DP6194 Social Connections and Group Banking
Author(s): | Dean S. Karlan |
Publication Date: | March 2007 |
Keyword(s): | group lending, informal savings, microfinance, social capital |
JEL(s): | O12, O16, O17, Z13 |
Programme Areas: | Development Economics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=6194 |
Lending to the poor is expensive due to high screening, monitoring, and enforcement costs. Group lending advocates believe lenders overcome this by harnessing social connections. Using data from FINCA-Peru, I exploit a quasi random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans. Individuals with stronger social connections to their fellow group members (i.e., either living closer or being of a similar culture) have higher repayment and higher savings. Furthermore, I observe direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default.