New Working Paper by SOCENT researcher Luminita Postelnicu and Niels Hermes and Roselia Servin Juarez available for download
“Social Capital and the Repayment of Microfinance Group Lending. A Case Study of Pro Mujer Mexico”, by SOCENT researcher Luminita Postelnicu and Niels Hermes and Roselia Servin Juarez has been published in CERMi-CEB working paper series (WP 15-023) and is available for download on the SOCENT website.
Abstract: This paper investigates how social networks of group borrowers come into play in joint liability group lending. The authors use a large and original dataset containing 802 mapped social networks of borrowers from Pro Mujer Mexico. This is the first paper to look at external ties, i.e. social ties with individuals outside the borrowing group. The main finding is that group lending with joint liability works when group borrowers use the informal risk insurance arrangement embedded in their external ties as guarantee for loan repayment. The extent to which this informal arrangement is used as guarantee is not decided by the borrower, but it is determined by the configuration of the group borrowers’ social networks, i.e. by their overlapping networks. These overlapping networks (or information channels) facilitate the diffusion of information into each other’s networks, and, thus, increase the credibility of the threat of losing one’s informal risk insurance arrangement in case of default. The results show that the threat of losing the informal risk insurance arrangement embedded in one’s external ties matters for loan repayment even more than internal ties (i.e. ties between group members).