Building Social Capital With Microfinance

 

Development
Faculty Researcher Rohini Pande, Mohammed Kamal Professor of Public Policy, Harvard Kennedy School Paper Title Building Social Capital through Microfinance Coauthors Benjamin Feigenberg, MIT; Erica Field, Harvard University

Since 1976, when the Grameen Bank Project was founded by Muhammad Yunus in Bangladesh, microfinance groups (MFIs) have provided credit and bank services to poor women in developing countries around the world. In the classic microfinance program, groups of rural woman are given small (micro) loans, which they repay in installments at weekly group meetings with a loan officer. Is the Yunus/Grameen model of weekly repayment meetings the best — or are there other ways to design an MFI? This is the question raised by Professor Rohini Pande of the Harvard Kennedy School, and explored in a series of innovative studies.

The surprising results are presented in a new paper, “Building Social Capital through Microfinance,” authored by Pande with Benjamin Feigenberg of MIT and Harvard University’s Erica Field. It reveals a related benefit of microfinance: the building of social capital, in the form of networks that result in trust, cooperative behavior, and mutual aid.

Pande and her coauthors describe two natural field experiments with innovative methodologies — randomization and a lottery — that investigate how the frequency of MFI repayment meetings affects social interaction, group cooperation, and loan repayment and default. Both experiments were conducted in a leading MFI — the Village Welfare Society (VWS) in West Bengal, India, which targets women with a household income below $2.00 a day, who face frequent financial shocks.

The first experiment involved 100 first-time borrower groups of women in neighborhoods of peri-urban Kolkata. Loan officers formed groups of eight to thirteen members, and each client received a Rs 4,000 ($100) loan for eight months. After group membership was finalized, but before any loans were disbursed, the groups were randomly assigned to either a weekly or a monthly repayment meeting schedule, and social interactions were studied. The results, based on interviews by the loan officer at the end of each meeting, showed that “after five months . . . a client in a weekly group was 90 percent more likely to know her group members’ families (by name) and to have visited them in their homes than a woman in a group with monthly repayment meetings. She was also 16 percent more likely to know about social activities at another group member’s house.” This dramatic difference in social interaction between women in weekly and monthly repayment groups led to the second experiment, which took place one year after the first loan repayment.

The second experiment studied the differences between weekly and monthly groups’ prosocial behavior. Here surveyors went to the homes of a random sample of women in the two kinds of groups and invited them to enter a lottery. Each participant was informed that she had a one-in-eleven chance of winning the prize — a Rs 200 ($5) gift voucher redeemable at the vws retail store. She was also “offered the opportunity to include fellow group members in the lottery: by doing so she increased expected group payoff but reduced her expected individual payoff.” The results showed that clients who met weekly were 30 percent more likely to send a lottery ticket to a fellow member. An innovation in lottery protocol design allowed the investigators to identify trust and reciprocity (rather than altruism) as motivations for increased lottery ticket giving in weekly groups. In addition — and very important for MFIs — according to Pande, loan repayment data show that first-time clients who were randomly assigned to weekly meetings in the first loan cycle were much less likely to default in their next loan cycle.

What do these experiments really show about the classic microfinance repayment model that suggested the study? Pande says that model “got the answer right but for the wrong reason.” When groups meet weekly it reduces default not because the loan officer is teaching fiscal discipline but because of social interaction and group cooperation. “So it is not so much the meeting itself,” she says, “but meeting as a conduit to further social interactions and risk-sharing arrangements.”

The results delineated in the paper — that more frequent repayment meetings build social capital and reduce default — have other important implications. According to the authors, “By broadening and deepening social networks, microfinance institutions may have an important influence on the growth potential of poor communities and the empowerment of women beyond the role of credit provision.” — by Eileen Gordon Zalisk

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“By broadening and deepening social networks, microfinance institutions may have an important influence on the growth potential of poor communities and the empowerment of women beyond the role of credit provision.”

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