Imperfect Information, Social Capital and the Poor's Access to Credit

Thierry van Bastelaer - THIERRY@iris.econ.umd.edu

Director, Integrated Financial Services Team,
Center for Institutional Reform and the Informal Sector (IRIS)
The University of Maryland.


Abstract:

The last fifty years have seen the large-scale implementation of financial programs that specifically target the poor. Many such early programs, often implemented by governments, were not able to satisfactorily deal with information uncertainties, and hence resulted in weak incentive structures, heavily bureaucratic and politicized approaches and inevitably low repayment performance. More recently (even though the concept is more than a century old), a new type of approach to lending to the poor—known as microfinance—has designed specific methods to deal with information uncertainties, resulting in impressive program performance. Almost concurrently, social scientists and development practitioners have identified and assembled growing anecdotal evidence to suggest that the forms of capital traditionally used in growth theory (natural, physical and human) are missing an important element. This concept, generically known as “social capitalE includes the various networks of relationships among economic actors, and the values and attitudes associated with them.

A large part of the success of microfinance programs resides in their ability to surmount the significant information problems inherent in dealing with poor customers with no banking experience and unknown creditworthiness. Hence this literature review examines how social capital can help reduce the cost of imperfect information in small financial transactions, and thereby improve the performance of credit delivery programs in the developing world. It will suggest that, although social ties facilitate the poor’s access to credit and lowers its cost, they do so in a more diverse and complex manner than the mainstream literature on development finance indicates. In addition to the horizontal networks of borrowers that are largely credited for the success of organizations like the Grameen Bank, credit delivery systems also rely heavily on vertical and/or hierarchical relationships between lenders and borrowers.

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