Economic Geographies » Social Capital

The importance of trust

Rachel Strohm — Tue, 22 Dec 2009 16:20:53 +0000

I promised Asif Dowla some time ago that I would blog about some of his work, and after digging myself out from a fair deal of work that accumulated whilst I was focusing on grad school applications, I finally read his interesting 2005 article on how Grameen Bank built social capital among its members. Dowla identifies three components of social capital – trust, norms, and social networks – and what primarily fascinated me from an institutional perspective was how the norms & networks of rural Bangladesh played into Grameen’s search to build vertical trust between bank & clients. Women’s access to finance seems to be a less contentious issue in Bangladeshi microfinance today, given the country’s relatively high penetration of microfinancial services, but at the outset Grameen had to work carefully around purdah norms and women’s correspondingly limited social networks in order to convince potential clients that it was a serious partner. As religious restrictions on gender and public space are less pronounced in most of Africa, I had previously thought of trust-building as more a matter of demonstrating reliability and transparency of services, as Portfolios of the Poor observes. It’s interesting to see the creation of institutional trust explicitly embedded in a local context like this. (On a related note, I was surprised to learn that Bangladesh has more microfinance borrowers than all of Africa and Latin America combined. They’ve come a long way.)

Naturally, all of this put me in mind of Tim Harford’s hugely insightful article on the importance of institutional trust for economic growth. Dowla has a good section on how building non-kin-group networks through group lending was an important effect of Grameen’s work in the Bangladeshi context, but he also hints at the limits of building a financial system on personal trust when he observes that joint liability within groups seemed to be enforced more by staff than by other group members. This makes sense on the face of it, when one thinks about the conflicting incentives any group member might have to force another member to cover a missed loan payment. On the one hand, predicating continued access to credit on full and timely group repayment is a powerful incentive to force payment, but on the other hand, clients might want to be given some leeway themselves if they miss a payment in the future – or might not want to act as hostile enforcers towards people they’ll continue to see around the neighborhood. This is mere speculation, of course, but it does point to the advantages of shifting loan enforcement duties from a situation governed by personal trust to one governed by institutional trust. I think it would be a good sign if Grameen’s groups had naturally drifted towards this arrangement.

Finally, my favorite phrase? The poorest of the poor often have “a short radius of trust … because trust [must be] enforceable by the threat of retaliation.”

Posted in Behavior, Books, Economic Growth, Gender, Incentives, Microfinance, Repayment, Social Capital, Social Networks

FrontlineSMS:Credit

Rachel Strohm — Fri, 16 Oct 2009 15:09:31 +0000

[NB: this post was written before I was affiliated with FrontlineSMS:Credit. Just goes to show that blogging can occasionally land you a job!]

I’ll be candid: I am really quite excited about the idea behind FrontlineSMS:Credit. Microcredit has seen a lot of innovation on the funding side, and some on the product design side, over the past 30 years, but service delivery has remained virtually static throughout the world: loan officer, 10-30 clients, group repayments, wash rinse repeat next week. A secure, reliable, open-source platform for making mobile payments would be the first game changer in service delivery in the history of the industry.

What I find particularly intriguing here are questions of how product design might have to change in order to accomodate mobile payments. Specifically,

Group structure. The predominant group lending methodology in microcredit cuts both ways: some of FINCA’s clients in the DRC found the social support (or pressure) of group lending very helpful, whilst others considered it burdensome. Mobile payments would obviate the logistical necessity of weekly repayment meetings, but MFIs will have to think carefully about how to maintain the social benefits of the old group structures for those who valued them, whilst also seizing the opportunity to expand services to new clients who were perhaps turned off by the group method in the past. (For some insightful observations on group vs. individual loan structures, see this paper by Karlan & Gine, who find that group loan clients in the Philippines who are randomly switched to individual loans maintain the same repayment rate.)
Repayment schedules. The challenge of managing an irregular low income is one of the main themes of Portfolios of the Poor, and the authors aptly point out that inflexible repayment schedules prevent many potential microloan clients from accessing this type of formal financial service. Mobile payments have obvious potential for facilitating flexible repayments. The question, then, is how one might design repayment plans that are sufficiently flexible to attract customers with varying cash flow management needs, yet sufficiently rigorous and verifiable for the MFI’s own cash flow management. (Karlan again has some good ideas for this. My suggestion: let customers pick among repayment schedules varying from daily to monthly.)
Predictability & transparency. Another key takeaway from both Portfolios and the FINCA clients I spoke to this summer concerned the desirability of predictable and transparent financial services. FINCA consistently won praise from clients for being “serious” – that is, for having loan officers show up on schedule, for reliably disbursing funds, and for not stealing clients’ money. They knew what to expect, and they got what they expected. Mobile payments bode very well for the transparency front – probably much better than the paper-based systems that many low-budget MFIs are still using, in fact – but implementing MFIs will have to do some serious work to prove to clients that mobile payments & disbursements are more reliable than the in-person variety. (I think the question of theft is also an interesting one. Several FINCA clients said that they had been robbed whilst coming out of the bank after a loan disbursement – an obvious risk of dealing in cash – but, anecdotally, cell phone theft seemed much more common among clients than theft of cash on a day to day basis. You’d have to build a system that’s robust to these risks before it would truly be useful to clients.)

But what a fascinating set of challenges overall! I’m very much looking forward to following the development of FrontlineSMS:Credit.

Posted in DR Congo, Income Variability, Mobile Phones, My Travels, Repayment, Social Capital

Lending group sizes & other microcredit tidbits

Rachel Strohm — Mon, 27 Apr 2009 16:18:45 +0000

Lending group sizes: Read something recently stating that repayment rates were highest among a studied selection of lending groups when the group had 14 people in it. I find this fascinating – is it something like Dunbar’s number for close friends, instead of general social connections? What I don’t totally understand is why the number would be as large as 14. It seems to me that the social pressure exerted by any one individual on others would decrease linearly with the number of group members – that is, I can put more pressure on 5 other people to repay their loans than on 14, because of my own time constraints. Or perhaps the limits on social pressure are outweighed by the implicit pressure of having 13 other examples of people successfully repaying their loans, instead of just 4? Freakonomics mentioned some research recently about the power of implicit social pressure (or sanction) in guiding behavior, with regard to people seeing examples or merely believing that a majority of others were acting in a certain way. Perhaps one could think of living up to an example (of loan repayment, in this case) as a way of earning social capital, instead of actively spending it by pressuring other group members to repay their loans.

Social determinants of lending group access: Another predictable but still interesting fact is that self-selecting lending groups are sometimes reluctant to take on members who are too poor – lacking social capital as well as financial (and isn’t that a metaphor for poverty in general?). It does make sense to view current poverty as deterministic of future entrepreneurial success, from the POV of another lending group member, but I also wonder if group members would view occasional poverty (i.e. brought on by a recent illness) differently than chronic poverty. How long does someone have to be abjectly poor before a lending group is more likely to reject them? That’s an interesting question. [NB: Can’t find citation for this, although I think it may have come from Understanding Poverty.)

Monthly vs. weekly repayment schedules: This was a wonderful study – an analysis of whether Indian MFI clients were more likely to repay their loans if they made weekly repayments, monthly repayments, or monthly repayments with weekly group meetings regardless. Repayments didn’t actually vary in a statistically significant manner across any of the three repayment schemes, although the monthly group actually had the lowest rate of missed payments according to the raw data. I say “wonderful” because this knowledge is a great step towards designing lending programs that are better suited to the variable and unpredictable incomes of the poor – it’s quite valuable to understand that time-consuming weekly repayments aren’t necessary to pressure clients into repaying, which may give them more flexibility with their repayments (and use of loans).

Posted in Culture, India, Microfinance, Repayment, Social Capital, Social Networks