International Journal of Social Economics

Investigating causal relationship between social capital and microfinance: Implications

for rural development
Sohail Akram Jayant Kumar Routray
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Sohail Akram Jayant Kumar Routray, (2013),"Investigating causal relationship between social capital and
microfinance", International Journal of Social Economics, Vol. 40 Iss 9 pp. 760 - 776
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IJSE
40,9 Investigating causal relationship
between social capital and
microfinance
760
Implications for rural development
Sohail Akram and Jayant Kumar Routray
Regional and Rural Development Planning Field of Study,
School of Environment, Resources and Development,
Asian Institute of Technology,
Bangkok, Thailand
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Abstract
Purpose – The aim of this paper is to investigate causal link between social capital and microfinance
by testing the role of social capital in explaining the household’s access to microcredit under the
group-based lending approach.
Design/methodology/approach – Household level primary data was collected from a rural district
of Pakistan. Principal component analysis (PCA) was applied to construct a social capital index,
whereas two logit models were developed to predict the probabilities of access to credit. Besides,
few qualitative statements have also been used to supplement the results from main empirical analysis
and to understand the impact mechanism of social capital on microfinance participation.
Findings – Participation in local organizations, heterogeneity of associations and level of both
generalized and institutional trust were identified as the key dimensions of structural and cognitive
social capital to influence households’ access to credit. On the other hand, when these dimensions were
combined in a single social capital index, the result indicated that social capital index has no significant
effect on microfinance participation. This result provides support to the argument that grouping all the
dimensions of social capital into one index may run the risk of losing the explanatory power of social
capital.
Practical implications – The results of the study could be encouraging for governments and other
development agencies. The existing social capital could be utilized in the design and delivery of
microfinance programs as well as other rural development activities. The results of the study also
encourage policy makers to invest in the creation of social capital either directly or by providing
environment supportive of its creation.
Originality/value – The study is a contribution to the limited empirical literature on social capital
and microfinance. This study is the first of its kind in Pakistan and hopefully will contribute to the
limited knowledge on social capital literature in the country generally and in the context of rural
development specifically.
Keywords Social capital, Microfinance, Rural development, Causal relationship,
Logistic regression, Pakistan, Household survey, Principal component analysis, Rural areas,
Rural economies
Paper type Research paper

International Journal of Social

Economics
Vol. 40 No. 9, 2013
pp. 760-776 The authors would like to express their gratitude to the Asian Institute of Technology, Thailand
q Emerald Group Publishing Limited
0306-8293
and University of Baluchistan, Quetta, Pakistan for providing financial support for the
DOI 10.1108/IJSE-11-2012-0113 household survey conducted for this study.
 1. Introduction Social capital
The notion of social capital has a long academic history. However, the recent reputation and microfinance
of social capital is credited to Putnam et al.’s (1993). Putnam defines social capital as the
“features of social organizations such as networks, norms, and social trust that facilitate
co-operation for mutual benefit”. Social capital is a multifaceted concept with many
different notions. Some view social capital as an individual asset that comes from access
to networks and social connections, whereas others view it as a collective asset in the 761
form of a homogenous community with shared values and common interests. Across the
varied social capital literature, structural and cognitive dimensions of social capital are
also taken as key terms of the concept. Structural dimension includes behavioral
manifestation of social capital such as participation in organizations. The cognitive form
covers attitudinal manifestation such as norms and trust. Another key demarcation is
made between bonding, bridging and linking social capital (Woolcock, 2001). Bonding
social capital refers to the social capital generated and shared by members of relatively
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homogenous groups. Bridging social capital, on the other hand, refers to the social
capital generated and shared through distant and unlike communities or groups.
Linking social capital refers to relations between individuals and groups in different
social strata where power, social status and wealth are accessed by different groups
(Cote and Healy, 2001).
Work of Robert Putnam on regional economic development in Italy is credited to
bring the concept of social capital to economics and development studies. Since then, a
rethinking of the problems of development took place recognizing the significance of
social and cultural factors in explaining the variation in the development outcomes at
individual (Fafchamps and Minten, 2001), household and community (Narayan and
Pritchett, 1997), and at national level (Knack and Keefer, 1997). It was acknowledged that
beside the lack of human and physical capital, there are various structural obstructions
to the process of growth and development, such as transaction costs, ineffective and
inefficient government policies, weak formal institutions, and cultural differences
(Yeager, 1999). Kaldaru and Parts (2005) attribute these development impediments to the
lack of social capital. Several authors recognize social capital as the “missing link” in the
traditional development models (Grootaert, 1998). As in the case of various other
disciplines, this realization also encouraged the development practitioners and
policymakers to consider social capital as vehicle for rural development.
The arguments linking social capital with rural development are based on the
proposition that social capital generates added benefits or externalities, such as trust,
information flow, reduced transaction cost, and reduced opportunistic behavior,
collective action and cooperation. Active participation, cooperation and collective action
are highly demanding factors in design and implementation of most rural development
projects. Social capital improves the efficiency of development programs by offering the
potential for more participatory, sustainable and empowering approaches to
development (Woolcock and Narayan, 2000). In recent years, the theoretical work on
social capital and development outcomes is also supported by various empirical studies
reporting positive effect of social capital on different aspects of rural development such
as agriculture extension and diffusion of innovation (Reid and Salmen, 2002; Andriani
and Karyampas, 2010), poverty reduction (Grootaert, 1999), food security (Daiz et al.,
2002), irrigation management (Daud, 2006), and microfincance (Ajani and Tijani, 2009;
Olomola, 2000).
 IJSE Supporters of the positive effects of social capital, mention a long list of
40,9 improvements in human welfare that supposedly flow from social capital. However,
for some scholars, social capital may not always be invested towards exclusively
positive ends without considering its possible negative implications. This bias has
become stronger as Putnam and others have recommended social capital as a solution
for all current development problems, as if social capital has no downside. Yet there are
762 several distinctly negative aspects of social capital that these analyses ignored. Social
capital has risks that can sometimes be more important than its benefits for the focal
actor and sometimes benefits for the focal actor create risks for other actors (Portes,
1998). A community network created to build social capital has initial benefits in terms
of information flows, norms of reciprocity and trust, however, network closure results in
norms that restrict behavior with a high possibility of negative externalities thereby
self-regulating total benefit and potentially returning community networks to
pre-project states through loss of membership (Claridge, 2004). Strong ties associated
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with dense networks (members having similar characteristics), generally provide access
to redundant information and resources (Granovetter, 1985). Similarly, too much
bonding social capital can cause constraints, if it is not complemented by bridging social
capital. If people deal only with members of their own group, they run the risk of getting
locked-in into a limited sphere that is not very innovative or efficient in terms of resource
allocation (Staveren and Knorringa, 2007). In some situations, strong linking social
capital can lead to a kind of favoritism. Some individuals or groups having strong
linking social capital may enjoy more benefits on the expense of community. This is
possible where the nature of the project or services to be provided is to provide benefits to
the individual or to groups such as microcredit schemes.
Microfinance has become an important intervention as a tool for rural development
and poverty alleviation. More than any other development programs, the link between
microfinance and social capital is not only stronger but also clearer. Though,
microfinance programs have adopted different methodologies, most analysis concerned
with social capital and microfinance have taken the group lending or solidarity group
approach into consideration. An increasing number of financial institutions provide
credit to the poor on the basis of “social collateral”, through which borrowers social
networks to which they belong, take the place of traditional physical or financial
collateral (Bastelaer, 2000). The social collateral is generally considered an element of
social capital upon which the successful microfinance programs are based. Mutual trust
and norms of mutual accountability fostered by horizontal networks of strong
relationship (bonding social capital) become important for group based approach of
microfinance. For the borrowers, trust facilitates access to credit and for lenders it assure
against risk of default (Olomola, 2000). Moreover, group lending schemes rely on social
capital to overcome the problem of information asymmetries present in financial
markets (Serageldin and Grootaert, 2000).
Studies in the literature can be found which have empirically shown the positive role
of social capital on the access to micro credit? (Ajani and Tijani, 2009) analyze the role of
social capital in the rural finance system in Nigeria. Using a multistage stratified random
sampling data was collected at household level through structured questionnaires. The
analytical techniques used in this study included descriptive statistics and probit
regression. The study concludes that in addition to exchange or information and other
benefits derived from networks, belonging to networks or associations also increases the
 probability of access to credit for the members. Grootaert (1999) also estimated the Social capital
impact of social capital on household welfare. Applying structure equation technique on and microfinance
household level primary data, he concludes that households with high social capital are
better able to accumulate physical assets and have easy access to credit. Lowal et al.
(2009) in their study examine the determinants of credit access among Cocoa farm
households in Nigeria using several indices of social capital and bi-causal relationship
between social capital and credit access. Primary data was collected from 150 farm 763
households with the help of structured questionnaire using multistage sampling
procedure. Data was analyzed by using censored Tobit regression. The findings from
the study revealed that social capital is truly a “capital” and positively affects the credit
access among farming households. Many other studies on the role of social capital in
access to credit have proved that social capita plays an important role in the successful
microcredit program. The effectiveness of social capital in access to credit, however, is
based on the pre-existing stock of social capital of the community.
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Pakistan is predominantly a rural country having 67 percent of its population living

in the rural areas. More than 45 percent people generate their income from agriculture
sector and 85 percent of them are small farmers. Numerous studies, on the solutions
relating to rural poverty in Pakistan, have pointed out microfinance as an effective tool
for poverty reduction strategies (Herani et al., 2008). Moreover, since the smallholders
account for the major section of the rural poor, efforts to reduce poverty is strongly
linked with the smallholder’s access to agricultural credit. However, intervention
through a range of credit institutions over the years has not resulted in considerable
improvement in providing financial assistance especially to the smallholders (Hussain
and Thapa, 2011). Commercial banks do not serve a large section of rural population
mainly because of the requirement of physical collateral. Informal lenders, on the other
hand, charge very high interest rate which keeps majority of the small producers away
from the informal financial sector leaving a large gap in the demand and access to the
credit by the poor majority (Herani et al., 2008; Hussain and Thapa, 2011).
Consistent with the other developing countries and inspired by the remarkable
success of Grameen Bank in Bangladesh, in Pakistan, both governmental and
non-governmental organizations have recently emphasized on the group approach in
extending credit to the poor households in rural areas. Nonetheless, the expectation that
this approach will mitigate the problems associated with the access to credit has not
materialized. In recent years, the availability of social capital to the rural household has
been known to solve the problems of collateral and information asymmetry associated to
access to credit. It is therefore important to know whether the theory of social capital to
improve the performance of group-based lending approach also holds in Pakistan.
The current study is mainly an empirical one which employed principal component
analysis (PCA) to construct a social capital index and logistic regression to model the
relationship between social capital and microfinance. However, the empirical results are
also supported by some qualitative statements obtained through group discussion and
key informant interviews. The study is expected to fill the existing gap in the literature in
mainly two ways. First, with a few exceptions, the literature has ignored the empirical
studies on analyzing the relationship between social capital and microfinance. Second, to
the best of our knowledge, this study is the first of its kind in Pakistan and hopefully will
contribute to the limited knowledge on social capital literature in the country generally
and in the context of rural development specifically.
 IJSE 2. Theoretical framework and hypothesis
40,9 This study draws upon the theoretical framework that has guided the research on the
relationship between social capital and microfinance. Social capital is a resource which
can improve access to credit by the poor (Bastelaer, 2000).
The impact mechanism of social capital on access to credit is shown in Figure 1. Social
capital is defined as resource that can be accessed and mobilized through formal and
764 informal associations, social networks, norms, participation in community based
activities and interpersonal and institutional trust. These resources then can produce
returns for the actors which may have different forms, such as information flow, social
support, capacity for cooperation and coordination and mutual trust. Poor households
can utilize these added benefits for their access to credit services. For instance, lack of
physical collateral can be replaced by social collateral for an easy access to credit for poor
households. Moreover, the mutual trust and sense of cooperation among the community
members not only facilitates the formation of solidarity group to borrow from
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microfinance institution but also reduce the possibility of being default. Financial
market imperfections, such as transactions costs and information asymmetries are
likely to limit access to credit to the poor especially those lacking physical collateral.
This is translated by the conventional understanding that lending to poor household will
fail as the cost of doing so is too high; risks are also great and saving tendency of these
households is too low. In this situation social capital might be the only asset available to
these households which they can utilize to overcome these barriers in access to credit.
The conceptual basis for this study follows the measurement of social capital
framework based on both structural and cognitive dimensions of social capital because
each of these dimensions is potentially associated with the access to microfinance
services. For instance, trust is a vital element for group-based lending schemes. For the
borrowers, it facilitates access to credit and for lenders, it insures against risk of default
(Olomola, 2000). Similarly, being connected to associations promotes collective action to
achieve common goal, i.e. access to credit.
Guided by this theoretical link between social capital and microfinance, we establish
hypotheses for our study as: social capital is truly a “capital” available to the rural
households which may provide them with access to certain resources and thus
facilitates access to microfinance services to those who are interested to borrow from
microfinance institutions under the group-based approach of lending.

3. Methods and materials

3.1 Study area
The selected area for this study is an exclusive rural-agricultural district namely
Killasaifullah, located in the North West of Baluchistan province of Pakistan. A significant

Membership and Structural Social Collective Action

Participation in Capital Reduced
Associations Information Sharing information
asymmetry, sense Access to
Social Collateral of cooperation and Credit
Existing Stock of
Joint Liability
Social Capital
Reduced Transactional Cost facilitate credit
group formation
Figure 1. Generalized and Less Opportunistic Behavior
Cognitive Social
Theoretical framework Institutional Capital
Trust
 portion of population is engaged in agriculture sector especially in horticulture activities. Social capital
According to 1998 census, the population of the district was 193,553 with the population and microfinance
density of 28.3 persons per square kilometer against an average of 166 persons at national
level. Only 13.4 percent of the population lives in urban area making it an exclusively rural
district. Although these statistics are quite outdated, but unfortunately, the only available
statistics are from the 1998 population census of Pakistan which is the last census carried
out in the country. In the district, society is structured on kinship basis. Although, many 765
decisions are made at household level, important decision, especially of mediation,
collective welfare and development activities are made at clan or community level.
Local associations such as, religious groups, sports and youth clubs, cultural associations,
volunteer and welfare organization are abundant in the district playing a vital role for
socioeconomic betterment of the people. These characteristics have made the area a
suitable place to investigate the existing structure and outcomes of social capital.
Under the ministery of food and agriculture, a special project for food security and
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crop maximization commonly known as crop maximization project (CMP) is operating

in this district. This district is among one of four districts (out of total 29 districts of
Baluchistan province) where this project is being carried out with the objectives of
increasing agricultural productivity of small farmers, creation of employment,
providing sustainable livelihood by providing credit for agricultural inputs. The CMP
is the first major microfinance program in the area and is the focus of the current study.
Before this project, no major project or program for providing credit was initiated in
the study area by government or NGOs.

3.2 Data and instruments

The data collection process was carried out during May-August 2011. In Pakistan there
is a three-tier administrative system: district, tehsil (sub-district) and union council. The
execution of sampling process was accomplished in different stages starting from
district to household level. By using formula developed by Arkin and Colton sample size
was calculated. According the poverty survey conducted by the Baluchistan Rural
Support Program in the year 2009, total rural household in the districts are 304,120. But
due to unstable law and order situation, eight union councils were excluded from the
sampling frame. This exclusion reduced the target households to 19,734. Putting this
number in the formula developed by Arkin and Colton, sample size for the study was
calculated to be 210. The district which was selected as a study area comprises two
tehsils and 15 union councils. To select the required sample, first those union councils
having presence of microfinance programs were purposively selected. Out of these union
councils, 21 villages were selected applying stratified random sampling using equal
allocation. From these villages, households were randomly selected to get the total
sample size of 210 households. Households having membership in a microfinance
program and the households without membership but interested to borrow from a credit
program were included in the survey. The households, who had never been microfinance
group members or did not require credit at the time of survey, were screened out at the
start of the survey. This screen out was done to avoid the situation where a household
may have high social capital but they do not need credit. In this case relating social
capital to access to credit does not make sense.
For quantitative analysis, the data set for this study was established through self
designed questionnaire. The questionnaire was developed in the national language of
 IJSE Pakistan (Urdu) and the survey was conducted with the help of local research assistants
40,9 under the supervision of the researchers. The survey was aimed to capture households’
demographic information, socioeconomic characteristics, their participation in local
institutions, their degree of generalized and institutional trust, and information that
identifies endowment of human and financial capital of households and their access to
credit. To supplement the empirical results, few interviews with officials of microfinance
766 programs and group discussions with the members and non members of microfinance
programs operating in the area were also conducted.

3.3 Measuring social capital

Measuring social capital has become a great challenge due to its multifaceted attributes.
However, regardless of how social capital is defined, there is general agreement that it is
a multidimensional concept and that the social capital is intangible. Therefore, it is
difficult to measure social capital directly from a single variable. Due to this
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heterogeneous and abstract nature of social capital, it can only be measured by a range of
indicators and by reference to those features of society with which its creation is linked.
These features of society include formal and informal associations, group membership,
participation in community based activities and social and institutional trust.
A subjective measure of these attributes of society may be used as proxy indicators for
the measurement of social capital to operationalize the concept. Moreover, measuring
social capital also depends on the scope (micro, messo and macro) and the context (rural
or urban) of the analysis. Depending on these considerations some indicators may be
more appropriate than others. Since, for this study, our focus is on the micro level
(household) analysis in a rural society, the indicators related to households’ memberships
in local associations and groups, the characteristics of these associations, and the level
of generalized and institutional trust are chosen.
Structural dimension. Membership and participation in associations are the most
important components of structural dimension of social capital. Being members of
organization or group unite the people in a common cause, producing social capital that
can be used for other common goals. Putnum (1993) argue that participation in groups or
organizations may lead to exchange of valuable information among the members. For
Granovetter (1985), participation creates internal solidarity and promotes trust based
relations among the members, thereby facilitating cooperative action. However, the role
of membership and participation in terms of facilitating exchange of information,
reducing opportunistic behavior and promoting cooperative action depends on different
aspects such as extent of participation and the structure and functions of associations.
Therefore, for this study, the variables capturing the structural dimensions of social
capital include: density of membership, frequency of participation, heterogeneity of
associations and decision making pattern of the associations.
Cognitive dimension. Trust constitutes one of the most important component and
most widely used indicator of the cognitive dimension of social capital. In practice, both
sociologists and economists have used the survey-based “trust” indicator as a proxy for
social capital. There are different sub-dimensions of trust such as trust in individuals,
families, community members (generalized trust) and trust in service providers
(institutional trust). Group based microfinance programs are heavily dependent on
strong interpersonal trust among the community members. Moreover, government
officials in societies with higher trust may be perceived as more trustworthy, and their
 policy pronouncement are more credible (Knack and Keefer, 1997). For this study both Social capital
generalized and institutional trust were measured to capture the cognitive dimension of and microfinance
social capital.
For this study, variables of primary interest with brief description are given in
Table I. For Likert scale variables, multiple items were included in the questionnaire to
assess each of the social capital variables. All items were coded in such a way that higher
values represented higher levels of social capital. Sum of the items under each variable 767
were used as the respondents’ representative score for each variable. Taking the sum or
the average of a set of items is standard practice in the social and behavioral science
where each item is measured on the same response scale.

S. no. Variables Type Definition

1 Generalized Explanatory Measured by aggregating scores on questionnaire items

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Trust broadly related to trust, cooperation and reciprocity

(neighborhood and community level)
2 Institutional Explanatory Measured by aggregating scores from questionnaire items
Trust related to respondents degree of trust on service providers
(both government and NGOs)
3 Membership Explanatory Captured by the summation of the total number of
density associations to which each household belongs
4 Heterogeneity Explanatory Measured by aggregating score from items related to the
of associations diversity (in terms of sex, age, economic status, occupation,
etc) of the members of the associations to which households
belong
1 – homogenous
2 – heterogeneous
5 Frequency of Explanatory Obtained by summing up the attendance (out of last ten
participation meetings held) of household members at the meetings of the
associations they belong to
6 Democratic Explanatory Measured by summing up the scores of the items related to the
decision decision making and leadership selection process of the
making associations they belong to
7 Social Capital Explanatory Composite index constructed by applying PCA on all above
index mentioned social capital variables
8 Age of the Controlled Measured by age of the household head in years
household
head
9 Education Controlled Measured by the level of education of the household head and
status of HH categorized as:
head 1 – primary; 2 – secondary and 3 – higher levels
10 Household size Controlled Number of family members per household
11 Duration at Controlled Measured by the number years of household’s residence at
current current location and categorized as:
residence 1 ¼ 1-5 years
2 ¼ 5-10 years
3 ¼ more than 10 years
13 Landholding Controlled Measured by the land holding size of the respondent
size households in acres
14 Access to Dependent Dichotomous variable measured by household membership in
credit credit group Table I.
1 – member; 0 otherwise Description of variables
 IJSE 3.4 Statistical techniques
Before applying any statistical method, data was examined for possible errors which
40,9 could limit the analysis. Respondent households that reported no membership in any
organization were excluded from the analysis. These households could not contribute
information on the variables related to participation and structure of associations which
could limit the analysis of structural dimension of social capital for these households.
768 This process of data cleaning reduced the sample size from 210 to 191 households for
final analysis.
Principal component analysis. The method of PCA was applied to construct an index
to produce a suitable overall measure of social capital. Social capital cannot be combined
in a simple way because allocating weights to variables describing social assets of the
people is much harder. As a first step in the computation of a single social capital index,
factor or component scores were estimated using PCA. The households’ actual scores on
the six social capital variables optimally weighted and then summed to compute their
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scores on a given component. This calculation was carried out using SPSS and the score
were saved as variables. Subsequently, using the percentage of variation explained by
each component as weights on the factor score, an index of social capital was developed
to use in logistic regression model as an explanatory variable. The details of the steps
involved in index construction through PCA can be seen elsewhere (Vyas and
Kumaranayake, 2006).
Multiple logistic regressions. The logit model was applied to test the hypothesis that
the presence of social capital within a household facilitates access to microcredit.
Logistic regression is frequently applied method for modeling a non-normally
distributed binary dependent variable, which takes values 1 or 0. We specify the
following model:
Y ¼ a þ b 1 X1 þ b 2 X2 þ 1 ð1Þ
where:
8
>
> 1; Househole has microfinance membership
<
Yi ¼ 0; Households who were interested in borrowing
>
>
: but did not have access to credit:

X1 is the aggregated index of household endowment of overall social capital, X2 is the

vector of households’ socioeconomic and demographic characteristics. (Table I).
a, b1and b2 are parameters to be estimated and 1 is the random error term assumed to be
logistically distributed.
Since the dependent variable is dichotomous, logistic regression dose not predict a
numerical value of a dependent variable instead a set of regression coefficients predicts
the probability “p” of the outcome of interest: that it is 1 rather than 0 (belonging to one
group rather than the other). This probability can be calculated as:
eaþb1 X1 þb2 X2 þ· · ·bi Xi
PrðY ¼ 1Þ ¼ ð2Þ
1 þ eaþb1 X1 þb2 X2 þ· · ·bi Xi
Rather than model equation (2) directly, the binary response variable is modeled in
terms of odd ratio as:


ln
PðyÞ
¼ a þ b1 X1 þ b2 X2 þ · · ·bi Xi ð3Þ Social capital
1 2 PðyÞ and microfinance
The parameters a and bi are estimated using maximum likelihood technique. In logistic
regression analysis, impact of independent variables on the dependent variables can be
estimated by calculating odd ratios. The odd ratios estimate the change in the odds of
membership in the target group for one unit change in the independent variable or 769
predictor. Odd ratios are computed by taking the exponent of coefficients of predictor
variables.
The social capital index in the above model can be disaggregated to tests the
influence of social capital on credit access by separate dimensions. This permitted us to
perform two model analyses. In the first model, all social capital variables, reflecting
both structural and cognitive dimensions, were used with the assumption that some
variables may have strong (positive or negative) impact on outcome variable. In second
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model, a single social capital index constructed by PCA was used as only explanatory
variable to see the impact of overall social capital.

4. Results and discussion

4.1 Memberships in associations
Table II presents distribution of membership in various local associations reported by
the surveyed households. In rural Pakistan, most important type of local association is
volunteer organization accounting for 23 percent of all the memberships in the studied
sample. This is followed by farmers groups with 22 percent of total memberships by the
surveyed households. It is important to note that, these farmers groups were originally
created by farmers themselves without an external sponsorship from government or
NGOs. In addition, the households in rural Pakistan are also members of political
groups, women groups, and religious groups constituting 19, 12 and 10 percent of the
total memberships. Overall 440 memberships were reported with an average of 2.3 per
household.

4.2 Construction of social capital index

The results of PCA with factor loadings on each component are shown in Table III. Two
components or factors were extracted using Kaiser’s criterion of eigenvalues exceeding
unity. The extracted factors were rotated using varimax rotation to increase the
interpretability of the results. Two factors together accounted for 60 percent of the total
variance in the data. For the first factor, variables of generalized trust, institutional trust

Association type Memberships Percent

Youth and sports clubs 36 8

Political group 85 19
Religious groups 44 10
Cultural groups 27 6
Volunteer organizations 99 23
Women groups 54 12 Table II.
Farmers groups 95 22 Memberships
Total 440 100 in associations
 IJSE
Rotated component matrix
40,9 Components
Variables 1 2

Membership Density 0.26 0.54

Frequency of Participation 20.21 0.81
770 Heterogeneity of Associations 0.36 0.75
Generalized Trust 0.86 0.06
Institutional Trust 0.58 0.43
Table III. Democratic Decision Making 0.85 0.08
Principal component Percentage of variance 33.92 26.90
analysis Cumulative (%) 33.92 60.00
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and democratic decision making showed higher positive loadings. First factor accounted
for 33.92 percent of the total variation in the data.
For the second factor, membership density, frequency of participation and
heterogeneity of associations, showed high positive loadings. The second factor
accounted for 26.90 percent of the total variance. Using these percentages of explained
variation by each component as weights on the factor score coefficients, an index of
social capital was developed representing overall all measure of social capital by each
household.
Subsequently this index was transformed to 0-100 scale to avoid the difficulty in
interpretation due to the negative values of the index.

4.3 Effect of social capital on access to credit

Two models were developed to tests the hypothesis that the presence of social capital
facilitates household’s access to microcredit. Results of the logistic regression analysis
are presented in Table IV. In the first model, six variable covering both structural and
cognitive dimensions of social capital were used as explanatory variables together with
controlling for relevant households’ characteristics. Negelkerke’s R 2 of 0.77 indicated
that model was a good fit to the data. Wald’s test showed a significant contribution of
four out of six explanatory variables. Membership density and frequency of
participation appear to be working in opposite directions. Membership density which
is a commonly used indicator of structural dimension of social capital does not show a
significant contribution to the access to credit. The frequency of participation, on the
other hand, is significantly associated with household’s access to credit. The value of
Exp (B) or odd ratio indicates that when frequency of participation is raised by one
unit, the households are 1.3 times more likely to have access to credit. These finding
indicates that existence of social capital cannot be assured by only having membership
in an organization; in fact it is the quality and quantity in terms of frequencies and
intensities of participation which enhances the social capital of the association
members. Frequent interactions are important for creation of social capital as they not
only make it easier for members to develop trust but also facilitate exchange of
valuable knowledge and information with which members can increase their access to
services and resources. In the study area, to have access to credit, the households have
been benefited both by the trust built through repeated interaction and the flow of
information about credit opportunities. This fact was also evident from the focus group
 Independent Model I Model II
Social capital
variables B SE Wald Sig. Exp(B) B SE Wald Sig. Exp(B) and microfinance
Membership
Density 0.034 0.128 0.072 0.78 1.035 – – – – –
Frequency of
Participation 0.276 0.127 4.721 0.03 * 1.318 – – – – – 771
Heterogeneity of
Associations 1.489 0.551 7.292 0.00 * * 4.433 – – – – –
Generalized Trust 0.477 0.237 4.042 0.04 * 1.611 – – – – –
Institutional Trust 1.543 0.416 13.749 0.00 * * 4.68 – – – – –
Democratic
Decision Making 0.665 0.297 5.036 0.22 1.945 – – – – –
Duration At
Current Residence 0.031 0.044 0.478 0.48 1.031 0.002 0.025 0.006 0.938 1.002
Household Size 0.107 2.827 0.09 0.836 0.071 0.063 1.284 0.257 1.074
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20.179
Age of the
Household Head 20.041 0.034 1.478 0.22 0.96 0.005 0.022 0.041 0.839 1.005
Landholding Size 20.287 0.114 6.335 0.01 * 0.75 20.367 0.062 35.64 0.00 0.693
Education of
Household Head 20.056 0.445 0.016 0.89 0.945 20.481 0.235 4.194 0.041 0.618
Social Capital
Index – – – – – 20.023 0.015 2.256 0.133 0.977
Constant 222.12 6.672 10.993 0.001 0 4.181 1.46 8.197 0.004 65.439 Table IV.
R 2
0.77 0.35 Results of multiple
logistic regression
Note: Significant at: *p , 0.05 and * *p , 0.01 analysis

discussion carried out as a part of qualitative analysis for this study. In focused group
discussion, majority of the participants agreed that the weekly or monthly meetings of
their associations have always been useful in providing new and useful information.
One participant farmer shared his experience:
In a monthly meeting of my association, I came to know from a fellow member about
corrugate packaging. This was new information for me and now I also use this method for
packing my fruits. This is not only more durable than the conventional method I used to use,
but has also enabled me to take my fruits from the farm to the retailer without staining,
thereby improving the returns to my produce (FGD).
In terms of cognitive social capital, both generalized and institutional trust variables
are significantly and positively associated with access to credit. One unit increase in the
level of generalized trust increases the chances of being a member of credit group by
1.6 times. This finding confirms the expected effect of generalized trust on the choice
of credit participation. The theoretical models of joint liability lending also argue that
through the use existing trust among the borrowers, the formation of group is easy and
chances of default are low. The understanding of this result also enhanced by an
interview with project director of the “crop maximization project” as a key respondent
for qualitative analysis. One of the objectives of this project is to provide credit to
the farmers for purchasing of farm inputs under the group based credit scheme. The
findings from the interview also supported the significant role of generalized trust as a
key dimension of social capital influencing access to credit:
 IJSE We initiated this project in different districts of the province. But our performance varies
considerably in terms of difference between the number of credit groups targeted and achieved.
40,9 In some areas, we found generalized trust being insufficient or incomplete which made it
difficult for community member to form solidarity groups for borrowing (Key Respondent).
The effect of institutional trust on credit access is unexpectedly positively high in the
study area. The value of Exp (B) indicates that for unit increase in the level of
772 institutional trust, odds of having access to credit are 4.5 times greater. Thus,
institutional trust appears to be a main factor influencing the households’ decision to
participate and borrow from a microcredit program. These empirical results are also
supported by the qualitative analysis. In a group discussion, those who did not join the
credit group were asked why they refused to join the microcredit program even though
the program was supposedly designed for them. The lack of trust in service providers
appeared to be the main impediment in joining the credit program:
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The officials of both NGOs and government departments are not trustworthy. In the past,
many development programs and projects promised by NGOs and government were not even
initiated and remained only promises. Now we hardly trust them (FGD).
Two variables, heterogeneity of association and democratic decision making, describing
the structure and functioning of the associations were included in the analysis.
Heterogeneity of associations showed a significantly high and positive association with
access to credit. The odds of households’ access to credit are about four and a half times
higher with a unit increase in the score of heterogeneity of associations. This result is
obvious as internal heterogeneity of association is always supportive of the creation of
social capital. In an association, the presence of members with different social and
economic attributes provides more opportunities of learning new skills and exchange of
diverse information and knowledge. The variable of democratic decision making does
not show significant association with dependent variable. This result is contrary to the
argument that the associations having a democratic pattern of decision making are more
effective in social capital formation (Grootaert, 1999; Olomola, 2000). The possible
explanation of this result is the particular nature of the society in the study area.
Although, all people are encouraged to express their views on reaching the decisions to
communal maters, important decision, especially of mediation, collective welfare and
development activities are influenced by the head of the clan, old wise men or religious
leaders in the community. This behavior of the society might have also been reflected in
decision making process of the local organizations restricting the collective and
democratic decision making by the members within the association.
In the second model, six variables of social capital were replaced by single aggregated
social capital index as the only explanatory variable to see the effect of overall social capital
on access to credit. The result of Wald’s test indicated that social capital index did not show
a significant effect on household’s access to credit. This result implies that there is no effect
of overall social capital on microfinance participation. This result provides support to the
argument that grouping all the dimensions of social capital into one index may run the risk
of losing the explanatory power of social capital (Franke, 2005). Therefore, it seems to be
inappropriate to test the impact of social capital on access to credit using one overall
measure comprising different dimensions of social capital. Hence in rural Pakistan’s
context, the development and use of one social capital index has little policy value, as it
revealed nothing about how social capital works in facilitating access to credit.
 However, this result does not imply that using PCA for combining different Social capital
dimension of social capital into a single index is statistically meaningless. The result is and microfinance
only statistically insignificant for this study. Some other studies have shown that
combining different dimensions of social capital does not affect the explanatory power of
social capital. For example, similar approach was adopted by Lowal et al. (1999) and
their results indicate that the social capital index is a significant variable in the model
without losing model’s explanatory power. Unfortunately, the conceptual and 773
theoretical literature on social capital has not yet provided with an adequately refined
model to justify one or the other approach. Therefore, it is necessary to introduce the
social capital in an empirical model in both ways. One way is to consider each of the
dimensions separately in an additive model. Other way is to take some or all of these
dimensions to make an index of social capital. The index approach is important for
policy purpose as it opens up the possibility of a comparative analysis in time and space.
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5. Conclusions and policy implications

The present study shows a positive and strong dual relationship between social capital
and microfinance programs. Significance of social capital in group lending was proved
by the quantitative analysis supplemented by the qualitative one. Local organizations,
in rural Pakistan, formed for non-economic purposes without the sponsorships of
government or NGO were seen as potential sources of social capital formation. Active
participation in local organization, level of trust and heterogeneity of the associations
were identified as key social capital dimensions effecting household’s access to credit.
Unlike most social capital studies, the variable of democratic decision making showed
no significant effect as a proxy indicator of structural dimension of social capital. Trust
as a measure of cognitive dimension of social capital demonstrated highest role as a
facilitator of borrowing from a group based microfinance programs. Overall it can be
concluded that poor households may utilize and replace their social capital with physical
collateral to have access to credit. Thus, the results of this study support
the communitarian perspective of social capital by Woolcock and Narayan (2000)
which assumes that social capital as community level organization network is good for
economic development of particularly poor.
The findings from this study contain important lessons to governments and other
agencies willing to initiate the group-based financial institutions to the rural
communities in Pakistan or in other developing countries. The positive and significant
contribution of institutional trust in household’s decision to participate in a microfinance
program suggests that the major issue to resolve is to minimize or possibly eradicate the
distrust between lenders and groups of borrowers. The ability of the governments and
NGOs to be credible and trustworthy and to win the confidence of the potential
borrowers is crucial for not only successful microfinance program but also for other
rural development assistance programs emphasizing group participation.
Our findings support policies by governments or others development agencies to
invest in social capital. The local association in rural areas can be effective means for
rural community development. In Pakistan these organizations are abundant and
different depending upon the cultures and traditions of rural society. After examining
and understanding the type of these associations one can effort to strengthen and
mobilize these associations either through direct investment, e.g. by providing financial
support, training and capacity building for local association or indirectly by creating
 IJSE an environment responsive to the emergence of local associations. The concept of social
40,9 capital should be integrated in Pakistan’s rural development planning and could be very
valuable in the design and delivery of rural development projects related to poverty
reduction, agricultural extension, microcredit, irrigation and other grouped based
development activities. Such projects can be channeled through the local associations to
exploit the social capital existed in these associations.
774
Scope and limitations of the study and further research
The scope of this study is only to assess the effect of social capital on households’ access
to credit in the group-based lending approach. The results and conclusions do not apply
on other approaches adopted by microfinance institutions such as to provide credit to
individuals. The theoretical framework for this study is adopted from the literature
hence the study does not claim to propose a new theoretical framework for assessing the
role of social capital in access to credit. Moreover, the data was collected only from the
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male respondents. Females did not participate in the survey due to the tribal and
religious characteristics of the society in the study area.
The current study has taken social capital as a “mean” through which efficient
microfinance services can be provided to the poor households. This is, however, only the
one direction of the relationship between microfinance and social capital. Another
important but neglected feature that may relate microfinance and social capital is the
impact microfinance programs have on existing social capital of its clients. Therefore,
further research is necessary to see whether reverse also applies, i.e. microfinance is the
“mean” and social capital the “end”. The impact assessment of microfinance programs
should not be exclusively limited to the financial viability and repayment performances.
Microfinance practitioners and researchers should explore the social impact of
microfinance program participation on the family and the local community in which
these programs are to be implemented.

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 IJSE Further reading
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About the authors

Sohail Akram is currently a doctoral student in Regional and Rural Development Planning Field
776 of Study, School of Environment Resources and Development, Asian Institute of Technology,
Thailand. His current research is on the “Social capital for rural development in Pakistan:
determinants and outcomes”. Previous degree: Master of Science in Regional and Rural
Development Planning from Asian Institute of Technology, Thailand in 2010. His Master thesis
was on “Regional disparities in the socioeconomic development in Pakistan”. Sohail Akram is the
corresponding author and can be contacted at: st107665@ait.ac.th
Prof. Jayant Kumar Routray (PhD, Utkal University, India) is currently a Professor of
Regional and Rural Development Planning at the School of Environment Resources and
Development, Asian Institute of Technology, Thailand. His areas of expertise include
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rural-regional development, social impact assessment, community forestry, geographic

information systems, rural transport development, district planning methods and techniques,
etc. He has also published several articles in reputable international journals.

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