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Building relationships on trust – understanding how microfinance schemes survive

Most microfinance projects involve group-based credit and savings activity. Their success therefore depends on the trust that group members have on each other. Organisers of such trust-based schemes have to work on developing good rapport and trust among group members. They also have to continuously ‘re-invest’ in trust-building activities in order to reach wider numbers of people. However, microfinance institutions (MFIs) tend to adopt a one-size-fits-all approach to beneficiaries because they pay insufficient attention to the workings of the various trust systems on which group-based microfinance is built.

A report from the UK's University of Reading Business School argues that there has been insufficient attention to the nature of the trust systems on which group-based microfinance is built. Using economic analytical models, the researchers examine how successful group-lending schemes have overcome several barriers – lack of information, the inability of the poor to provide collateral security, high cost and high risk – to the provision of savings and credit to the poor.

Key commonalities of successful schemes include:

densely populated areas with group members living in the same village or area
self-selection of members to the group – though this can lead to exclusion of the poorest
small group size – typically groups with between three and seven members are most likely to succeed
same gender and similar levels of income earning, landholding among group members
joint liability for the loan among group members
the existence of a good level of mutual trust between group members and, equally importantly, between groups and MFIs.

The researchers examined two savings and credit schemes in rural Mexico, one in Oaxaca with a poor repayment record and a more successful one in Puebla. In both areas credit promoters have a vital role in expanding schemes, encouraging members to save when they can, collecting information on borrowers and monitoring borrowers’ groups. Both agencies employ local people but do not assign them in groups from their own communities. Members of the two schemes were interviewed to obtain data on repayment records, household income, consumption and production, access to credit and attendance and participation in groups. Measurements were made of their declared level of trust in the group’s representatives and other members (including the perception of trust by other members) and in the wider community.

Key findings were that:

Better-off and more educated respondents trust MFI representatives more than poorer beneficiaries do.
The relatively better off are more distrusting of outsiders.
When the group is cohesive and there is trust in other group members, it is seen that there is a good amount of trust in MFI representatives too.
In the more successful Puebla scheme, MFI representatives appeared to be trusted more in those groups where there had been instances of default.
In Oaxaca, group members felt that they needed to be brought together by MFI representatives in order to stimulate their internal unison.
Group solidarity is more important than peer pressure, for success.

The researchers also found that societies with dense social networks and relationships find it useful to have an outsider to trust. Like the credit promoter in a bank, the credit promoter in an MFI is not trusted because of his personal reputation but because he has been selected by an organisation endorsed by reputable representatives already known and trusted by communities. Successful microfinance schemes therefore require an understanding of the specifics ways in which trust exists among different people and how it comes into play for different functions.

This would help to:

respect the role of impartial trust-brokers or outsiders
build on an existing MFI’s reputation for reliability
create a banking scheme founded on the basic trust developed by previous cooperative endeavours not related to savings and loans
create a shared perception of local ownership.

Source(s):
‘The costly business of trust’, Development Policy Review Vol. 22 No. 3, pp 321-342, by Mark Casson and Marina Della Giusta, 2004

id21 Research Highlight: 18 November 2004

Further Information:
Mark Casson and Marina Della Giusta
University of Reading Business School
Department of Economics
P.O. Box 21
Reading
RG6 6AH
UK

Tel: +44 (0) 118 378 8226
Fax: +44 (0) 118 975 0236
Contact the contributor: m.dellagiusta@rdg.ac.uk

University of Reading, UK

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