The Impact of Microfinance on Social Capital and Female Empowerment in India

The researchers evaluated two interventions to examine the effect of the frequency of microfinance group meetings on social capital formation, informal risk sharing, default rate, and female empowerment. In the first intervention, 100 lending groups of first-time borrowers were randomized into three experimental arms where lending groups met to make loan payments monthly (control), weekly (first treatment), and a third that met weekly but repaid monthly (second treatment). In this intervention, the researchers examined the effects of weekly meetings vs. monthly meetings on social interaction, willingness to pool risk, and default rate with borrowers in monthly meetings as the control group.

In the second intervention, 148 loan groups were randomized into two experimental arms: the control arm with a monthly repayment schedule and the treatment arm with a weekly repayment schedule. The participants included first-time borrowers and repeat borrowers. In this intervention, the researchers examined the effects of weekly meetings vs. monthly meetings on long term social capital formation and female empowerment. The researchers also investigated heterogeneity of treatment effects.

2006-04-05

2009-07-31

In the first intervention, key outcome variables are default rate in the subsequent loan cycle, short and long run social contact, and willingness to share risk with lending group members.

In the second intervention, key outcome variables are a group social contact variable and a pairwise social contact variable.

In the first intervention, social contact was measured as the average of equally-weighted z-scores of several survey questions about a borrower's contact with her group members. Willingness to share risk was measured as ticket-giving to other group members in an experiment where borrowers are asked how many of their group members they wish to enter in a lottery with themselves for a chance to win a prize voucher.

In the second intervention, the group social contact variable was measured as the average of equally-weighted z-scores of survey questions about a borrower's contact with her group members. The pairwise social contact variable was measured as the average of equally-weighted z-scores of survey questions about a borrower's contact with another group member.

In the first intervention, 100 lending groups of all new borrowers were randomized into 3 experimental arms. The control group was made up of 38 lending groups which met monthly to make loan payments. The first treatment group was made up of 30 lending groups which met weekly to make loan payments. The second treatment group was made up of 32 lending groups which met weekly but made loan payments monthly. After the first loan cycle, all lending groups switched to a biweekly meeting and repayment schedule. Data collection consisted of a pre-disbursement baseline survey, an endline survey thirteen months after initial disbursement, monthly surveys collected at group meetings, and a lottery experiment intended to measure risk sharing.

In the second intervention, 148 lending groups of new and old borrowers were randomized into two experimental arms. The control group was made up of 74 lending groups which met monthly to make loan payments. The treatment group was made up of 74 lending groups which met weekly to make loan payments. Data collection consisted of a pre-disbursement baseline survey, an endline survey collected shortly after the loan cycle, and monthly surveys collected monthly at group meetings.

Randomization done in STATA

In the first intervention, randomization was by lending groups of 9-13 first-time borrowers.
In the second intervention, randomization was by lending groups of 5 first-time and repeat borrowers.

Yes

First intervention: 100 lending groups
Second intervention: 148 lending groups

First intervention: 1028 borrowers Second intervention: 739 borrowers

First intervention: 38 lending groups in control; 30 lending groups in first treatment arm; 32 lending groups in second treatment arm
Second intervention: 74 lending groups in control; 74 lending groups in treatment

As an intrinsic part of the classic microfinance model, group meetings are intended to employ social capital to ensure timely repayment. Recent research suggests that more frequent meetings can increase social capital among first-time clients. Using randomized variation in group meeting frequency for 174 microfinance groups in India, we demonstrate that social capital gains associated with more frequent meetings continue to accrue across multiple lending cycles. However, these effects are reduced when group members differ in their borrowing history. In addition, clients who start with low levels of empowerment report higher social capital gains when matched with similar clients. We discuss how current microfinance policy debates overlook the creation of social capital, including through repayment meeting frequency, and we encourage regulators to undertake a holistic understanding of microfinance's impacts.

Feigenberg, Benjamin, Erica Field, Rohini Pande, Natalia Rigol, and Shayak Sarkar. 2014. "Do Group Dynamics Influence Social Capital Gains Among Microfinance Clients? Evidence from a Randomized Experiment in Urban India.” Journal of Policy Analysis and Management, Forthcoming.

http://onlinelibrary.wiley.com/doi/10.1002/pam.21790/abstract

Microfinance clients were randomly assigned to repayment groups that met either weekly or monthly during their first loan cycle, and then graduated to identical meeting frequency for their second loan. Long-run survey data and a follow-up public goods experiment reveal that clients initially assigned to weekly groups interact more often and exhibit a higher willingness to pool risk with group members from their first loan cycle nearly 2 years after the experiment. They were also three times less likely to default on their second loan. Evidence from an additional treatment arm shows that, holding meeting frequency fixed, the pattern is insensitive to repayment frequency during the first loan cycle. Taken together, these findings constitute the first experimental evidence on the economic returns to social interaction, and provide an alternative explanation for the success of the group lending model in reducing default risk.

Feigenberg, Benjamin, Erica Field, and Rohini Pande. 2013. "The Economic Returns to Social Interaction: Experimental Evidence from Microfinance." Review of Economic Studies 80(4): 1459–1483.

http://restud.oxfordjournals.org/content/80/4/1459.abstract