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

Posted: 2 Jul 2020

See all articles by Nicholas Sabin

Nicholas Sabin

Universidad de Santiago de Chile; University of Oxford - Said Business School

Felix Reed-Tsochas

University of Oxford - Said Business School

Date Written: July 13, 2014

Abstract

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.

The most recent version of this paper can be found at https://ssrn.com/abstract=3579121.

Keywords: Africa, economy, geography, social capital, social networks

JEL Classification: A14, D12, D64, D71, O12, R10

Suggested Citation

Sabin, Nicholas and Reed-Tsochas, Felix, The Structure of Social Collateral: Embeddedness and Economic Performance in Microfinance (July 13, 2014). Saïd Business School WP 2014-9 [Previous version of SSRN ID No. 3579121, Saïd Business School WP 2018-17 and Saïd Business School WP 2017-19], Available at SSRN: https://ssrn.com/abstract=2465634 or http://dx.doi.org/10.2139/ssrn.2465634

Nicholas Sabin

Universidad de Santiago de Chile

Avenida Libertador Bernardo O'Higgins 3363
Santiago
Chile

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Felix Reed-Tsochas (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/felix-reed-tsochas

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