An inquiry into the effects of microfinance on social distrust levels among the poor

This thesis makes three contributions to the microfinance literature. It synthesizes the evidence on microfinance and social capital, developing an understanding of how group lending-based microfinance and social capital interact. Drawing on gaps in the literature, it highlights the need for interdisciplinary research that bridges the approaches taken by sociologists and economists for understanding what (actually) works for society. Next, three novel measures of microfinance (prevalence) intensity for cross-country analyses are proposed. We show that these new measures are more precise than existing ones, are highly correlated with the existing measures, and show a higher variance. These characteristics allow the new measures to better exploit cross-country heterogeneity. Lastly, the association between microfinance intensity and social distrust is analysed. Utilizing data extending over two decades, we use the four recent waves of the World Values Survey, corresponding to the years 2001, 2007, 2012, and 2019, and find a significant relationship, robust to various checks, including empirical Bayes, 2-Stage Least Squares, and weak instruments-robust regressions. The relationship is present only in the low-income strata of the society and not in the rich, suggestive of the effect of microfinance in these countries, as microfinance targets the poor strata. Microfinance may affect distrust levels within communities because of the collateralization of social capital. The joint-liability mechanism creates social friction, as has been reported by many qualitative studies in the past, which fractures the levels of trust in society. This thesis is the first to show how microfinance worsens (dis)trust empirically using publicly available data. The study has important implications for microfinance in theory and practice: the results suggest that the incentive structure of the typical group-based microfinance needs revisiting to better account for the social costs inherent in its design; financial inclusion should not come at the expense of social ties and trust.