Socioeconomic Status and Social Capital Levels of Microcredit Program Participants in India

Abstract

Poor households lack access to traditional financial services in many developing countries, even though they demand and could efficiently utilize such services. Without access to services such as credit or savings, poor households may not be able to take advantage of business opportunities or deal with large expenses (Littlefield and Rosenberg, 2004). Microcredit has received attention for being an innovative and effective development tool that may be able to solve this problem, compensating for low-income households’ lack of access to traditional financial services. Observers theorize that traditional financial institutions fail to serve low-income households more often than they fail to serve higher-income households because of poor households’ lack of collateral, country interest rate limits, and transaction costs facing banks associated with lending to low-income households (Armendariz and Morduch, 2007). While microcredit programs can do little to change institutional factors such as interest rate limits, they can affect a household’s access to collateral and the transaction costs associated with lending money. The main way in which they do this is through group-based lending. In group lending, collateral is gathered on a group basis, and groups are formed among individuals who know each other, lowering the transaction costs associated with gathering information about potential borrowers (Armendariz and Morduch, 2007: 89). Given microcredit’s aim to compensate for poor households’ lack of access to credit, what types of households utilize microcredit services in relation to others in their community? Are these the households that are likely to be failed by the traditional system? Scholars in the field have pondered these questions. As Khandker (1998: 7) writes, an important issue for research is “determining which poor and small borrowers actually participate in these programs.”