Social Capital and the Repayment of Microfinance Group Lending. A Case Study of Pro Mujer Mexico

Luminita Postelnicu, Niels Hermes

Research output: Working paperAcademic

Abstract

This paper investigates how social networks of group borrowers come into play in joint liability group lending. We 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. Our 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, increases the credibility of the threat of losing one’s informal risk insurance arrangement in case of default. Our 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).
Original languageEnglish
Place of PublicationBrussels
PublisherCentre Emile Bernheim, Universite Libre de Bruxelles
Number of pages54
Publication statusPublished - 2015

Publication series

NameCEB working paper series
PublisherUniversite Libre de Bruxelles
No.15-023

Keywords

  • Microfinance, group lending, social capital, repayment performance

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