Groups, Social Capital, Microfinance and Empowerment—a Tangled Web

My last post probably left you confused but hopeful that groups have value for microfinance users, though it was unclear why or how they add value beyond just providing access to credit and opportunities to save in those circumstances where group microfinance is all that is available.

The good news is that Dean Karlan can help us dig deeper into the group dynamics that seem to help microfinance clients and providers alike have better outcomes. One of his first research projects at M.I.T.’s Department of Economics was on “The Impact of Social Capital on Poor Borrowers and Savers” at FINCA Peru. These and other related research results are reported with entertaining style in his book More Than Good Intentions with Jacob Appel (Chapter Six).

Dean and Jake don’t hesitate to attribute women’s empowerment to participation in microfinance groups (p. 120): “The empowerment angle comes from the simple fact of clients coming together on a regular basis. They talk about their work and home lives, share knowledge, and help one another deal with problems. They inspire one another.” Simple—they meet, they talk, they help, they inspire. Peru is very different culturally and socially from Bangladesh, so maybe the lack of hesitation is because “empowerment” is so much more immediately evident: an increase of self-confidence casual observers can see in the groups of Latin American women who participate in microfinance. But Dean is not one to leave it there, to accept casual observation as the last word. He is after really solid evidence, so let’s see what he and his colleagues found.

Dean looked for the effects of social capital that members brought to their group from the start. He measured social connectedness in two ways: ethno-cultural similarity of the group members and the proximity of their residences. A member’s culture score was the proportion of group members who shared her “culture index” of “Westerness” vs. “indigenousness,” based on a few simple observations of language, clothes and headwear. Her geographic score was the proportion of group members who lived within ten minutes’ walk of her house. Both measures were presumed to be highly correlated with the depth of familiarity and frequency of interaction that determine how well the group knows its members, assesses their ability to repay, monitors the use of their loans and knows the circumstances that may prevent on-time repayment. These measures also should be highly correlated with the reputational risk of defaulting.

Dean found that social capital, in this sense of connectedness, matters (p. 134): “Clients with higher culture and geographic scores were more likely to make their payments on time and significantly less likely to drop out (or be forced out) of their groups, even if they had missed some payments. Well-connected groups were more likely to forgive delinquents than poorly connected ones.”

Dean investigated the effects of what he called “connectedness,” which Michael Woolcock would consider to be one of the four dimensions of social capital: Integration of individuals within a community (intra-community ties)(see post # 54). Dean’s results show that the integration dimension of social capital is an important determinant of the success of groups engaged in microfinance. That is, this form of social capital is an important input to group microfinance. Does the microfinance group also increase social capital, as an outcome?

Chapter Six of More Than Good Intentions comes to our rescue again. Dean and Jake describe the results of a study by Feigenberg, Field and Pande (2010) of Village Welfare Society (VWS) clients in the state of West Bengal, India. The VWS group-lending model follows closely the Grameen Bank model in next-door Bangladesh, including joint liability. The researchers set up a field experiment to explore the relationship between meeting frequency, group dynamics and client default. Of 100 first-time borrowing groups, 30 were randomly assigned to meet weekly and the rest monthly, then the groups were followed for two years. In the period of the initial loan to the groups, there did not appear to be any significant difference between the weekly- and monthly-meeting groups.

Then differences appeared. According to Dean and Jake (p. 137): “… over time it became clear that the more frequent meetings had slowly but surely built stronger groups. Five months in, members of weekly repayment groups were 90 percent more likely than their monthly repayment counterparts to know other members’ family members by name, and to have visited them in their homes. After more than a year, members of weekly repayment groups were more likely to socialize together and more likely to say they’d help one another in the case of a health emergency.”

In the researchers’ own words (from their paper’s abstract): “We show that the resulting increases in social interaction among clients more than a year later are associated with improvements in informal risk-sharing and reductions in default. A second field experiment among a subset of clients provides direct evidence that more frequent interaction increases economic cooperation among clients. Our results indicate that group lending is successful in achieving low rates of default without collateral not only because it harnesses existing social capital, as has been emphasized in the literature, but also because it builds new social capital among participants” (emphasis added).

Now we have evidence that social capital (the integration dimension) is both an input and an outcome for group microfinance; social capital helps build successful groups, and successful groups help build social capital.

So far, we’ve considered only group microfinance that involves joint liability for loan repayment. Considering the burden on group members of monitoring the other members, covering the defaults of others and kicking defaulters out of the group, Xavier Giné and Dean carried out a field experiment with the Green Bank of Caraga, in the Philippines, to see what would happen to the group and the bank if joint liability was dropped in favor of individual-liability loans. This study and the results are also described in Chapter Six of More Than Good Intentions.

The study actually involved two experiments. First, half of 169 existing borrowing groups were randomly selected to convert to individual liability for the next loan and beyond, while the other half continued with joint liability as before. Both types of group continued to meet once a week and made a single payment as a group, even though the members were no longer forced to cover for one another. Second, three types of loan liability were marketed to potential new clients in an expansion area for Green Bank—one type was the old-style joint-liability loan, a second type was the new-style individual-liability loan and the third type was a hybrid in which the first loan was subject to joint liability while all subsequent loans were individual liability.

Individual- and joint-liability loans had the same repayment rate! Regarding the group dynamics, Dean and Jake summarized (pp. 126-7): “The move to individual liability also strengthened the social ties between group members in two ways. First, since members no longer had to dig into their own pockets to cover for delinquents, borrowers began to cut one another some slack. Clients were less likely to force one another out of groups. Second, the prospect of having to prod and even punish fellow borrowers, which had long dissuaded clients with strong social ties from signing up together, disappeared. People started inviting their close friends and relatives to join Green Bank.” Individual liability was a win-win for clients and the bank. But not for the field officers, who had to pick up the slack: they were more likely to be the “bad guys” who hounded defaulters and eventually threw them out of the groups, and weekly repayment meetings were about 90 minutes longer.

Without the requirement of joint liability and weekly meetings, would these microfinance groups persist? One answer can be found in my much earlier post # 13, which concludes that women value their microfinance groups over and above the value of the credit, savings and other services they receive from the microfinance provider—if the field officers who serve the groups are recruited, trained, supervised and incentivized to support positive group dynamics.

Another answer seems to be found in the informal savings groups. Megan Gash’s review of evidence of savings group impacts (Chapter Five of Savings Groups at the Frontier) indicates a “high likelihood” of solidarity and a “medium likelihood” of other dimensions of social capital formation (collective activities and leadership roles for members) and of individual empowerment (self-confidence and decision-making power in the household) due to savings group membership that involves no external credit or pressure to meet and repay.

Finally, I offer this personal observation of a credit union program in the Philippines. When eligible to leave their credit-union-sponsored microfinance groups to become individual, regular members of the credit union, women in large numbers insisted on continuing as members of their microfinance groups even as they became regular individual members of the credit union.

Clearly, group membership is valued for its own sake, most likely for the social capital gained and the empowerment that comes with that.

In the next post, I will examine the role of the field officer in supporting the social capital and empowerment effects of group membership.


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