Social capital and group homogeneity: Joint-liability lending in Thailand

Microcredit programs provide small loans to poor people organized in jointly liable groups. Given the borrowers' lack of collateral, the group lending literature emphasizes the social capital of borrowers, specifically their ties to and information about one another through which they can monitor, sanction, self-select, and provide help and cooperation to fellow members. While development theory identifies these factors as the reason for the success of group lending, empirical studies in the field provide mixed evidence for the practical usefulness of these factors. Group composition in terms of similarity of social characteristics of members and its effect on repayment is significantly less studied. Applying a synthesis of economic development theory and social networks perspective, I look at the way group composition affects the social capital of group members and their performance with loan repayment. I argue that group homogeneity is a key factor in analyzing group lending in a developing country setting. Using data on borrowing groups of a microlender in Thailand, the Bank for Agriculture and Agricultural Cooperatives, I assess the extent to which group homogeneity accounts for differences in the amount of social capital available to groups and in the risk of formal penalties for late repayment or default on a loan. I find that socially homogeneous groups tend to have less social capital reflected in the form of monitoring, sanctions, and cooperation but such groups also suffer fewer problems with repayment. Thus, group lending appears better suited for groups comprised of socially similar individuals, and this effect is not due to the conventionally accepted interpretation of social capital in the development field.