The Structure of Social Collateral: Embeddedness and Economic Performance in Microfinance

Sabin, Nicholas and Reed-Tsochas, Felix (2014) The Structure of Social Collateral: Embeddedness and Economic Performance in Microfinance. Saïd Business School Working Paper.

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We examine the explicit use of social relationships as collateral against loan default, a core feature of modern microfinance. What structural factors determine whether borrower relationships serve as an effective security? Through a rich combination of data on microfinance clients in Sierra Leone, including ethnographic, affiliation survey, GPS, and loan performance, we explore how a microcredit group's spatial structure affects its embeddedness and the efficacy of social collateral. We posit that group structure determines the salience of alternative social mechanisms underlying cooperation. The effects of group structure on economic performance are statistically tested using a dataset of 5,582 repayment-transactions made by 1,884 microfinance clients in Sierra Leone from 2006-2011. Our findings highlight two structural features of social collateral: (1) A group's spatial concentration improves economic performance up to a certain level; after which, the effect reverses and performance declines. Contrary to predominant expectations in the microfinance literature, groups are significantly at risk of overembeddedness. Though embeddedness enhances the ability to sanction, communicate, and build solidarity, high levels reduce the willingness to enforce the loan. (2) Groups that consist of multiple spatial fragments produce significantly worse economic performance. Socially, such groups are prone to split into factions and hinder overall cooperation.

Item Type: Oxford Saïd Research Paper
Keywords: Africa, economy, geography, social capital, social networks, complexity
Subject(s): Complexity
Centre: CABDyN Complexity Centre
Date Deposited: 05 Aug 2014 13:32
Last Modified: 07 Dec 2018 16:32
Funders: FET-Open Project FOC-II FP7-ICT-2007-8-0 Grant 255987, Skoll Centre for Social Entrepreneurship, Complexity Economics Programme of the Institute for New Economic Thinking at the Oxford Martin School Grant INET12-90001

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