Social Capital and Access to Credit: Evidence from Uganda

Panu Kalmi (joint with Anni Heikkilä and Olli-Pekka Ruuskanen)

CERMi, May 14, 2013

Financial access in developing countries

• Despite the increase of various forms of microfinance, financial access remains problematic in many developing countries

• This paper looks at the connections between social capital and financial access in Uganda

Previous literature• Separate strands of literature of:• Financial access: e.g. Johnston and Morduch 2008; Cull and Scott 2010;

Johnson and Nino-Zarazua 2011; Aterido et al. 2013• Social capital in development: e.g. Narayan and Pritchett 1999; Grootaert

and van Bastelaer 2002• A separate large literature on social capital and repayment under group

incentive structures:• Besley and Coate 1995; Sharma and Zeller 1997; Zeller 1998, Wydick 1999;

Karlan 2007• Literature on social capital and financial development in developing

countries: Calderon et al. 2002; Hong et al. 2004; Guiso et al. 2004, 2008• However, role of social capital and financial access in developing countries

does not seem to be studied

In this paper

• We study whether social capital influences the access to credit from Ugandan financial institutions

• We use two different definitions of social capital: • Individual-level social capital, in the sense of

social connections;• Collective-level of social capital, using the

measure of generalized trust at regional level

Overview

• Different definitions of social capital, and how they are related to financial access

• Institutional framework, data• Empirical analysis• Conclusions

Special problems of lending relationship in developing countries

• The general agency problem between lender and borrower is more pronounced due to:

• Lack of collateral• Problems of legal enforcement• However, social capital can mitigate these

problems

Individual social capital

• Quantity and quality of an individual’s social connections (Glaeser et al. 2002)

• Larger number of social connections may imply greater trustworthiness

• Improves access to group lending schemes and credit cooperatives

• People with more social connections find it easier to find guarantors

Generalized trust

• Collective-level attribute• Reduces the agency costs as lenders perceive

borrowers more reliable (Guiso et al. 2004)

Financial sector in Uganda

• Three layers:• Formal sector, supervised by the Central Bank,

includes banks and deposit-taking microfinance institutions

• Semi-formal sector, regulated by parliamentary acts, includes SACCOs and credit-only MFIs

• Informal sector, unregulated, includes e.g. ROSCAs and ASCAs

Our data

• We use the Finscope Uganda 2006 survey• Allows us to determine whether an individual

has taken loans from financial institutions (positioned somewhere along the three layers), has taken informal loans (friends, relatives, moneylenders…) or has not taken loans

Measuring access• Non-use does not imply non-access• Among non-users of financial institutions, three

different cases can be identified:• Has tried to get a loan, but been turned down

(lack of access)• Has not tried to get a loan, because expects to be

turned down (lack of access)• Has no demand for loans (no implications for

access)

Measuring loan access from Ugandan Finscope 2006

• No direct question on loan demand• We can observe both loans from institutions and

informal loans• There is also a question whether an individual has

tried to access a loan from institution but has been unsuccessful

• To ensure we include only observations for which there has been a demand for loans, we include only those who have taken loans, whether from institutions or informal

Measuring loan access, cont.

• First measure: 1: a person has accessed a loan from a financial institution (formal, semi-formal, informal); 401 cases (36%)

• 0: a person has accessed only informal loan; 727 cases (64%)

• Second measures: 1: as above (64%)• 0: a person has accessed only informal loan &

reports being unsuccessful in applying a loan from an institution; 222 cases (36%)

Measuring social capital

• Measure of individual social capital: Affirmative answer to the question ”I have many stable friendships and we support and trust each other” (73%)

• Measure of generalized trust: regional level-averages to the question ”Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people” (from World Values Survey); average 7.8%

Method

• Probit regression, using two alternative versions of dependent variable

• Social capital measures included first separately, the together

• A host of controls: marital status, age, employment, education, literacy, wealth, rural

Results

• Social capital has a significant positive association in both regressions

• Generalized trust does not have a statistical association with the dependent variable

• Other results mostly as expected, showing the role of education, literacy, wealth and age

Regressions

Further results

• Social capital may have an interaction effect• We test it for wealth, rural location, and

generalized trust by splitting the sample in these dimensions

Results

Results

• Social capital matters for poorer persons, for people living in rural areas, and for people living in districts where generalized trust is low

Conclusions

• The paper provides evidence that social capital may be an important determinant of financial access

• The role of social capital seems to depend on the context

• Further research could investigate the mechanism through which social capital operates