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Social Capital and Group Banking

Dean Karlan ()

No 181, Working Papers from Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies.

Abstract: 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 quasirandom 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.

Keywords: microfinance; group lending; informal savings; social capital; Peru (search for similar items in EconPapers)
JEL-codes: O12 O16 O17 Z13 (search for similar items in EconPapers)
Date: 2005-05
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Persistent link: https://EconPapers.repec.org/RePEc:pri:rpdevs:karlan_d_soccap_grp_bankingpaper.pdf

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