The Effect of Social Capital on Group Loan Repayment: Evidence from Artefactual Field Experiments

This paper seeks to understand the importance of social capital to the success of group lending, a significant tool used in the effort to provide credit to the poor in developing countries.The paper particularly examines group lending process under the three categories:

• Those that emphasize the importance of relational social capital to group lending;
• Those that emphasize the importance of informational social capital;
• Those that emphasize the inherent contractual benefits of joint-liability contracts.

It then highlights the following findings:

• Socially homogenous groups perform better than socially heterogeneous groups;
• Personal trust between group members is more important to group loan repayment than general societal trust or acquaintanceship between members;
• More than penalties, what prevents clients from defaulting are threat perceptions about expulsion from the group and the subsequent loss of opportunities from availing credit.