The Relentless Pursuit of Financial Capital for Micro-enterprises: Importance of Trust and Social Capital

Abstract

In developing countries, prospective entrepreneurs struggle with getting access to financial capital to start small businesses. Formal lending sometimes works for solidarity groups of small business owners who approach microfinance institutions (MFIs) to access capital for expanding their businesses, but MFIs do not typically lend money to entrepreneurs interested in starting new businesses. In order to create an environment where startup business and entrepreneurship thrives, it is crucial to meet the needs of the marginalized entrepreneurs. As a response to this trend, the informal lending and credit market in rural Kenya is growing fast, but little research is available regarding the mechanics of this system. Instead of decomposing the microfinance industry into a binary relationship between MFIs and their clients, this paper views the financial capital industry as a multi-actor system (informal lenders, rotating savings and credit associations, solidarity groups, savings and credit cooperatives and microfinance institutions) and discusses how their success is mutually dependent. This paper delves further into the dynamics between these actors and the role of trust and social capital in their complex relationships. Entrepreneurs targeting developing communities need to understand these relationships and challenges to develop business strategies that make their products and services accessible through appropriate partnerships.