Social ties, access to loans, and loan repayments in savings and loan associations: evidence from rural Tanzania

Abstract

PurposeInstitutional structures of rural savings and loan associations influence their performances. One of the guiding principles for defining clear group membership boundaries is by setting rules on who has access. Social ties is a prominent requirement for membership. The objective of the current study is to provide quantitative evidence on the role of social ties membership criteria for the performance of saving and loan associations.Design/methodology/approachA cross-sectional survey was conducted in July–August 2019 comprising 48 associations in 13 villages in the Iringa District of Tanzania. In the current study, the authors use two indicators to measure the social ties between members, namely social closed association (the association applies criteria to accept only members who are relatives, friends or from the same hamlet) and physical distance (the fraction of members from other villages).FindingsThe authors find that associations are diverse both in terms of social ties, physical distance and performance, even in a small homogeneous region like Iringa District. Providing loans more easily to members with social ties has a negative relationship with loan repayment rates. Associations applying the social closeness criteria experience higher default rates than those not applying. The default rates become even worse when the fraction of member members from other villages increases in the socially tied associations.Practical implicationsPhysically distant members are more likely to default as they perceive less social pressure in an association with socially tied members. Development practitioners and policy makers should integrate the potential implications.Originality/valueThe authors provide empirical evidence on the relevance of social ties on credit access and repayment in savings and loan associations, using a novel multi-level data on financial performance in the context of community-based finance organizations in rural areas.