Collaborative Research: Social Networks and the Diffusion of Microfinance

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Microfinance has spread very rapidly in the last decade, raising the hope that it has the power to lift millions out of poverty by providing them with access to capital. A source of the success of microfinance in successfully making loans to the poor (in contrast to the failures of previous government-sponsored subsidized credit schemes) is its reliance on the local social network. Loans are often given to group of five to ten women who are jointly liable for the loan to the group. The social networks are harnessed to diffuse information about micro-finance, screen out bad borrowers, and provide monitoring. The goal of this proposal is to examine in more details, both theoretically and empirically, how the social network structure impacts the diffusion of membership in a microfinance organization. To this end, we will collect very detailed information on social ties between villagers in 50 villages where a specific microfinance institution (BSS, in Karnataka) is planning to start work in the next few months. We will also collect information on specific features of the villages (such as geographical features) which may be a source of exogenous variation in the structure of these networks. As BSS expands, the BSS credit department will share information on those who become members, on how groups are formed, and on the performance of the groups (repayment, drop out, meeting attendance, etc.). This information will be matched with the social network survey, allowing us to map the diffusion of microfinance both along networks within a village and across villages, depending on the type and shape of networks present in the village.We will use this information to answer several important questions on the role of social networks in Microfinance: First, what is the impact of the structure of the network on the way microfinance diffuses? Second does it matter that some specific members of the network join early? Third, does microfinance exclude some people who are not central to the social network? Fourth, are individuals who have more connections also more reliable borrowers? To frame these questions, we will rely on existing theoretical results on the impact of social network structure on the diffusion of information which have been contributed by some of the PIs on this proposal. We will also develop new results to shed light on issues that have not yet been explored theoretically. The project has scientific and practical implications. At the scientific level, microfinance, which relies on social networks both to spread information as well as a basis for effective functioning is an interesting area for testing some of the modern theory of networks. At the practical level, microfinance has been widely heralded as one of the effective ways to harness social networks to reach the poor with credit. But little is known on how variations in social networks across villages impact the ability of microfinance organizations to spread in villages, their tendency to exclude or include some pockets of the population, and how effectively they function. Answers to those questions can lead to important practical advice for microfinance practitioners and for policy makers who are concerned that microfinance could exclude socially marginalized populations.