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.”