Reinke, Jens
(1998)
Group solidarity and transaction costs: Micro-credit in South Africa.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis analyses alternative models for the provision of micro-credit, with a particular focus on the role of solidarity. It produces a critique of the lending model developed by the Grameen Bank and copied in many parts of the world. The critique focuses on the claim that such schemes are well suited for delivering micro-credit in a sustainable, ie self-financing manner. I argue group solidarity is not an essential component of successful micro-credit schemes, and that lending to individuals can be at least as efficient. I argue that solidarity groups do not perform economic exchange on the basis of ad hoc contracts, as existing literature implies. Rather, solidarity groups are institutions; as such, they are costly. Groups, therefore, require resource input from their members as well as regulations. These findings are shown to be relevant both for informal rotating savings and credit associations (ROSCAs) and solidarity groups of formal micro-lenders. A case study of a South African, Grameen-type lender illustrates that the staff- intensive group interaction implies a cost structure that cannot be supported by the interest income from its micro-credit portfolio. A second case study of a microlender giving credit to individuals finds that sustainability has been achieved with innovative lending technology. Self-selection and cost-saving measures are shown to be effective. The importance of innovation, finding its expression in reduced unit costs rather than enhanced solidarity, leads to a particular perspective on micro-finance: rather than viewing micro-finance as an issue for donor-funded, isolated development projects, micro-finance is seen as part of the financial system. The thesis concludes by pointing out that these findings may be relevant in other fields of development practice. Participatory project design involves costs, not only in micro-credit. However, such costs depend on the specific social environment and may well be justified if they contribute to desirable social processes which are not adequately captured by criteria of self-sustainability.
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