Social Capital and Access to Credit: Evidence from Uganda

1. Social Capital and Access to Credit: Evidencefrom Uganda Panu Kalmi (joint with Anni Heikkilä and Olli-Pekka Ruuskanen) CERMi, May 14, 2013

2. Financial access in developingcountries • Despite the increase of variousforms of microfinance, financialaccessremainsproblematic in manydevelopingcountries • Thispaperlooks at the connectionsbetween social capital and financialaccess in Uganda

3. Previousliterature • Separatestrands 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 separatelargeliterature on social capital and repaymentundergroupincentivestructures: • Besley and Coate 1995; Sharma and Zeller 1997; Zeller 1998, Wydick 1999; Karlan 2007 • Literature on social capital and financialdevelopmentin developingcountries: Calderon et al. 2002; Hong et al. 2004; Guiso et al. 2004, 2008 • However, role of social capital and financialaccess in developingcountriesdoesnotseem to bestudied

4. In thispaper • Westudywhether social capital influences the access to creditfrom Ugandan financialinstitutions • Weusetwodifferentdefinitions of social capital: • Individual-level social capital, in the sense of social connections; • Collective-level of social capital, using the measure of generalizedtrust at regionallevel

5. Overview • Differentdefinitions of social capital, and howtheyarerelated to financialaccess • Institutionalframework, data • Empiricalanalysis • Conclusions

6. Specialproblems of lendingrelationship in developingcountries • The general agencyproblembetweenlender and borrower is morepronounceddue to: • Lack of collateral • Problems of legalenforcement • However, social capital canmitigatetheseproblems

7. Individual social capital • Quantity and quality of an individual’s social connections (Glaeseret al. 2002) • Largernumber of social connectionsmayimplygreatertrustworthiness • Improvesaccess to grouplendingschemes and creditcooperatives • People with more social connectionsfinditeasier to findguarantors

8. Generalizedtrust • Collective-levelattribute • Reduces the agencycosts as lendersperceiveborrowersmorereliable (Guiso et al. 2004)

9. Financial sector in Uganda • Three layers: • Formalsector, supervisedby the Central Bank, includesbanks and deposit-takingmicrofinanceinstitutions • Semi-formalsector, regulatedbyparliamentaryacts, includesSACCOs and credit-onlyMFIs • Informalsector, unregulated, includese.g. ROSCAs and ASCAs

10. Our data • Weuse the Finscope Uganda 2006 survey • Allows us to determinewhether an individualhastakenloansfromfinancialinstitutions (positionedsomewherealong the threelayers), hastakeninformalloans (friends, relatives, moneylenders…) orhasnottakenloans

11. Measuringaccess • Non-usedoesnotimplynon-access • Amongnon-users of financialinstitutions, threedifferentcasescanbeidentified: • Hastried to get a loan, butbeenturneddown (lack of access) • Hasnottried to get a loan, becauseexpects to beturneddown(lack of access) • Has no demand for loans (no implications for access)

12. Measuring loan accessfrom Ugandan Finscope 2006 • No directquestion on loan demand • Wecanobservebothloansfrominstitutions and informalloans • There is also a questionwhether an individualhastried to access a loan frominstitutionbuthasbeenunsuccessful • To ensureweincludeonlyobservations for whichtherehasbeen a demand for loans, weincludeonlythosewhohavetakenloans, whetherfrominstitutionsorinformal

13. Measuring loan access, cont. • Firstmeasure: 1: a person hasaccessed a loan from a financialinstitution (formal, semi-formal, informal); 401 cases (36%) • 0: a person hasaccessedonlyinformal loan; 727 cases (64%) • Second measures: 1: as above (64%) • 0: a person hasaccessedonlyinformal loan & reportsbeingunsuccessful in applying a loan from an institution; 222 cases (36%)

14. Measuring social capital • Measure of individual social capital: Affirmativeanswer to the question”I havemanystablefriendships and wesupport and trusteachother” (73%) • Measure of generalizedtrust: regionallevel-averages to the question ”Generallyspeaking, wouldyousaythatmostpeoplecanbetrustedorthatyouneed to beverycareful in dealing with people” (from World ValuesSurvey); average 7.8%

15. Method • Probit regression, usingtwoalternativeversions of dependentvariable • Social capital measuresincludedfirstseparately, the together • A host of controls: marital status, age, employment, education, literacy, wealth, rural

16. Results • Social capital has a significantpositive association in bothregressions • Generalizedtrustdoesnothave a statistical association with the dependentvariable • Otherresultsmostly as expected, showing the role of education, literacy, wealth and age

17. Regressions

18. Furtherresults • Social capital mayhave an interactioneffect • Wetestit for wealth, rurallocation, and generalizedtrustbysplitting the sample in thesedimensions

19. Results

20. Results • Social capital matters for poorerpersons, for peopleliving in ruralareas, and for peopleliving in districtswheregeneralizedtrust is low

21. Conclusions • The paperprovidesevidencethat social capital maybe an importantdeterminant of financialaccess • The role of social capital seems to depend on the context • Furtherresearchcouldinvestigate the mechanismthroughwhich social capital operates