Social Capital as Collateral: Banking on the Poor
This article is corrected by:
- Errata: Erratum Volume 73, Issue 2, 443, Article first published online: 2 April 2014
Group-based micro finance is a field in which the place of social capital in development has been given a central focus. The formation of micro group is based on tapping into the information that group members have about each other, thus relying on social capital. Group-based micro finance has also been explained as a means of creating social capital. This article, drawing on Pierre Bourdieu's conception of social capital, in contrast to the widely accepted notion of it, critically examines the link between social capital and group-based micro finance. It argues that group-based MF is not favored by the marginalized poor, and it serves as a mechanism in the production and reproduction of social conflict and inequality.
In most of the development literature, the end of the Cold War has been identified as a time of fundamental shift in the economic, social, and political policies of many countries of the global South (Sogge 2002; Stiglitz 2002; Held and McGrew 2003). It was also a period of generation of new development ideas and philosophies. The decline of the modernization thesis as far back as the 1980s brought a new direction in development thinking. Action-oriented projects which made the participation of the poor the central objective of development, were popular in the course of the 1990s. In both the discourse and praxis of development, the participation of the poor in creating their own development was considered indispensable. This orientation replaced the top-down (the trickle-down thesis) by the bottom-up (bubble-up) development philosophy (Schuurman 1993). On top of the continuation of these new development directions, the late 1980s and the 1990s also saw the emergence of social capital as a central concept in development thinking (Fine 2001).
Social capital has often been characterized as a missing link that corrects market imperfections (Grootaert 1997; Dowla 2006). It is seen as an engine of economic development, prosperity, and social well-being. It is often assumed that the social capital development approach beyond simply criticizing the top-down development approach gives a clear indication as to how the bottom-up development approach can be realized. It elaborates as to how the poor can reorganize themselves outside of formal networks in the making of their own development. Rather than formal hierarchical structures, it is based upon horizontal relations that are not bound by formal restrictions and expectations. It is placed in the day-to-day functioning of ordinary life (Grootaert 1997; Ito 2003). The fundamental philosophy of such initiatives relies on giving emphasis to the social dimensions of economic expansion (Rankin 2002).
“Social capital has by now become part of the development main stream,” considered as the “glue” that combines institutions for the prosperity of societies (Swain 2003: 186). The potential of social capital that emanates from informal associations has been identified by many development agencies and institutions as a best alternative for realizing development ends. For many development agencies such as the World Bank and the U.N. agencies, the identification, creation, and utilization of social capital have been regarded as the central task of development work (Woolcock and Narayan 2000; World Bank 2001, 2002a, 2002b; UNESCO 2002).
The popularity of the concept of social capital owes much to the recognition of the development initiatives that give primary importance to informal social networks and the associational life of the poor. Hence, approaches and strategies that were considered as marginal and less important came to the forefront. Among these approaches and strategies since the 1990s we find microfinance (MF) initiations dominating the global, regional, and local development discourses and praxis (Mayoux 2001; Ito 2003; Rankin 2002). Social capital in the context of MF is interpreted as a means of creating a group-based system, which makes it possible for poor individuals to access small-scale finance from microfinance institutions (MFIs). The formation of a group is based on tapping into the information that group members have about each other, thus relying on social capital to overcome information deficiencies of and related risks to prospective lenders (Serageldin and Grootaert 2000; Dowla 2006). Social capital has also been explained as a means of social integration that facilitates the creation and expansion of micro enterprises (Bornstein 1996; Mayoux 2001).
Social Capital as Collateral: “Banking on the Poor”
Unlike conventional financial institutions, group-based MF organizations commonly provide loans to the poor, who lack assets that they hold as collateral or the competence in undertaking transactions for utilizing banking facilities. However, the premises of MF rationalize the possibility of banking on the poor, assuming the pertinent social capital of the poor as collateral (Mayoux 2001; Ito 2003; Woodworth 2008). This is particularly true of the Grameen-type of MFIs, which diminish the risk and cost of banking on poor women by giving them access to credit on the basis of “social collateral” obtained through membership in borrower groups (Schreiner 2003: 359–361). These MFIs often organize borrowers into self-selected member solidarity groups. The group members then become jointly liable for each other's debt repayments. If one from the group defaults, the rest of the group will not get future access to credit (Bornstein 1996: 51–52; Johnson and Rogaly 1999; Rankin 2002: 11–12).
Through the system of MF, without having to demonstrate a credit history and tangible capital, individuals get credit access. In this system, the consensus of the group members determines a poor member's chance for getting a loan. The group, by ascertaining the credit worthiness of a poor individual, helps the individual to gain credit. At the same time, when an individual defaults on a loan, the group takes the responsibility of paying back what the individual borrowed. This means rather than formal legalistic frameworks upon which conventional banks operate, the normative frameworks that are based on “social sanction” and “peer enforcement” realize the possibility of “banking on the poor” (Woolcock 1999; Schreiner 2003: 359–361; Harper 2007). The system MFIs utilize, in addition to avoiding the risk of “banking on the poor,” helps the institutions to cut operational costs. This is because the group members take on the institution's role of decision making as to whom should credit be extended, how the borrowers should be monitored, and how the rules are enforced so that they do not default (Woolcock 1999; Dale 2001; Ito 2003: 324–325; Woodworth 2008).
Social Capital: Robert Putnam's Thesis
According to Robert Putnam, social capital refers to connections among individuals, social networks, and the norms of reciprocity and trustworthiness that arise from them (Putnam 2000: 19). Putnam's social capital concept is constituted by three component ideas, which are moral obligation and norms, social value (particularly trust), and social networks. While in explaining social values he focuses on trust, his social network concept emphasizes voluntary associations. For Putnam, economic prosperity, political stability, and social welfare are dictated by social networks, social values (trust), and norms (see Putnam 1993). Putnam argues that the degradation of social capital results in social instability and social failure (see Putnam 2000). Two of his popular works, discussed below, address these central dimensions.
Putnam, in his book entitled Making Democracy Work: Civic Traditions in Modern Italy (1993), addressed the central question of what prerequisites are essential for the establishment of strong representative institutions and a prosperous economy? To provide an answer to this question, he studied the socioeconomic and political conditions of North and South Italy. In the year 1976–1977, there was governmental reform in Italy. The reform was responsible for the establishment of new bodies of local government structures. The reformed local government gave a good opportunity for Putnam to answer his question. Within the reformed local government structure, Putnam examined the role and the extent of “civic community” engagement. He found that the economic success that followed the governmental reform in Northern Italy related to the support of Northern Italy's “civic community.” Putnam asserted that the economic success and the effectiveness of the performance of local government of Northern Italy related to the Northern public's voluntary engagement and the prevalence of mutual trust among the citizens. Also, Putnam noted the existence of strong social networks and cooperation of citizens in North Italy (Putnam 1993).
Here, it is important to note that when Putnam refers to trust, he is referring to “generalized trust” which is evident in well-functioning modern societies. This trust is based on the voluntary regulation of social relations between persons who are unknown to each other. When “modern” individuals engage in doing good, it is not because they know the reciprocal action of others, but because they trust that the development of positive communal relations will reward their actions. Also, the networks and associations that might be involved in these settings are not the means of realizing short-term interests. Rather, “generalized trust” normally reproduces “brave reciprocity” and “brave reciprocity” strengthens voluntary associations and trust (Putnam 1993: 171–185). Apparently, when social capital is used more, it grows more. When trust, association, and civic engagement are expanded, they engender collective well-being.
In his more popular book entitled Bowling Alone: The Collapse and Revival of American Community (2000), Putnam explores the degeneration of social capital in America. He argues that the decline is evident in what he regarded as bastions of social capital, the family, the neighborhood, and also work places. He highlighted a general decline of connectedness among Americans in both formal and informal ways. Putnam maintained that there was a decline in Americans' interest in participating in political, civic, and religious activities (Putnam 2000: 32–79). He noted that despite the fact that traditionally unions and professional societies have been the most common forms of civic connectedness in America, union membership has been falling for more than four decades (Putnam 2000: 80–92). Putnam emphasized, nowadays, Americans are spending significantly less time with friends and neighbors than they used to do (Putnam 2000: 93–115). His central argument was that the degeneration of civic activity and trust resulted in the decline of mutual togetherness and social intercourse. For him, civil activity and trust go hand in hand. According to Putnam, the decline resulted in the increase in family violence, alienation caused by unemployment, the breaking down of communities, and the usage of drugs and other social evils (Putnam 2000). Despite its popularity, Putnam's concept of social capital has been widely critiqued. For example, some questioned Putnam's basic assumption of considering social capital as necessarily a good thing. They argue that associations can generate inequality, for example, simply by excluding others from membership. This means “access to social capital is not evenly distributed … and, second, the value of social capital is inextricably linked to the fate of the social sectors in which it is nested” (Foley and Edwards 1997: 672). This according to Fine (2003) implies a dark side to social capital and that it can be a potential source of conflict (see also Putzel 1997).
Nevertheless, the popularity of Putnam's social capital concept is rooted in giving paramount importance to social integration. Social integration, which is generated through collective action of voluntarily associated entities, could be the basis of development and social well-being. The maintenance, creation, and reformation of collective values are seen to guarantee social transformation (Putnam 1993, 2000). At the heart of many of the social-capital-related development conceptions we find the replication of Putnam's assertions. The same assertion is the basis for the expansion of the group-based MF development paradigm throughout the majority world (World Bank 2001; Rankin 2002; Swain 2003: 199).
In group-based MF systems, individuals voluntarily form groups. That means, in the words of Putnam, they create “voluntary associations.” Although MFIs such as the Grameen Bank require individuals to be organized in groups in order to get access to credit, the individuals create the groups by their own free will. But it is usually assumed that individuals prefer to be grouped with others who are “trustworthy” or “creditworthy.” They evaluate the “creditworthiness” of others based not on the MFIs criteria, but by the already prevalent nonconventional normative frameworks that embody trust and previous links. Such a normative framework in this case can be said to reflect what Putnam calls “generalized trust.”
The normative frameworks that individuals utilize to evaluate the creditworthiness of others, social capital, helps in the formation of MF groups. The formation of groups provides the possibility of accessing credit for the poor, which they are otherwise unable to obtain from formal conventional banking channels. Also, the groups that are created can be the bases for the maintenance, creation, and reformation of social networks and associations among group members and across groups and group members. This argument, supporting Putnam's conception of social capital, reaffirms that social capital maintains and facilitates social well-being. Also, once social capital is created, it grows.
On this basis, it can be argued that the formation of groups for accessing loans has a range of advantages. First, it provides the poor the chance of accessing capital, which is instrumental for the enhancement of the entrepreneurial spirit of the poor, which guarantees their empowerment and social well-being. Second, MF groups can serve as a means of eradicating harmful traditions and practices. For example, Schreiner (2003: 361) noted that although the Grameen Bank's primary role is the provision of credit and a saving facility for the rural poor, it has also contributed to the breaking down of harmful norms and practices such as dowry and early marriage. Also, the Grameen Bank through facilitating and supporting educational activities, urging members to drink clean water and engage in gardening, contributes to other development activities. More importantly, the normal operations of the bank's activity, which include meetings of groups, facilitate an enabling environment for the creation of social capital, which facilitates the establishment of networks among women, which is important for the enhancement of their awareness and empowerment (Bornstein 1996; Schreiner 2003).
However, it is important to note that despite the focus of Putnam's idea on trust as a basis for the building of social integration, his thesis does not deal with conflicts and inequalities among actors and hence, I contend, his social capital theory cannot help us to critically examine the concept of social capital in general and MF as a development concept in particular. While Putnam's social capital approach focuses on horizontal associations, it overlooks vertical contradictions. Despite discussing norms of reciprocity that emanate from horizontal network formation, it understates the possible inequality and contradictions embedded in vertical associations. Similar to Putnam's idea of social capital, the majority of MF literature focuses on horizontal social capital creation and ignores hierarchal relations that support and in some cases hinder the success of MFIs in achieving their development goals (see Ito 2003). When social capital is conceived only as the outcome of horizontal relations and interactions, conflicts of interests that are embodied in associations, networks, and normative frameworks become overshadowed. On the contrary, the creation and reproduction of social capital are achieved at the cost of the marginalization of some sections of society (Fine 2001, 2003; Rankin 2002).
Social Capital: Pierre Bourdieu's Concepts
Counter to the positive and constructive gloss on social capital as explained by Putnam, Pierre Bourdieu provides us with an appropriate framework to critically examine the concept of social capital in general and its use as a theoretical base for the popularity of the MF development strategy in particular. According to Bourdieu (1986), social position is determined by the possession of four components of capital, economic, cultural, symbolic, and social. For him, each of these cannot be separated theoretically. Economic capital refers to the accumulated wealth of agents and the value of goods they own. It relates to property ownership and wealth that can be defined in monetary form such as land. In Bourdieu's analysis, this is the most “rationalized” form of capital because it can be easily quantified in monetary terms. On the other hand, cultural capital, which is symbolized by the culture of those who dominate, is the most recognized and thus is the marker of life chances and opportunities. Cultural capital primarily involves culturally-valued competencies and knowledge. In the class structuring, then, it plays an equally important role as that of economic capital (Bourdieu 1999: 22). The other capital in Bourdieu's analysis is symbolic capital and this emerges with the ownership of the other three capitals (economic, social, and cultural). It refers to one's status, honor, or prestige (Bourdieu 1986).
For Bourdieu, social capital, which refers to social connections (ties), social networks, group membership, and respectability, is another important element that determines class position. The volume of social capital possessed by a given agent depends on the extent of the network of connections that the person can effectively mobilize. Group membership paves the way for involvement in social networks and social networks facilitate the social position of actors in a range of fields. The disparity in position of social capital can help explain why the position of similar degrees of economic and cultural capital result in different levels of achievement and the power positions of actors (Bourdieu 1986).
In Bourdieu's analysis, membership in a group or being linked to a network of social relations brings to an individual a specified social value, which he calls social capital. If we assume Bourdieu's argument to be valid, then in the case of MF, membership of an individual in a group in order to obtain credit can be considered an expansion of the social capital of the individual. At the same time, because social capital serves as a function of power, membership in a MF group can immediately justify the popular “empowerment” discourse, which is the central developmental rationale of the MF project. At the same time, because the basic aim of MF is the realization of development through providing financial access to the poor, the opportunity of getting loans by itself can be framed as the expansion of the “economic capital” of the poor.
However, unlike Putnam's conception, which emphasizes the collective benefit of associations and networks for social welfare, in Bourdieu's theory the value of membership in a group is found in the enhancement of an individual's social position. Bourdieu's concept reflects the existence of social hierarchy and the necessity of group membership and the establishment of networks to move up the hierarchy (Bourdieu 1986). Hence, based on Bourdieu's conception, it can be assumed that membership of an individual in a group-based MFI can help the person to move up the social hierarchy.
However, the common MF maxim does not reveal social capital in terms of individuals' social positions. Rather, it reinstates the collective welfare version of addressing the problem of the poor. At least rhetorically, it is framed as an inclusive development approach that does not exclude the very poor (see Bornstein 1996: 23–26; Klobuchar and Wilkes 2003). With this view it shares the collective welfare vision of Putnam's social capital rather than Bourdieu's concept, which focuses on hierarchy and conflicts of interest in the hierarchy. Thus, the working of the system of MF is entrenched in a contradiction that defies its collective vision and the contradiction and inequality that are embedded in the workings of group-based MF can be clearly explicated by applying one of the central ideas of Bourdieu's sociological perspective, that is, his conception of society as a collection of social fields. According to Bourdieu, each social field is an arena of “play and competition” in which “agents,” both individuals and institutions, strive to control the leading position within it. The possibility of these actors to control any specified position within a field is determined by the degree of their possession of the three forms of capital (economic, cultural, and social). Although the required capital differs from one field to another, the chance of winning the “competition” is determined by the degree of the forms of capital controlled by the agents (Bourdieu and Wacquant 1996: 76).
Outwardly, “in the field of MF,” the success of individuals to obtain access to finance is a factor of their possession of the three types of capital (economic, cultural, and social). However, because MF is targeted at benefiting the poor who are denied credit access through the conventional channels, the micro-level economic disparity is often overlooked. Rather than economic differentiation, disparity based on social capital (particularly trustworthiness) is often seen as a base for MF foundation. However, the trustworthiness of the poor is often inferred from their economic potential.
Unlike for those who do not have assets, credit facilities have always been accessible to those who are better off in terms of having assets and other forms of income (Hulme and Mosley 1996; Ahmad 2003; Coleman 2006). Although MFIs do not require collateral to provide loans for groups, the chance of becoming a member of a group depends on economic status, that is, it is hierarchical. In accepting group responsibility for defaulting, members of a group prefer to have a member who has assets or other forms of income, for example, a woman who has a husband with income (Rankin 2002: 16). For example, an ethnographic research undertaken in the North Showa Zone of the Amhara region, in Ethiopia, on rural clients of the Amhara Credit and Savings Institution (ACSI), one of the largest MFIs in Africa, revealed that the economic capital of loan applicants determine their success in becoming members of a micro group for accessing ACSI's loans (Geleta 2010).
ACSI provides loans to men and women using the popular “solidarity group” lending method, and hence prior to the disbursement of loans, the formation of solidarity groups is a must. The institution provides its loans to individuals who are organized into self-selected member groups, and who are willing to take responsibility for each others' loans. In the formation of micro-groups, individual loan candidates rely on the networks, associations, contacts, friendships, lineage, and blood links (social capital) that they have. However, social capital does not facilitate the integration of all interested individual loan candidates into a micro-group. Regardless of the existence of social capital (networks, associations, and links), loan candidates often evaluate the economic capital (such as land or oxen) that the person has, and also the person's capability to run a successful business (Geleta 2010).
Despite the fact that most people in Amhara region of Ethiopia are poor, their socioeconomic positions significantly differ. In particular, while some own property such as houses and oxen, others are completely dependent on the support of their relatives. Those who own property can easily get access to loans through forming micro-groups, but the destitute are suspected of using the loans for consumption purposes, and hence they are marginalized from credit access. For example, one female participant of the research expressed her bitterness in the following way. The person had always wanted to borrow from ACSI, but have never had the chance because she had no property or dependable income:
All five of my friends who grew up with me formed a group to obtain loans from ACSI. I begged them to allow me to join them. But none of them agreed. I will never forget what one of them said. She said “if we go to her house what we find are small children.” How can we trust her and take loans with her. If she fails to pay what are we able to sell? We cannot sell her children! (Interviewed on 16 August 2008)
In Amhara region of Ethiopia, more than men, the poorest women especially single women (widowed and divorced) who have children to care for are the most discriminated against. On the contrary, single women who have older children who have reached maturity and who support their mothers can more easily get access to micro-credit. The fact that they have children means that they are less burdened with household activities, and hence they have more time to engage in productive activity. Thus, single women who have older children find it relatively easy to become members of micro-groups (Geleta 2010).
Moreover, in contrast to the common functionalist assumption that social capital is an indiscriminately available resource of all, Bourdieu (2000) argues social capital arrangements are differentiated based on distinct social status. For Bourdieu, social capital is one of the forms of capital that determines the social position of actors who are involved in the struggle in search of their interests. For him, social capital serves the purpose of “power function.” The amount of social capital resources an individual has reflects the person's capacity to further his/her interests in “social arenas.” The degree of social relations and networks a particular person has reflects the person's social position.
However, in the Grameen-type group-based MF organizations, what guarantees a person's access to finance is often framed as due to the individual's creditworthiness and the person's success to form collective relations with others. From this perspective, the formation of collective relations and social networks is constructed as something that can be conditioned only by the extent of the personal capability and willingness of the poor individuals. This implies that the social capital that individuals already own is insignificant. This is clearly reflected in the words of Muhammad Yunus, the founder of the Grameen Bank. Yunus asserts:
Grameen is a pure meritocracy, providing opportunities for self advancement based not on class or race or inherited privilege but on character, imagination, and hard work. (Bornstein 1996: 26)
Despite this assertion, the mere interest of an individual in obtaining credit does not ensure that the individual will obtain credit. Grameen itself with its strict principle of strengthening loan security has always preferred to make each group a “stable unit.” Before it provides loans, Grameen ensures that group members are villagers who know each other very well (Bornstein 1996: 50–52). Its loan security goal leads the Grameen Bank to provide loans to those who already have networks and links. However, such links, which ultimately lead to forming collective relations, could be based on inherited privileges such as blood ties, family relations, contacts, and, possibly, ethnicity.
The ethnographic research undertaken on rural clients of ACSI discussed above also revealed that social capital (network, association, and especially trust) that is rooted in blood relationships has enabled a significant number of people to access ACSI's loans. Although ACSI does not allow members of the same household to be members of a micro-group, it does allow relatives to form groups. In this regard, someone who has relatives is more likely to be a member of a micro-group, and hence to receive credit than someone with no or a limited number of relatives. In fact, eight of the 15 micro-groups that were studied contained members who are relatives, for example, sisters in women's micro groups and brothers in male micro groups (Geleta 2010).
The main reason given by the studied micro-group members for their preference to form groups with relatives is because in case of the default on loans, they prefer to take the risk of paying back their relatives' debts rather than unrelated members' debts. However, individuals who are alone for various reasons, such as their recent settlement in the area or those who have a limited number of relatives, are often excluded from becoming members of micro groups and hence from access to credit (Geleta 2010). Hence, rather than imagination and hard work, an already existing social link provides further opportunity for an individual to gain credit access. Such kinds of group formations can sometimes hinder the possibility of solidarity “across other socio-cultural differences” (Rankin 2002: 16).
Furthermore, the degree of social capital that individuals succeed in mobilizing determines their chances of remaining as members of a group for accessing continuous credit. As mentioned earlier, membership in a MF group on top of assuring credit access provides a range of advantages for poor individuals. However, success in becoming a member of a group in itself does not guarantee continuous credit access. In order to get continuous credit access, the poor need to be successful entrepreneurs. Whatever business they pursue, they must generate substantial profits that are at least enough to enable them to repay their loans. Because group-based MFIs charge interest rates above the commercial rate to finance the cost of running the institutions, the poor are expected to work hard and make a substantial profit (see Bornstein 1996: 20–22; Wright 2000; Schreiner 2003).
In the system of MF, this necessity of making a profit in order to repay loans and to get access to more loans creates a competitive ethos. However, success in this competitive environment is again conditioned by the amount of social capital that individuals possess. More so than those who are less networked, those individuals who are highly networked can more easily exchange their produce and services and hence can make a profit and pay back their debt. Whatever the type of business the entrepreneurs are engaged in, their success depends upon the social links and associations that they already have (Rankin 2002). For example, Mayoux (2001: 432–436), based on her study in Cameroon, notes that some of the women included in MF programs generated low levels of income from the products that they traded because the markets are dominated by men who had created their own social networks and associations (social capital). Men's domination of the markets is backed by “discriminatory institutional relationships and structures” that involve the practice of customary law, which alienates women from accessing resources except through husbands. Hence, rather than the social capital that they create after joining a group to gain access to MF, the links and associations that they already have determine their chances of gaining credit access. Also, their success in running a profitable business and their chance in gaining continuous credit access from MFIs depends on the social capital they possess.
This article critically examined the social capital concept and established the link between group-based MF and the concept of social capital. It highlighted that commonly social capital has been considered as the “glue” that combines institutions to enable economic factors to work towards the prosperity of societies. This common understanding of social capital is rooted in Putnam's conception of social capital, which highlights the importance of associations, networks, and the development of trust for social integration and development. However, this article, drawing on Bourdieu's analysis of social capital, questioned this common association of social capital with social integration and development. Thus, I argued that social capital is an aspect of the factors that determine social position and power structures in a given society and plays a key role in the production and reproduction of inequality. Hence, social capital cannot be considered necessarily as a good thing.
Also argued in the article is that similar to the widely accepted perspective on social capital, group-based MF assumes that the formation of micro groups and the creation of associations and links among the poor facilitate social integration and development. However, despite its core objective of providing credit access to the very poor, the system of group-based MF is not as poor-friendly as it is commonly assumed. The article suggested that the nature of associations and links (social capital) among the poor is influenced by their economic, social, and cultural positions. Not all the poor are networked, associated, and linked to one another and not all micro groups necessarily facilitate social integration. While power structures and social positions allow some sections of societies to benefit from credit access, they exclude others from credit and credit-related advantages. Because some of the poor, especially the poorest of the poor, are excluded from gaining access to loans of MFIs, the system of group-based MF contributes to the intensification of social differentiations and inequality among the poor. Hence, if group-based MF is to benefit the very poor, the power structures and social positions that condition the exclusion of some sections of societies from credit access need to be transformed by inclusive policy guidance or other mechanisms that could enhance the capacity of the very poor.