

The results showed that those who met weekly were far more likely to form long-lasting relationships with other group members compared to those who were required to meet only monthly. The economic value of a larger social network may at the onset seem negligble. But these social-capital gains resulted in an increasing willingness to share risks with other group members, which the authors reckon would lead to significant economic returns in the long run.

Increased pooling of risks to make joint investments could certainly give entrepreneurship and innovation a boost. To what extent these social-capital gains could eradicate poverty, however, is unclear since the authors do not provide any estimates of the effect of social capital on income or economic growth.

Social-capital gains may not be how microcredit advocates would normally envision to help the poor, but they may still be pretty useful.

Simon Hedlin

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