Imperfect Information, Social Capital and The Poor's Access to Credit

Microfinance institutions gained success through the trust and mutual support of their field workers

A large part of the success of microfinance programs resides in their ability to surmount the significant information problems inherent in dealing with poor customers with no banking experience and unknown creditworthiness.

This literature review examines how social capital can help reduce the cost of imperfect information in small financial transactions, and thereby improve the performance of credit delivery programs in the developing world. It suggests that:

  • Although social ties facilitate the poor's access to credit and lowers its cost, they do so in a more diverse and complex manner than the mainstream literature on development finance indicates;
  • In addition to the horizontal networks of borrowers that are largely credited for the success of organizations like the Grameen Bank, credit delivery systems also rely heavily on vertical and/or hierarchical relationships between lenders and borrowers.

Overall, the capacity of microfinance organizations to instigate high levels of trust and mutual support among their field workers is one of the main characteristics of their operations, which, in turn, reflects their ability to successfully draw on the diverse social elements of their environment in developing successful programs of credit delivery for the poor.