Social sanctions or social relations? Microfinance in Mexico ¬リニ

a r t i c l e i n f o Microfinance is a vital source of funding for micro-entrepreneurs in emerging markets and underdeveloped nations. The emphasis in the literature on social sanctions as a mechanism for ensuring high repayment rates may be misplaced. We propose that the construct of harmonious social relations needs to be added in order to explain repayment rates and that high repayment rates foster increased capital formation for micro-entrepreneurs. Using a sample of 182 respondents drawn from a microfinance institution in Mexico and structural equation modeling, the results support the main hypotheses. Unexpectedly, social sanctions had a negative impact on repayment rates. At a time when the eradication of poverty in the twenty-first century is highlighted as one of the Millennium Development Goals, the ability of micro-entrepreneurs to gain access to credit through microfinance institutions (MFIs) has become a core theme of the entrepreneurship and development literatures (Bruton, 2010; Khavul, 2010). As a result, the explosion in microfinance should be encouraging. As of July 20, 2010, there were over 1834 MFIs with gross loans of over US$43 billion (Mixmarket, 2010). Yet, at the same time, there has been a growing crisis in microfinance repayments in many countries due in part to a relaxing of credit discipline, including less frequent meetings for lending groups (Chen, Rasmussen, & Reille, 2010). A microfinance institution can be defined as " a bank, a cooperative, a credit union, an NGO or some other form of non-bank financial intermediary , (which) seek(s) to provide clients from poor households with a range of money management and banking services " (Remenyi, 1999: 8). The viability of MFIs depends on their ability to foster high repayment rates for the lending group and build capital for its members. The conventional wisdom in the microfinance literature, related to agency theory, attributes high repayment rates to economic mechanisms for enforcement, especially screening and monitoring, as well as social capital, usually equated with group and community pressure and sanctions (Besley & Coate, 1995; Hermes & Lensink, 2007). Enforcement generally refers to the threat of sanctions through peer-group pressure, whether through verbal admonition or the denial of future cooperation (Besley & Coate, 1995). Screening takes place when group members select new members; and monitoring is the process whereby members decide whether tardiness in payments by a member is justi-Where groups belong to highly connected communities, group pressure is …