Investing in trust: Building cooperation and social capital in micro-credit borrowing groups

Date of Completion

January 1997


Sociology, Theory and Methods|Business Administration, Management|Economics, Finance|Sociology, Social Structure and Development




This dissertation investigates the processes of cooperation emergence and maintenance within micro-credit borrowing groups. Micro-credit is a relatively new form of lending commercial capital to small business owners, most of whom would be considered high-risks by conventional banks. One form of micro-credit requires potential borrowers to join a borrowing group with other interested business owners to make loan decisions and to oversee loan repayment. The success of micro-credit lending depends on cooperation within borrowing groups. I argue that cooperation in borrowing groups contributes to micro-credit success for two reasons. First, borrowing groups reduce the transaction costs to of lending to high risk borrowers because the group is responsible for loan decisions and monitoring repayment. Second, the social relationships built in the group through cooperation produce social capital for group members, effectively changing them from high-risk to low-risk borrowers.^ Two competing theoretical frameworks pose different explanations for the process by which cooperation emerges in groups such as micro-credit borrowing groups. Identity theories argue that individuals cooperate because they share a common set of beliefs and values with others, termed a collective identity. Incentive-based theories, in contrast, explain that individuals cooperate only when they have individual incentives that make cooperation in their interests. To evaluate these explanations, I conducted a survey of a representative sample of 361 former and current participants of a multi-state micro-credit program, and completed a case study of a second, smaller micro-credit program.^ Overall, the findings in this dissertation provide more support for the incentive-based explanation of cooperation. Specifically, groups in which members build strategic trust by cooperating on low-risk activities are more successful in avoiding loan delinquency and default; individuals in these groups borrow more loans. Although some findings are consistent with identity theories, group identity failed to distinguish between successful and unsuccessful groups. In contrast, members of groups that build strategic trust have better outcomes, both economic and personal, compared to members in groups that did not build strategic trust. ^