Beyond the Product: Creating Social Capital to Make the Most of Microfinance

Thank you to everyone who participated in the Virtual Conference on May 2, 3, and 4 called “Extending the Conversation on Reaching the Poorest: Another look at the 2011 Global Microcredit Summit.” A lot of great ideas were covered, and a great many thoughts and experiences shared which brought depth and clarity to the conversation. In an effort to help provide an accessible synopsis of the discussion topic for the third session, Megan Gash and Bill Maddocks marshaled their thoughts into the following review. A full transcript of the discussion is still available here. It’s a great way to familiarize yourselves with the topics covered on Day 3’s “Beyond the Product: Creating Social Capital to Make the Most of Microfinance.”For the past three decades many microfinance programs have used group based methodologies to serve “entry level” clients with the hope that these customers would “graduate” to individual loans as their financial security improved and they became more “trustworthy” borrowers.Once these clients have moved on to the individual borrowing path, the solidarity and guarantees provided by the group is substituted by a credit rating and a personal relationship between lender and borrower. The social capital built during this process can be jettisoned as an unnecessary by-product of the former group lending process. This is a generalization, of course, and many microfinance institutions retain the group lending process and integrate effective social development goals as “double bottom line” businesses. However few of these institutions wade into the waters of serving the very poor—and for good reason.Those microfinance institutions and development organizations which work to reach the poorest create social capital for purposes beyond debt collection. They often must move far beyond the frontiers of mainstream financial inclusion to nothing less than rebuilding the basic elements of civilization for those whom humanity has cast out. Community consultant Peter Block talks about creating social capital to restore whole communities. According to Block, “restoration begins when we think of community as a possibility, a declaration of the future that we choose to live into… The communal possibility rotates on the question ‘What can we create together?’ This emerges from the social space we create when we are together.”

The 10 pilots in the CGAP-Ford Foundation Graduation Program use social capital as a key element in the process of building a foundation of self-confidence and social bonds needed to move women from extreme poverty to small wins and beginning to enjoy meager levels of financial security. They are learning how powerful a force social interdependence can be in this restoration process. As Janet Heisey of Trickle Up commented during the Virtual Conference on May 4th (Session 3: Beyond the Product: Creating Social Capital to Make the Most of Microfinance), “…we are seeing that after 12-16 months, in many cases, the dynamic in the group really shifts, and group members take ownership, troubleshoot household and community issues on their own, operate independently of the partner agency, and advocate with local government institutions.” While social capital may be viewed as a by-product of the graduation process, its presence is an accurate indicator of the level of transformation and determination to which members individually and collectively are willing to commit.

The SEEP Network’s STEP UP initiative (Strengthening The Economic Potential of the Ultra Poor) views building social capital as an important “Push” strategy along with confidence-building, savings, conditional cash transfers, asset transfers, and food stipends. A continuum of “Protecting, Promoting, and Providing” can move the destitute poor to be ready and able to make positive changes in their lives.

In order to reach some fraction of the massive number of poor not currently served by microfinance, especially the 1.29 billion that live on $1.25 a day or less, we will need strategies like STEP UP that work to break down the silos of practice (and link to other initiatives), play a central role of facilitation and coordination, and provide advocacy. We need such initiatives to assess the real poverty of those participating in microfinance interventions and to build integrated, systemic approaches utilizing assessment, design, implementation, evaluation, and learning. Contact STEP UP facilitators, Jan Maes and Margaret Richards, for more on this approach.

Savings groups is another methodology that uses social capital as a key element to build strength in its success. As self-selecting groups of 20-25 women come together to save, loan, and manage their money together, they build strong bonds of trust and mutual support. They democratically elect a management committee, which they can change over time, and make decisions together. They often feel group decision-making is a fair and peaceful process which creates an environment where they can trust and rely on one another. They learn from each other by exchanging ideas, such as sharing tips for improving businesses. In times of need, they feel that they can go to their group for both financial support (through emergency loans) and emotional support. They feel it is a place where they can go and talk about their problems openly; they can relax, have fun and enjoy themselves. It is a place of their own.

In the case of savings groups, it can be argued that social capital is not just a by-product of the program, but a main objective. If members do not trust and rely on each other, then the group will fall apart. This methodology works well for many and often creates a platform for the group to engage in other community activities and take on other leadership roles. For more information about savings groups and their impact, watch for the book Savings Groups at the Frontier, which should be published in summer 2012. First drafts of the chapters are available here.

Creating products and services which serve both individual needs and also capitalize on the power of social capital can be challenging to create and to maintain over time. It may seem easier to focus program design on serving individual needs first and then capitalize on a social aspect if a positive dynamic amongst participants already exists. However, this can limit the potential of social programs. As Peter Block said, “restoration begins when we think of community as a possibility … What can we create together?”

—Megan Gash, Research and Evaluation Specialist, Freedom from Hunger,
—William Maddocks, Sustainable Microenterprise and Development Program Coordinator, The Carsey Institute at University of New Hampshire,