Does Social Capital Facilitate the Poor's Access to Credit? A Review of the Microeconomic Literature

This literature review examines the empirical evidence on the relationship between social capital and the performance of credit delivery programs in the developing world. The paper discusses the different types of credit arrangements targeted at the poor in a roughly decreasing order of lender-borrower closeness and exogeneity of the lending methodology:

• The rotating credit and savings associations (ROSCAs);
• The local moneylenders;
• Trade credit;
• The group-based microfinance programs.

Further, the paper:

• Describes the features of group-based lending programs that draw on social relations;
• Examines the empirical role of these features in explaining the performance record of the programs;
• Examines whether lending methodologies that draw on social capital-type factors reach the poorest members of their target membership.

It finds that:

• Social networks are important elements of most types of formal or informal programs that provide credit access to the poor;
• The networks achieve the goal of closing a gap in the financial structure that commercial banks are unable to fill.

Finally the paper concludes with the following:

• When the credit provider is closely related to the borrower, the role of interpersonal ties is a central element in ensuring repayment;
• When, there is no a priori relationship between the borrower and the lender, social factors are less likely to be central elements in explaining credit discipline, and their mobilization requires significantly more effort;
• The use of existing social ties improves the access of the poor to credit.