Group Lending, Joint Liability, and Social Capital: Insights from the Indian Microfinance Crisis

Abstract

This article grapples with the causes of India’s microfinance crisis. By contrasting Bangladesh’s highly successful Grameen model with the allegedly “universalizable” version of India’s SKS Microfinance (which precipitated the crisis), trust or social capital is isolated — not just narrowly interpreted within standard economic theory, but more broadly construed — as the essential element accounting for the early success of microfinance. It is argued that the microfinance experience has been widely misinterpreted, in both analytical and policy terms. This article suggests inherent limits in extending the model to for-profit institutions and, in particular, to the pace of scaling up.

Keywords: Microfinance, Microfinance and Social Capital, Indian Microfinance Crisis, Microfinance For-Profit, Scaling Microfinance

JEL Classification: O10, O17, Z13, K12, K42, G01, G21