Work

The impact of joint liability lending on leveraging social capital

Year: 2025

Type: article

Abstract: Joint liability lending, which leverages borrowers' social ties, is crucial for providing credit access to the poor. However, scholars worry that these lending practices might undermine the social capital they utilize, hindering its development as people become wary of such arrangements. While these concerns have persisted, they lack rigorous analysis. Using a game‐theoretic framework, we show that when reciprocity motivations are strong, joint liability lending can trigger social sanctions among borrowers, eroding their social capital. We test these theoretical predictions using data from the China Household Finance Survey. Our analysis reveals that variations in loan amounts unexplained by observable borrower characteristics, which serve as proxies for the use of joint liability in lending decisions, negatively impact borrowers' expenditures on maintaining social ties — our measure of social capital. These findings suggest that financial institutions should carefully implement joint liability lending to avoid damaging community social capital while serving the poor.

Source: Annals of Public and Cooperative Economics

DOI: 10.1111/apce.12504

Authors: Weijia Wang, Hanying Qi

Institutions: Zhejiang Gongshang University, Zhejiang University of Finance and Economics

Language: English

Topic: Microfinance and Financial Inclusion

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: No poverty

Open Access status: green

Funder: Zhejiang Office of Philosophy and Social Science