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Institutions,

Behavior, and Social Capital: Case Studies of Four MFIs in the Philippines
Submitted By Asuncion M. Sebastian For Anthropology of Development DVS590P To Dr. Levy Duhaylungsod On August 25, 2012

Under the unorthodox economic principle, social capital has been recognized as a vital ingredient in economic development and an essential factor to growth of physical investment, appropriate technology, and market mechanisms of indigenous grassroots associations. Acknowledged globally as a poverty alleviation tool, microfinance is built on the concept of social capital. The first methodology employed in 1979 in Bangladesh was group-shared liability, which was also adopted by the microfinance institutions (MFIs) in the Philippines beginning 1989. Over the years, however, majority of the MFIs have shifted to individual liability. With this trend, one may be led to ask if social capital still has a role in the effectiveness of microfinance programs in the country. This paper argues that the change in the kind of loan availed by the micro borrowersor the graduation from group loans to individual loanswhich is commonly done without the micro borrowers necessarily leaving the group or terminating attendance in group meetings does not affect the micro borrowers nature and extent of social capital. The change in methodology employed by the MFIsfrom group liability to individual liabilityis also only indicative of the strengthening of vertical social capital relative to the horizontal social capital and not the absence of either. Finally, both vertical and horizontal social capital are necessary in effectively running a microfinance program and systems alone will not suffice. Since the lower-income segments tend to be less trusting than those who are better off and that poverty is linked to the depletion of social capital, management systems alone will not likely work. This paper further proposes this: in general, an MFIs weakness in systems, structures, and managerial skills is compensated by the presence of social capitaleither horizontal or vertical, or bothand vice versa to be effective in implementing microfinance programs. Weakness in social capital may either be complemented by strong institutional systems or be built or strengthened using institutional mechanisms.

Abstract

Table of Contents
I. INTRODUCTION .......................................................................................................................1 A. RATIONALE ............................................................................................................................................... 1 B. RESEARCH QUESTIONS ........................................................................................................................... 2 C. CONTRIBUTION OF THE STUDY .............................................................................................................. 3 D. SCOPE AND LIMITATIONS ....................................................................................................................... 4 II. THEORETICAL BACKGROUND ............................................................................................6 A. DEVELOPMENT ECONOMICS AND THE MICROENTREPRENEURS .................................................... 6 B. INSTITUTIONS, BEHAVIOR, AND MICROFINANCE .............................................................................. 8 C. THE ROLE OF SOCIAL CAPITAL IN DEVELOPMENT .......................................................................... 11 D. VARIABLES ASSOCIATED WITH SOCIAL CAPITAL ............................................................................ 14 E. SOCIAL CAPITAL AND MICROFINANCE............................................................................................... 16 III. GROUP LIABILITY EXPLAINED....................................................................................... 19 A. FOUNDATION OF THE GROUP LIABILITY METHODOLOGY ............................................................ 19 B. GROUP LIABILITY IN THE PHILIPPINES ............................................................................................ 22 IV. CASE STUDIES ...................................................................................................................... 23 A. CENTER FOR COMMUNITY TRANSFORMATION (CCT) ................................................................... 23 B. KASAGANA-KA DEVELOPMENT CENTER, INC. (KDCI).................................................................. 24 C. TSPI DEVELOPMENT CORPORATION (TSPI) .................................................................................. 26 D. NEGROS WOMEN FOR TOMORROW FOUNDATION (NWTF)........................................................ 28 V. ANALYSIS ............................................................................................................................... 31 A. CASE STUDIES ....................................................................................................................................... 31 B. STATISTICAL DATA............................................................................................................................... 32 VI. CONCLUSION ........................................................................................................................ 34 VI. DIRECTION FOR FURTHER RESEARCH ........................................................................ 36 WORKS CITED................................................................................................................................ 38 ANNEX .............................................................................................................................................. 40

Institutions, Behavior, and Social Capital: Case Studies of Four MFIs in the Philippines
I.

Introduction
A. Rationale

Social capital has been recognized as a vital ingredient in economic development and, as shown in a number of studies, has been essential to growth of physical investment, appropriate technology, and getting prices right of indigenous grassroots associations. The success of cooperatives to manage common pool resources, for example, has also been attributed mainly to the stocks of social capital (Putnam, 1993, p.5). Acknowledged globally as a poverty alleviation tool, microfinance is built on the concept of social capital. The social capital embedded in the network of Bangla women has been the foundation of the group-liability, Grameen lending methodologythe first microfinance methodology that has been institutionalized and replicated globallyalthough its founder Muhammed Yunus did not call the power behind the network of women micro borrowers as social capital. The lending method was adopted in the Philippines in 1989 and only until the mid-2000s did the microfinance institutions (MFIs) adopt the individual liability method called ASA (an acronym for Association for Social Advance but is more popularly known as ASA) that originated also from Bangladesh. In the Philippines, the National Anti-Poverty Commission, the governments implementing arm for the Social Reform and Poverty Alleviation Act, defined the term microfinance as a credit and savings mobilization program exclusively for the poor to improve the asset base of households and expand the access to savings of the poor. It involves the use of viable alternative credit schemes and savings programs including the extension of small loans, simplified loan

application procedures, group character loans, collateral-free arrangements, alternative loan repayments, minimum requirements for savings, and small denominated savers' instruments (Republic Act 8425 Sec. 3J). Today, only a minority of the more than 4,0001 MFIs is using solely the original Grameen method; the rest have either combined the group mechanism of the Grameen method with individual liability (or also called group lending in some literature and Grasya in colloquial Filipino) or adopted individual liability as practiced in the traditional banking system. Among 37 MFIs participating in the MIXmarket, only 11 or 30 percent offer group liability (MIXmarket, 2012). One of the Grameen implementers remarked, Our group method is now dysfunctional. Often, this phrase is used to refer to high default rate on loans or high drop out rates of the borrowers, or both. With this trend in the microfinance sector, one may be led to ask if social capital still has a role in the effectiveness of microfinance programs in the country.

B.

Research Questions

This study aims to answer the following questions: 1. Does the change in the kind of loan availed by the micro borrowersfrom group liability to individual loansindicate anything about the nature and extent of social capital of the micro borrowers? One hypothesis is that the poorer segment needs more social capital to achieve their economic goals in the absence of other physical and financial capital. As they become better off, they tend to prefer to do business on their own, thus the shift from group to individual loans. This change in preference is also reflected in the graduation design of loans of many MFIs, that is, those members with bigger businesses are allowed to avail of individual loans. It could also be because, as the borrowers become better off, their social capital changes to becoming more bridging than exclusive, reaching to other and broader networks and markets (Woolcock, 1998), which is often
1 Data as of 2010. This number was composed of 25 non-government organizations, 200 banks, and a conservative estimate of 4,337 cooperatives engaged in microfinance. Institutions, Behavior, and Social Capital: Case Studies of Four MFIs in the Philippines Page 2 of 40

restrained by the features of group liability. This hypothesis is also in line with Putnams (2001) assertion that the more affluent people are more inclined to build social capital. 2. Does the change in methodology employed by the MFIsfrom group liability to individual liabilityindicate anything about the nature and extent of social capital between the micro borrowers and the MFIs? The hypothesis is that weak social capital is compensated by institutional or managerial mechanisms of the intervening organization, in this case, the MFIs. Does the change therefore indicate the weakening of social capital among micro borrowers? The counter argument, however, is that the intervening organization can provide the micro borrowers venues to build and strengthen their social capital instead of setting up managerial or control systems. Another counter argument is that social capital now moves from among the micro borrowers (horizontal social capital) to that between the micro borrowers and MFIs (vertical social capital). 3. What kind and/or level of social capital are necessary in effectively running a microfinance program, if at all? Ultimately, this study aims to establish the relevance of social capital in the microfinance programs today. One argument is that as long as systems, structures, and managerial capabilities are all in place, a microfinance program will be effective even without social capital (Gine & Karlan, 2007). The other is that social capital and management systems go together in the effective implementation of microfinance programs.

C.

Contribution of the Study

In the last 20 years of implementation of microfinance programs in the country, they have been examined extensively in the discipline of mainstream economics and financial management. This study aims to examine four cases of MFIs from

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the perspective of development economics (or the unorthodox economics), specifically in the light of socio-anthropology. Further, the theoretical frameworks of social capital have not been applied in the Philippine context, much less in its microfinance sectoran ironic phenomenon given that microfinance is founded on social capital and that the Philippines ranked second best performing country next to Peru in terms of microfinance conditions: regulatory framework, investment climate, and institutional development (The Economist Intelligence Unit, 2010).

D.

Scope and Limitations

The choice of the four case studies is based on the MFIs lending methodology, religious orientation, and area of operations. Center for Community Transformation (CCT) Kasagana-Ka Development Center, Inc. (KDCI) Lending methodology Individual Religious orientation Yes Areas of operation Metro Manila, Luzon, Visayas, and Mindanao Predominantly urban operation Metro Manila, parts of Rizal and Bulacan Predominantly urban operation Metro Manila, Luzon, one branch in Bukidnon Predominantly rural operation Visayas and Palawan Predominantly rural operation

Individual

No

TSPI Development Corporation (TSPI)

Group

Yes

Negros Women for Tomorrow Foundation (NWTF)

Group

No

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Several variables are associated with social capital but only two are considered in the selection of the case studies: 1) religious orientation of the MFIs, based on the arguments of Fukuyama (2001), Sen (2002), and Putnam (1993); and 2) the urban-rural characteristic of their areas of location, as suggested by Putnam (1993). Although literature cited education and age as the top two variables associated with social capital, including them in the analysis would require a different, more extensive data gathering and research methods. Of the four case studies, two are predominantly in urban areas using individual liability and two in rural areas using group liability lending method. The line up of case studies, however, would have been more comprehensive had there been four other MFIs operating under these conditions: TSPI, KDCI, and NWTF are non-government organizations (NGOs); CCT started as an NGO but later converted into a cooperative for legal purposes. For this study, regular cooperatives that are into microfinance are not included as there is no organizational or legal distinction between those cooperatives offering microfinance services and those who are offering regular cooperative financing. Banks are also excluded in this study because their recruitment of microfinance borrowers and offering of microfinance services are subject to government regulations, unlike the NGOs. Besides, the NGOs are recognized in development economics literature to have a critical role in the creation and capacity building of grassroots institutions and in intermediating the state and the market forces. Annex shows the position of these subject MFIs among the 37 Philippine institutions participating in the MIXMarket (http://www.mixmarket.org/about), a public portal where MFIs voluntarily share their financial and social performance information. These 37 MFIs account for more than 60 percent of Urban operation, group liability, with religious orientation Urban operation, group liability, without religious orientation Rural operation, individual liability, with religious orientation Rural operation, individual liability, without religious orientation

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the total 5.1million microfinance borrowers in the country in 2010 (Geron, 2010).

II.

Theoretical Background
A. Development Economics and the Microentrepreneurs

Unlike orthodox economics, development economics was concerned with the institutional places of custom, culture, and technology in resource allocation and peoples mindset, making constraints on individual behavior as significant as choices (Cameron, 2000, p.629). An anthropologic view of development based on Marxian philosophy was also introduced. It defines value as something that is based not on market forces but on relations of production determined historically and it is these relations that determine and govern those of exchange (Resnick, 1975, p.319). Finally, Lewis (1984) furthered that market mechanisms sometimes do not hold in poor countries, where people do what they do for non-economic reasons and not to maximize their income. He emphasized the role of economic anthropology in development, especially that the behavior relating to investment, savings, risks, and having children is not governed by the calculus of marginal utility (p.4). These propositions are true in the context of microenterprises. Many of them do not grow and scale up to at least small business category because the life of the enterprise is often co-terminus with the graduation of the last child to go to school. In other cases, business hours is only what fits into the microentrepreneurs remaining time after house chores are done and children are already off to school. In many occasions, too, the prices at the level of microenterprise are based on suki (customer loyalty) relations between the buyer and microentrepreneur and/or at the time of the dayfirst buyer gets deep discount for good luck for the rest of the day. The best products are also saved for the suki and not for the highest bidder or for the volume buyer (although the volume buyer could also be the suki). A study (Sebastian, Market Saturation of Microfinance in Metro Manila: Fact or Fiction? , 2011) also showed that of the 90 surveyed poor households in Metro
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Manila, 26 of them or almost 29 percent have multiple sources of income; 19 of them or 21 percent are engaged in a microenterprise combined with other income sources such as wage of other household members. Additional 24 households or almost 27 percent of the surveyed households earn solely from running a microenterprise. The households engaged in micro enterprises are usually operating sari-sari stores and food vending, or are involved in retailing (buy-and-sell or direct selling). Of the 43 households engaged in a micro enterprise, 40 have capital not exceeding Php5,000 and 31 have expressed the need for additional funds averaging Php8,700 to grow their micro business. Of the household surveyed in the same study, 83 or over 92 percent have had borrowed money. Usual reasons for borrowing are to finance childrens education (20 percent), to buy food (20 percent), to acquire capital for micro enterprise (20 percent), and for emergency purpose or illness in the family (18 percent). Their top sources of loans are family and friends (34 percent), 5/6 or loan sharks (30 percent), sari-sari stores (11 percent), and lending institutions (9 percent). The respondents said they prefer these sources because of convenience, flexible terms, and the ease or absence of processing requirementsthis despite the high interest rates of the loan sharks. They also go for a minimal interest rate and at times interest-free loans from friends/relatives and the neighborhood stores, who understand their conditions the most (Sebastian, Market Saturation of Microfinance in Metro Manila: Fact or Fiction? , 2011). Although the survey results are not conclusive but are only indicative of possible economic behavior of the poor microentrepreneurs, they show that relationships play a major part in the decision making of the individuals as far as their economic life is concerned, much more than market forces. Since microentrepreneurs think and behave this way, the microfinance institutions, which cater to their financial needs, would have to consider these factors in their design of interventions. Building on Beckers (1965) notion of household production, Parente, Rogerson, and Wright (2000) established a growth model that showed that individuals in poor countries spend less time working in the market. This proposition may not
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be exactly true in the case of the many microenterprises whose market only happens to be tightly intertwined with household chores (ironing clothes or feeding the children while manning a sari-sari store), with socialization (selling beauty products while visiting a neighbor who has just given birth), and/or religious events (selling items or putting up temporary stores during Sunday mass and fiestas). This behavior and the pricing system of the microentrepreneurs mentioned earlier make them easily fall into the cracks even of microeconomics. Another insight was provided by Mueller (1984) and Kirkpatrick (1978): while individuals devote much time working, relatively small fraction of it is devoted to activities that generate output that is measured in gross national product accounts (Parente, Rogerson, & Wright, 2000, p.685). Thus, the authors argued that home production, and based on the previous argument on the output of microenterprises, should be made part of the income accounting of macroeconomics.

B.

Institutions, Behavior, and Microfinance

While neoclassical economists assume that individuals make decisions based on rational choice or utility-maximization thinkingwhich we have shown is not necessarily true among the poor microentrepreneursinstitutional economists argue that factors such as culture of poverty, moral economy, and social formations influence the decision making of people. They also suggest that institutions have considerable durability and path-dependence and recognize NGOs as the mediator between two competing dominant institutional models the market and the state. Under institutional economics, the NGOs also play an important role in the creation and capacity building of grassroots institutions that better represent their target groups of vulnerable people (Cameron, 2000, p.633). The very first MFIs in the country were NGOs, although the cooperatives would argue that as early as the 1900s they have been offering microfinance services without calling them as such. However, it was the NGOs that introduced group-
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based liability and weekly repayment scheme that have effectively curtailed the credit risks inherent in the poor market. As pointed out by Ray (Development Economics, 2007, p.15), the formal credit sector excludes the poor not because they are less trustworthy but because in case of project failure, they do not have the resources to repay their debts. The poor are thus compelled to turn to informal lendersas shown in the survey they borrow from family and friends, from loan sharks, and/or from sari-sari stores. The entry of MFIs therefore gave the poor an option. Moreover, these MFIs have gone beyond the provision of micro creditthere are now micro insurance, micro savings, as well as non- financial products such as financial education, skills training, and business developmentan illustration of Camerons point that NGOs play an important role in the creation and capacity building of grassroots institutions. Perhaps another institution that is popular among the poor is the paluwagan. This self-selecting, -managing, and monitoring, organically developed financial service has been working for the excluded for ages. Paluwaganin which each member contributes a fixed amount every week and takes turn in getting the lump sum pool of fundsis so organic that nobody really knows when and how it started in the Philippine society. Its counterpart in other countries is called rotating saving and credit associations (ROSCA). This financial system has no written policies and is not governed by any legal provisionspeople function only on the basis of trust and should one not pay his/her share, it would cost him/her the sense of belonging in the neighborhood, shame, and/or peace. As cited in development literature, local, informal, non-market lending such as ROSCA has advantages over the large, formal credit system, because the embedded peer monitoring in the system, which Arnott and Stiglitz (1991 in Bardhan, 1993) argued, can be an important control mechanism for moral hazards. Development economists also looked into the individual behavior in the face of economic change. Sen (2002) argued that individuals do not always seek to maximize their self-interest; instead, culture influences the individuals work ethics, responsible conduct, entrepreneurial initiatives, attitude towards risk,
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and other aspects of human behavior that is critical to ones economic success (p.4). Duflo (2006 in Ray, Development Economics, 2007, p.6) further hypothesized that being poor almost certainly affects the way people think and decide. Aside from the survey result in the previous section that illustrates this point, the design of micro credit products is also based on this assumption to some extent, aside from the exercise of prudent risk managementone cannot give the poor too much too soon as they will most unlikely be able to handle it. Thus, micro credit, regardless whether group or individual liability, always has a cap to the loan amount that microentrepreneurs can borrow so as to help them avoid the temptation of splurging or spending the money in non-income generating activities. The first loan usually ranges from Php3,000 to Php5,000; bigger MFIs offer as much as Php10,000 per borrower. However, the loan limit increases over time, as the borrowers start building their creditworthiness. Loans are amortized on weekly basisdaily scheme would put too much pressure on the borrowers while monthly schedule would put them at risk of spending their business income before the loan repayment is due. Budgeting and setting aside money and other resources, including food, for future use can be a challenge among the poor. Thus, financial discipline is commonly made part of the education program of the MFIs. Besides, weekly repayment would allow the borrowers to roll their money as capital for at least six more days. The foregoing discussion supports the arguments of Baumol, et.al, Rodrik, and Collier, that local knowledge and needs should be taken into account and that the problems of the poorest are remarkably different from the rest of the world. (Rodrik, p. 89 in Taylor, 2008, p.550). As shown in the discussion, MFIs as institutions shape the individual behavior of the poor microentrepreneurs, as argued by Ray (Development Economics, 2007, p.19). Sen (2002) further supported this argument in his assertion that behavior depends not only ones values and dispositions, but also on the absence or

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presence of institutions and on the incentives they generate (p.7). Following Sens argument, trust or social capital therefore can indeed be built by MFIs. Institutional economists further argued the group liability works because the borrowers have incentive to choose their group mates well, thereby taking over the MFIs responsibility of selecting, monitoring, and making the borrowers pay their dues (Hoff and Stiglitz, 1993 in Ito, 2003). For this reason, group liability has been considered an institutional innovation in overcoming information uncertainties (Ito, 2003, p.325). Given this institution-behavior dynamic in microfinance, what then makes a good program? The best practices in the sector are often associated with social capital(Ito, 2003, p.1).

C.

The Role of Social Capital in Development

Social capital provides conceptual and policy device that go beyond the orthodox economic theories (Woolcock, 1998). Putnam (1993, pp.1-2) defined social capital as the features of social organization such as networks, norms, and trust that facilitate coordination and cooperation for mutual benefits. While Putnam defined social capital in a group or organizational context, Fukuyama (2001, p.7) had a more individualistic take: social capital is an instantiated norm that promotes cooperation between two or more individuals. Woolcock (1998) simply defined social capital as the nature and extent of a communitys personal and institutional relationshipswhich makes social capital relevant to the previous discussion on institutions and behavior. Gleasar, Laibson, and Sacerdote (2000 in Gomez & Santor, 2001), on the other hand, proposed that social capital maybe defined at several levels: country, community, and individual. At the macro or country level, social capital has both economic and political functionsin efficient functioning of modern economies and an essential condition for stable liberal democracy (Fukuyama, 2001). Another way of putting it is that social capital is the missing link in developmenta substitute to
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state intervention with social intermediation in order to overcome market imperfections (Ito, 2003, p.322). Social capital is important in the development of advanced Western economies. Studies of highly efficient, highly flexible industrial districts emphasize network of collaboration among workers and small entrepreneurs. Even the new growth theory pays more attention to social structure than conventional neoclassical models do. Likewise, studies of the rapidly growing economies of East Asia also almost always emphasize the importance of dense social networks, so that these economies are sometimes said to represent network capitalism. These networks, often based on extended family or on close-knit ethnic communities, foster trust, lower transaction costs, speed information and innovation (Putnam, 1993, p.5). Social capital is a public good, created as a by-product of social relationships, and as such, tends to be under produced if left to the market (Kawachi, Kennedy, Lochner, & Prothrow-Stith, 1997, p. 1495). Putnam (1993, p.4) explained that successful collaboration in one endeavor builds connections and trust, which would eventually facilitate future collaboration in other, not necessarily related tasks. Fukuyama (2001) opposed this view, arguing that social capital is a by-product of religion, tradition, shared historical experience, and other types of cultural norms. It is, more often than not, created by hierarchical sources of authority such as the religion and culture (p.16; Sen, 2002). Citing Verba et. al, Putnam (1993, p.8) also acknowledged that the church is a uniquely powerful resourcean arena in which tomake connections. Fukuyama (2001) also contended that since cooperation is necessary to virtually all individuals as a means of achieving their selfish ends, they would produce social capital as a private good (pp.7-8). On this premise, the author suggested that social capital be created by public policy that builds on existing social network such as the micro lending, educational institutions that promotes social
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rules and norms, provision of public goods such as property rights and public safety, and non-intervention in the business of the private sector. Although Cameron (2000) recognized the role of NGOs in the growth of grassroots institutions, Putnam (2001, p.3) argued that most prominent nonprofits are bureaucracies, not associations, so the growth of the civil society sector is not tantamount to a growth in social connectedness. At the community level, social capital may be witnessed in what people are willing to do for each other, their care of the less fortunate members, and the preservation and guardianship of common assets, among others (Sen, 2002, p.5). Members also participate because they like to, not because their participation strengthens social fabric (Putnam, The Prosperous Community Social Life and Public Life, 1993, p.4). Dense social ties facilitate gossip and other valuable ways of cultivating reputationan essential foundation for trust, according to Putnam (1993). Narayan and Cassidy (2001) used the following dimensions in measuring social capital, as applied in the group or macro context: At the individual level, social capital is believed to lead to better levels of economic performance for each person. It may be in the form of charisma, status, or access to networks that enables a person to gain benefits from interactions with others. The return on social capital, on the other hand, may be in terms of Group characteristics, including memberships in informal groups and networks with particular characteristics Generalized norms Togetherness Everyday sociability Neighborhood connections Volunteerism Trust

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material support, knowledge and information, and/or psychological aid such as encouragement (Gomez & Santor, 2001).

D.

Variables Associated with Social Capital

Several authors associated social capital with various social conditions although the direction of the causal relationship and the intervening mechanisms are yet to be established empirically. Where one lives and whom one knowsthe social capital one can draw on helps define ones self and thus determine ones fate (Putnam, The Prosperous Community Social Life and Public Life, 1993, p.7). Living in a neighborhood depleted in social capital, for example, regardless of the stock of individual resources, has deleterious effect. Families in deprived neighborhood have to deal not only with the societal issue such as unemployment but also with the behavior and frustrations of other jobless families in the neighborhood (Kawachi, Kennedy, Lochner, & Prothrow-Stith, 1997, p.1496). Putnam (1993, p.10) therefore suggested that if social capital is indeed important, then intervention must focus on community development. Putnam (2001) hypothesized that the following variables are closely associated with social capital: Education and economic affluence. Well-educated people are much more likely to be joiners and to trust, partly because they are better off economically, but mostly because of the skills, resources, and inclinations that were imparted to them at home and in school (p.5). Lower-income segments tend to be less engaged in community and less trusting than those who are better off; however, declines in engagement and trust are somewhat greater among the more affluent segments than among the poor and middle-income wage-earners (p.8). Some evidence also suggests that poverty is linked to the depletion of social capital (Kawachi, Kennedy, Lochner, & Prothrow-Stith, 1997, pp.1491-1492).
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Age. Second to education, age is a strong determinant of social capital. Older people are consistently more engaged and trusting than younger people, although they do not become more engaged and trusting as they age. This phenomenon is explained by period or generation effects, that is, when people are affected by an event in an era or all people born at the same time undergo common experience. If one grew up in a period of high level of civic engagementperhaps, the Martial Law babies or the EDSA People Power generationone is likely to be more trusting and engaged (pp.13-14). Mobility and suburbanization. They tend to disrupt root systems and it takes time for an individual to put down new roots. Residents of small towns and rural areas are slightly more trusting and engaged in civic matters than those who live in metropolitan areas. There is no correlation though between increase in population and losses in social capital (p.6). Employment. Women who are working on a part-time basis are more likely to be engaged in civic matters and more trusting than either those working full time or those who do not work at all. In general, regardless of gender, workaholics or those who work for long hours would cut down on their sleep, eating time, and leisure but not on organizational activities (pp.7-8). Marriage. Successful marriage is statistically associated with greater social trust and civic engagement; conversely, single people tend to be less trusting and less engaged in civic matters. The direction of causality, however, needs to be establishedfor example, divorce may be a consequence and not a cause of lower social capital (p.10). State intervention. By crowding out private initiatives, state intervention has undermined civil society. Demolition of informal settlements is one way of destroying social capital (p.11).

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Electronic revolution. Television, for example, takes time outside of home and encourages couch potato, passive behavior. While newspaper reading is associated with high social capital, TV viewing is associated with low social capital (pp.18-20).

While there are factors that determine or help build social capital, there are also factors that can destroy it. The growing gap between the rich and the poor, for one, has led to declining levels of social cohesion and trust, or disinvestment in social capital (Kawachi, Kennedy, Lochner, & Prothrow-Stith, 1997). Woolcock (1998, p.182) also argued that social capital tend to be low under the following conditions: Widespread, increasing, or legitimated class, sex, and ethnic inequalities Endemic poverty that cannot be resolved by social safety nets and employment, similar to the argument of Kawachi et. al. (1997) Weak, unjust, flaunted, or indiscriminately enforced laws Polities that are not freely and fairly elected, or when voters have few serious electoral choices Dominant and subordinate groups having little shared stake in common outcomes War, famine, rampant inflation, disease, or chronic underemployment Minorities being covertly or overtly discriminated against

E.

Social Capital and Microfinance

Literature cited how the MFIs using group-based financial scheme have tapped social capital in using information that the group members have about each other in managing their risks. Hence, the MFIs are encouraged to employ similar institutional mechanisms to use pre-existing social capital or help create it (Ito, 2003, p.323). Serageldin and Grootaert (2000, p.47 in Ito, 2003) argued that MFIs provide an informal framework for sharing information, coordinating activities, and making collective decisions, something that makes microfinance program work because members have better information about one another than banks do.
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The earlier works on microfinance often referred to group liability as the sectors lending mechanism because it was the first method used in 1979. However, the use of new lending methodologies put in question the role of social capital in microfinance programs. The ASA modelan individual liability lending scheme that utilizes groups for meetings founded in 1992shows that borrowers pay on time not because of the social consequences of their actions but because of the incentive of continuous access to credit. Further, the Safesave modelindividual liability scheme with absolutely no group interaction that started in 1996 suggests that social capital is no longer a critical component of microfinance (Ito, 2003, p.326). In fact, with Safesaves heavy use of modern technology and daily, door-to-door visits to clients (who are not necessarily microentrepreneurs), one might be inclined to think that with systems, structures, and managerial capabilities all in place, a microfinance program will be effective even without social capital. On Safesaves opposite end in the social capital-system spectrum lies the self-managed ROSCA, which is considered the embodiment of social capital (Putnam, 1993, 167-169 in Ito, 2003). Ito (2003) distinguished the social capital that lies in the relationship among the micro borrowers/micro entrepreneurs organized into groups or centers, or the horizontal social capital, from that which lies in the relationship between the MFI workers and the micro entrepreneurs, or the vertical social capital. Vertical social capital is also deemed necessary in microfinance program in that the MFI officers train the borrowers, guide them in business, recommend approval for their loans, and assess their various needs even those outside the micro transactions. Ledgerwood (1999, p.76 in Ito, 2003) of the World Bank explained that more than any other economic transaction, financial intermediation depends on social capital because it depends on trust between the borrower and the lender. One argument about vertical social capital is that, if it really matters in microfinance, then how different are MFIs from other formal institutions? Even banks, commercial banks at that, do have some form of vertical social capital
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with their customers. With the Safesave model, one would also wonder if it is really the vertical social capital that makes this MFI work or if its flexible product design simply fits the market needs sans social capital in the overall scheme. On the other hand, doubt is also cast on the importance of horizontal social capital in microfinance. An experiment converting 169 groups with shared liability into individual liability with sustained group meetings was held for a year in the Philippines. Group meetings in individual liability were used for consolidation of loan disbursement and collection, while possibly maintaining some but not all of peer screening, monitoring, or enforcement of policies (Gine & Karlan, 2007, p.3). The result was higher outreach or more members joining the microfinance program while the default rate remained the same. The study explained that individual liability attracted new members better, leading to bigger centers, and made the existing centers 10 percentage points less likely to be dissolved. The unchanged default rate also implied that peer screening and monitoring do not contribute significantly in the repayment practice of the borrowers. However, the experiment also resulted in lower social cohesion, which was indicated by fewer number of social events held, less amount spent on social occasions, and the new members not knowing the other new members. In the end, Gine and Karlan (2007) concluded that institutional mechanisms is sufficient to recover loans without group liability and that individual liability allows for more growth and outreach (p.27). The importance of social capital in the microfinance is a topic of discourse not only in the financial intermediation among the borrowers and between the borrowers and the MFIs; it is also hypothesized to play a crucial role in the success of the microenterprises of the borrowers. Gomez and Santor (2001) argued that social capital is essential for microentrepreneurial success, with social capital being a positive determinant of self-employment earnings. Their regression model showed that membership in social organizations was positively and significantly related to business successthat is, it pays to know your neighbors. Characteristics of neighborhood (e.g. educational attainment beyond high school and home ownership) are also positively and significantly
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related to the microentrepreneurs performancewhich is consistent with the earlier proposition of Kawachi et.al. (1997). What the authors further argued is that the success of microentrepreneurs is not solely determined by micro credit and that MFIs must take into account the less observable factors such as social capital that contribute to their borrowers success. Woolcock (1998) had another explanation as to how significant social capital is to the success of poor microentrepreneur. At the initial stage of the micro enterprise, intra-community social capital may help provide the necessary financial resourcesconsistent with the earlier result of the survey conducted among the poor households in Metro Manila. Later, the benefits may come in the form of business linkages. However, over time, the microentrepreneur has to learn to build extra-community social capital as well, to include non-members of his/her community. Woolcock argued that this transition is necessary for the microenterprise to grow. Fukuyama (2001) explained this expansion of social capital in another way: all groups with social capital operate within a radius of trust, usually in a small circle of family and personal friends (pp.8-9) equivalent to Woolcocks intra-community social capital. If ones trust does not extend beyond the circleto form Woolcocks extra-community social capital then the group may not be open to receiving beneficial influences from outside that circle (p.14). Finally, Fukuyama (2001) noted that social capital may have either positive externality, that which leads to collective growth and development, or negatively externalityan example of which is the culture that makes one feel entitled to steal for the benefit of ones family (p.9).

III. Group Liability Explained


A.

Foundation of the Group Liability Methodology

The group-shared liability in micro lending, which eventually became known as Grameen methodology, was first applied in Bangladesh, as used in a project by Muhammad Yunus in 1979. Grameens focus was on the landless poor, those who
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had no choice but to earn by selling labor, and on women. Grameen had two reasons for choosing women: 1) Bangladeshi women did not have access to financial services apart from their husbands or male figures in the family, and constituted the majority of the poor, the underemployed, and the economically and socially disadvantaged; and 2) credit given to women brought about change faster than when given to men (Yunus, 2007). At that time, all Bangladeshi women, even the rich ones, could not access credit without their husbands because the banking system was created for men (Yunus, 2007, p.71). There is more to their culture than simply not extending credit to women. All Bangladeshi women could not leave their houses without their husbands or any male member of their family; all of them could not have any possession and money matters are handled by men; and in times of hunger and famine, it is an unwritten law that women have to starve. Anytime he wishes, a Bangladeshi man can divorce his wife. Hence, with this kind of culture, Grameen Bank faced opposition both from the government officials and the religious leaders and created chaos within the households of borrowing women (because their husbands wanted the money for themselves) when micro loans were first introduced. It also had to convince and enable the women to enter the territory traditionally reserved only for men (Yunus, 2007, pp.72-76). Yunus (2007) started a project, the predecessor of todays Grameen Bank. He took out a loan from a bank and gave it out to the poor women producers as micro loans equivalent to US$25 without collateralhe served as guarantor to these poor and transacted with the bank in their behalf. Following were his insights, which formed the philosophy behind the Grameen lending methodology: To my great surprise, the repayment of loans by people who borrow without collateral has proven to be much better than those whose borrowings are secured by assets. The poor know that this credit is their only opportunity to break out of poverty. They do not have any cushion whatsoever to fall back on.
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(Then) we discovered that support groups were crucial to the success of our operations; we required that each applicant join a group of like- minded people living in similar economic and social conditions. Convinced that solidarity would be stronger if the groups came into being by themselves, we refrained from managing them, but we did create incentives that encouraged the borrowers to help one another succeed in their business. Group membership not only creates support and protection but also smoothes out the erratic behavior patterns of individual members, making each borrower more reliable in the process. If an individual is unable or unwilling to pay back her loan, her group may become ineligible for larger loans in subsequent years until the repayment problem is brought under control. This creates a powerful incentive for borrowers to help each other solve problems and to prevent problems (Yunus, 2007, pp.62-65). What Yunus did to the Bangladeshi womentrusting them with resources despite their lack of financial cushion and skills and encouraging them to form and support their own groupsbuilt the social capital among them. His statements above show how social capital was used to make the Grameen system work. Yunus (2007, p.111) thought that Grameen has succeeded not because of culture but despite the culture. In 1989, three NGOs replicated the Grameen method in the Philippines: Ahon sa Hirap Incorporated (ASHI), Negros Women for Tomorrow Foundation (NWTF, one of the case studies in this paper), and Center for Agriculture and Rural Development (CARD). Yunus (2007, p.157) thought operating a Grameen-type lending program in the Philippines would be a lot easier than doing so in Bangladesh, where long-standing poverty, low status of women, and frequent natural disasters are more extreme(but the implementers) had difficulty managing the staff and the board of directors. It seemed that the Grameen

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founder knew very well the poors behavior but must have overlooked the institutions that program implementers had to deal with.

B.

Group Liability in the Philippines

Faithful to the foundation of Grameen lending methodology, MFIs employing group liability generally target women and let these women borrowers recruit their own co-members to form a group, whose size may vary depending on the MFI. Ten groups (or around 40 to 50 members) made up a center. The idea is that the women would recruit only those people whom they trust. However, at times, they invite just anyone, even those who are not inclined to do business, so that they could form a group; otherwise, they would not be granted loans. Aside from sharing group liability, where members were obliged to pay for the loan of their defaulting co-members (conversationally called as tapal), they also pool money for center activities or for social insurance (especially for those MFIs that neither have any agreement with third-party insurers nor have their own insurance companies). As in the original Bangladeshi model, the borrowers meet every week for their center meetings where they decide whether to accept a woman into the center or not and determine the loan amount that would be granted each member based on their existing business or business proposal. They are also supposed to meet for mutual support and skill training. Loan disbursement and collection are also done during center meetings. There are instances, however, when center meetings had become nothing more than just a venue for businessdisbursement and collection of payments. Some even perceive this gathering merely as a time away from their business and home, thus they would have preferred to avail of individual loan instead. While in many cases women like being part of a center in that they see it as an opportunity to socialize, some do not like the idea of shared liability, which they perceive as unfair. This perception persists despite the MFIs explanation that they are the ones who choose their group members and that they are supposed to help one another, thus they are held responsible for one anothers liability.

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IV. Case Studies


A. Center for Community Transformation (CCT)
Rationale for the choice of lending methodology. The change in CCTs lending methodology started with technical assistance provided by TEARFUND in the 2000s. The participating MFIs were allowed to choose their own service providers and CCT asked the help of ASA of Bangladesh to learn about its individual liability program. The technical assistance was experimental but its outcome was better repayment rate and higher growth rate for CCTthe same performance measures used by Gine and Karlan (2007) in their experiment thus the MFI decided to adopt the new methodology for good while at the same time maintaining the group structure. For CCT, the group structure is indispensable because it is during group or center meetings when transformation (i.e. religious or church-related) activities are carried out. The chairman was not sure though if the lending methodology itself brought about the change in CCTs performance or if it was the strict technical assistance and hands-on training provided by the ASA consultants that made the difference. The ASA consultants came over to the country for the training of MFIs. On the other hand, when CCT adopted Grameen, its representatives went to Bangladesh to observe Grameen Banks operations (Chua, 2012). Horizontal social capital. The chairman opined that social capital is still at work in selection, monitoring, and support at the center level during CCTs weekly meetings. The center is also a venue for business support system of the borrowers. However, CCT experiences a mix of membersthose who appreciate the value of center meetings and those who find them burdensome (Chua, 2012). Vertical social capital. From CCTs experience, delinquency is a function of weak or an indication of lack of social capital. For example, some members deliberately miss their amortization only because the loan officer seems cold to them or is not able to give them enough attention. Minsan kulang sa pansin lang ang mga members. (At times, members just want attention.) Thus for CCT,

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microfinance program still requires high-touch relationship between the members and the loan officers (Chua, 2012). Management systems and social capital. The CCT chairman thought that there is a need to balance management systems and social capital; there cannot be one alone. When only system is at work without social capitalcredit check, assessment of capacity to pay, among othersthat is when problem arises, he said. Even if legal institutions protect MFIs against default or delinquencies, still resorting to legal resolution is an expensive option and CCT would still prefer the smoother, trust-based relationship (Chua, 2012).

B.

Kasagana-Ka Development Center, Inc. (KDCI)

Rationale for the choice of lending methodology. When KDCI started operation in 2002, the widely used method then was group liability so it employed the same. However, it had had problems with the good-paying members who got burdened sharing responsibility with the delinquent ones. Hence, when the individual liability ASA was introduced in the country, KDCI became interested, learned the methodology, and adopted it in 2004 primarily to protect its good members. It did not and would not go into pure individual lending because, as the KDCI president explained, the organization is not a bank offering mere financial services; KDCI is a development organization that aims to educate and develop the members, among others (Ignacio, 2012). Horizontal social capital. The change was welcome by the members and the staffthe members would not get penalized any more by paying for the loans of their delinquent group mates and the staff would know exactly who to run after when someone defaults on the loan. While the nature of liability it extends to its members has changed, KDCI still keeps the group mechanismthat is, forming groups and centers and meeting weekly. It is KDCIs way of instilling discipline both among the borrowers and among its staff as well as providing a venue to disseminate information, educate, and alter the behavior of the borrowers. Since loan repayments are supposed to be deposited by the center officers a day before

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the meeting, the actual time devoted to meeting is spent on non-financial-related activities (Ignacio, 2012). The center chiefs, who are the elected leaders of the center members, play a key role in the program. They recruit members, ensure that they attend the weekly meetings, communicate to the groups KDCI announcements and events, help in the members business, and oftentimes pay for the members missed amortization. Indeed, the center chiefs are in a powerful position so much so that KDCI has set up controls to prevent abuse (Ignacio, 2012). Some members, however, complain about going to the center meetings normally, they are the sari-sari storeowners who feel the need to watch over their business the whole time and those whose businesses have grown to a considerable scale that finding time for center meetings has become difficult for them already. Thus, KDCI offers its members, who have been with the program for a long period and have grown their business, individual loans sans the center membership and thus they no longer are required to attend the weekly meetings. However, many of these members still opt to join the weekly meetings, particularly the older ones (Ignacio, 2012). Putnams hypothesis about the relation of age and social capital thus holds in this particular case. KDCI members, who live in the suburban areas, usually with widely dispersed population, are also more consistent and eager in attending center meetings. It is because people treat the center meetings as a venue to keep themselves abreast of the latest news and happenings in KDCI and in their locality (Ignacio, 2012). Again, this observation supports Putnams hypothesized association of social capital and peoples area of residence. Vertical social capital. While many also attend the meetings as a form of socialization, KDCI makes it a point to make each center meeting worth the while of those who are attending them. Thus, meetings are mainly used for member training and education (Ignacio, 2012).
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The presence of vertical social capital is apparent whenever there is movement among the KDCI field officers, which is done regularly for control purposes. Normally, it takes some time for the members in a field office to adjust to the newly assigned loan officer and to get back to their normal performance level, that is, in terms of attendance and loan repayment. The president opined that the loan officers would not be able to convince a borrower to take out a loan, try a new product, or repay the loan on time, or understand the predicament of the borrower why she had to miss an amortization, if not for the trust between the loan officer and the borrower (Ignacio, 2012). Management systems and social capital. Despite the presence of social capital in KDCI, the management still sets up structures to make the microfinance program work. For example, it has incentive scheme for the center chiefs in the form of rebates on the principal amount should they be able to achieve the desired number of members (so they would recruit more borrowers) and 100 percent repayment rate (thus at times it is beneficial for them to pay for a members missed amortization and avail of the rebate). KDCI also conducts random audit to check any abuse of power among the center chiefs and workers and has a hotline, which the members can call anytime to express their complaints or grievance concerning a fellow member or any KDCI staff (Ignacio, 2012).

C.

TSPI Development Corporation (TSPI)

Rationale for the choice of lending methodology. TSPI started with individual lending in 1981 when it was established, shifted to Grameens group liability in the 1990s, adopted individual liability in some of its branches in the 2000s, and in 2012, has moved back to 100 percent group liability. The reason management gave for the recent shift in their methodology is delinquency of members. Recently, it has also opened individual loan windows for those clients with big enterprises and thus require bigger loans. So as not to burden the group members with repayment problems and other risks, these entrepreneurs are moved to individual lending programs. Not all members can avail of the individual loans thoughonly those who have been with the group program and
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have grown their business enough to warrant bigger loan amounts (Mendoza & Perfecto, 2012). Horizontal social capital. For TSPI, center meetings are mainly for ministry (similar to CCTs transformation) and business support. Of the weekly meetings in a month, three are devoted to transformational activities and one for business education. Loan collection is only a minor objective of the center meetings. Thus, despite individual liability, the individual loan borrowers are still asked to attend the center meetings. Some members voluntarily opt to attend the center meetings for socialization; still others, particularly those with bigger enterprises, want to stay with their group out of concern for those who cannot repay their loans occasionally. Kawawa naman sila kung walang magtatapal ng utang nila (Pity them if nobody would guarantee their missed amortization), as some would say. On the negative side, the power position of the center chiefs (the leaders elected by the center members) as well as those with bigger enterprise (the economic leaders essentially) has at times led to the creation of patron- client relations among the members (Mendoza & Perfecto, 2012). The executive director explained that social capital is indeed a good tool in screening potential members; however, recruiting five to 10 friends to join a group would be tough for anyone, much less if it is for a lending group. In some cases, people would get just anyone even if they do not know them well just so they could join a microfinance programthe backlash is in the form of default or bad debt and eventually in the breakdown of a group. TSPIs dropout rate of members is between 25 percent and 30 percent. Thus, TSPI management opined that group liability would not support the growth of an MFI in terms of outreach, if growth were indeed the main purpose in ones choice of a lending methodology (Mendoza & Perfecto, 2012). Vertical social capital. TSPI does not rotate its loan officers precisely because it wants its loan officers to establish relationship with the borrowerssomething deemed necessary in its ministry. In line with this thrust, the expected members served by each loan officer has been reduced only recently from 300 members to
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200 members so that the loan officers would have more time knowing the members at a personal level and for other non-financing related activities (Mendoza & Perfecto, 2012). Management systems and social capital. For TSPI, systems without social capital will not workin fact, its management will soon launch an employee award that will recognize the works of TSPI staff beyond their call of duty. An example is the case of a loan officer who helped a TSPI member, who was molested but was afraid to tell her family, take appropriate actions. That beyond the call of duty requires high level of trust. TSPIs position on this matter is not only due to its Christian orientation but also due to its nature as a development organization, not a bank (Mendoza & Perfecto, 2012).

D.

Negros Women for Tomorrow Foundation (NWTF)

Rationale for the choice of lending methodology. NWTF has never explored offering individual loans, except to those who require bigger loan amounts and have been in good standing in the group programsimilar to the graduated scheme of TSPI and KDCI. First, NWTF targets the very poor segment of the population, even those who have no business yet but are inclined to start one. People of this type are afraid to start a venture on their own and would want a support group, thus NWTFs choice of group liability. Second, such borrower profile entails higher risk and thus, NWTF has to manage it by employing group liability. Finally, NWTF does not see any reason to change a method that has been working well for it for decades (Serios, 2012). Horizontal social capital. For NWTF, center meetings are the venue for the members to extend support to one another although its special project manager admitted that at times, their loan officers treat these meetings merely as a mechanism for loan collection. When asked if borrowers do not get tired of group guarantees, he explained thus: No, they do not, because outside of NWTF, when they need food or money during hard times, they turn to the very same group members for help (Serios, 2012).
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To further help their members in their enterprise and complement its group- recruitment mechanism, NWTF conducts income-generating survival skills (IGSS) assessment whereby the household members of a loan applicant undergo an inventory of their business skills and interests and are asked to decide as a household in which venture would they invest their loan money. This way, the micro enterprise becomes a household activity, building on the assets and commitment of each household member (Serios, 2012). In this sense, NWTG taps the most basic source of social capitalfamily or household. Vertical social capital. Recently, too, NWTF has reduced the expected load of loan officers from 500 members to 350 members each. With this load, the loan officers can conduct center meetings for three days in a week; the two other days could be spent for establishing member-relationship, monitoring loan use of members, and identifying member needs. There is also a move to change the rotation policies of loan officerssomething that is done to prevent fraudulent transactions/connivance of staff and members in a branchand assign them permanently to a branch. This change is expected to motivate and retain the performing loan officers as well as strengthen relationship between the members and the loan officers. The manager reasoned that a loan officer would not get to know the people in an area if s/he keeps on moving and job rotation does not necessarily curtail collusion in a branch anyway (Serios, 2012). NWTFs vertical social capital with its members has already been put to test. In 2003, a group from the United States wanted to change NWTFs lending procedure from the traditional graduation of loan amount over time (i.e. by maintaining good standing one will get a bigger loan amount in the next cycle as prescribed in the policy manual) to cash flow-based evaluation of loans (i.e. one may borrow only an amount equal to 50 percent of ones businesss net income or capacity to pay) with the intention of helping NWTF solve its delinquency problems then. The cash flow-based method was piloted in one of the best and oldest branches, with consistent 98-percent repayment rate.

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However, the new method had more implications on the clients than what was anticipated by the consultants. Those members who were already entitled to a Php30,000-loan, for example, were allowed to borrow only Php8,000 as a result of the cash flow analysis. Special loans were likewise discontinued. Incidentally, the pilot coincided with the off-milling season, during which time the area was generally financially hardup, and with the pre-Christmas months, when people anticipated higher spending and thus needed more money (Sebastian, 2005). After six months of trial with the cash flow-based method, repayment rate dipped to 65 percent and portfolio at risk ballooned from over Php767,000 to Php5.7million. Apparently, the implementation of cash flow-based approach gave the borrowers a feeling that NWTF no longer trusts them to pay off their loans. Since their transaction was no longer trust-based, the borrowers feared that they would not be extended loans in the succeeding cycles so they decided to leave the microfinance program without repaying their loans. The branch performance went back to its original level only after three years of rehabilitation (Sebastian, 2005). Regardless whether the borrowers reaction of deliberately not paying back their loans was right or wrong, it seems that the well-meaning systems innovation led to the break down of vertical social capital. Management systems and social capital. The NWTF has been dealing with concerns on operational efficiency and has been through a number of rehabilitation or systems re-alignment, the major ones being in 1992, 2000, and 2004 (Sebastian, 2005). According to the study of Imp-Act Consortium (2007, p.5), the key issue in NWTF is determining to what extent a passion for the mission acts as an effective substitute for organizational structures, systems and processes that were deliberately designed to support the achievement of the social mission. Given that its management systems are not the best in the sector, then NWTF must have something that is working wellits strong social capital perhapssuch that in 2011, it ranked eighth in terms of outreach, eleventh in asset size, thirteenth in gross portfolio amount, and fifth in portfolio-at-risk rate, as shown in the Annex.
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V.

Analysis
A. Case Studies

If the claims of authors were truethat lower-income segments tend to be less trusting than those who are better off and that poverty is linked to the depletion of social capitalthen the MFIs in general, the case subjects included, must be doing a remarkable job in earning the trust of the poor microentrepreneurs as evidenced by the number of the micro borrowers in the country today. All case subjects see group mechanism, even CCT and KDCI that use individual liability, as a necessary component in their microfinance programs. The group structure primarily helps establish vertical and horizontal relationships and serves as a venue to promote human development-centered activities such as transformation, education, business skill building, and leadership training, among others. The group mechanism, in fact, is their main differentiating from the banks. Essentially, the case subjects are doing what Putnam (1993) suggested: focusing intervention on community development. Except for NWTF, all case subjects experience getting a mixed bag of members who appreciate the weekly group meetings and of those who do not. However, this attitude of some who find weekly meetings burdensome has not been identified as the reason why some groups do not last. The cases showed that group mechanism usually breaks down when 1) group meetings are used merely for loan disbursement and collection, leaving out the high-touch expectation of members and affecting adversely vertical social capital; and/or 2) members invite just anyone in order to complete a group, which has negative impact on the horizontal social capital. In the latter case, the innovation of overcoming information uncertainties fails. In short, group formation will not hold together in the absence of both vertical and horizontal social capital. That NWTFs members in general do not get tired of group guaranteeswhich were the complaints of the good-paying KDCI members that eventually drove KDCI to shift to individual liabilitymay be an indication of strong social capital among the NWTF members. Note that NWTF operates predominantly in rural areas, where people tend to be more trusting than those in the metropolitan
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areas (Putnam, 1993), where KDCI mainly operates. Given, however, that TSPI also operates mainly in rural areas and yet gets a mixed of clients, it is worth examining why NWTFs members are more amenable to group mechanisms. The case of NWTF members not complaining about group guarantees or paying tapal money, as well as TSPI and KDCI members not wanting to leave their group even after graduating to individual loan programs also proves Sens (2002) point that individuals do not always seek to maximize their self-interest. The difference in the perspectives of NWTF and KDCI as far as job rotation of field officers is also interesting. Both MFIs acknowledge that movements in the field affect members performance because of the established vertical social capital. However, while KDCI intends to maintain its control system, simply giving its members time to adjust to the new setup, NWTF is keen on changing its policy to enable its staff to build better and more stable relationships with the members. NWTFs stance is more consistent with Putnams (1993) argument that mobility tend to disrupt root systems and it takes time for an individual to put down new roots thus affecting the build up of social capital. NTWF, like TSPI, has also reduced the load of its field officers to enable them to enhance their vertical social capital. Finally, all four MFIs are unanimous in saying that social capital and institutional/managerial systems go hand in hand. Perhaps, only the mix of these two componentswhich of the two is stronger, more established, more functionalvary across these MFIs.

B.

Statistical Data

If Gine and Karlan (2007) were correct in saying that institutional mechanisms is sufficient to recover loans without group liability and that individual liability allows for more growth and outreach, then there must be correlation between portfolio-at-risk rate and lending methodology, and between number of outreach and lending methodology.
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Table 1 shows the growth in outreach of the four case subjects, which is used in this study to indicate the breadth of social capital associated with lending methodologies. However, only KDCI claims that its change in lending methodology in 2004 resulted in dramatic increase in its outreach by almost 38 percent the following year. While CCT also experienced tremendous growth of almost 41 percent in 2005 and 23 percent in 2006, the management is not sure what brought about this positive change. In the case of TSPI, the available data sets are not sufficient to establish a pattern with its every change of lending methodology. Table 1 Table 2 shows the portfolio-at-risk rate in 30 days (PAR-30) of the MFIs. PAR is the measure of delinquency equal to the outstanding loan amount with missed weekly amortization that has fallen due in 30 days or more. Apparently, KDCIs increase in its PAR from 4.5 percent to 17.42 percent coincided with its change in methodology. However, it has not been established whether the increase in delinquency was due to KDCIs shift to individual liability. CCTs two-point data are not statistically valid to establish a trend while TSPIs limited data, again, will not capture the possible impact of its shifts in methodology over the years. Table 2
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Considering the data of the 37 MFIs in Annex, there is weak, positive, and statistically valid correlation between PAR rate and lending methodology (coefficient=0.012509437). This figure means that MFIs employing group liability somehow tend to have higher PAR than those with individual liability program, implying that social capital within the group may not necessarily help in preventing delinquencies. Similarly, there is weak, positive, and statistically valid correlation between the number of outreach and lending methodology (coefficient=0.013561967). This figure means that the MFIs employing group liability somehow tend to have higher outreach than those with individual liability program, implying that social capital may still have been at work in group membership. This data set presents a margin of error or 16 percent; nonetheless the results are contrary to the conclusion of Gine and Karlan (2007). There is also weak, positive, and statistically valid correlation between the number of outreach and the MFIs religious orientation (coefficient=0.085628994). The result means that MFIs with religious orientation tend to have higher outreach than those that do not, supporting the hypothesis of various authors that religion is very influential in building social capital. The relationship of PAR and religious orientation of MFIs is also weak and positive, although not statistically significant.

VI. Conclusion
Based on the empirical evidence presented, this paper argues the following: 1) The change in the kind of loan availed by the micro borrowersor the graduation from group to individual loansdoes not affect the micro borrowers nature and extent of social capital. The shift is commonly done without the micro borrowers necessarily leaving the group or terminating attendance in group meetings at all. 2) The change in methodology employed by the MFIsfrom group liability to individual liabilityis indicative of the strengthening of vertical social capital relative to the horizontal social capital, and not the absence of the latter. Ensuring members repayment, for example, now becomes the field officers
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function and no longer the groups, while recruitment and monitoring of members performance remain with the group. Given in the statistical analysis that MFIs employing group liability somehow tend to have higher PAR than those with individual liability program, implying that social capital within the group may not necessarily help in preventing delinquencies, what may be lacking in horizontal social capital is thus compensated by the vertical social capital in the MFIs adoption of individual liability. It does not mean though that vertical social capital has completely taken over the role of horizontal social capital in microfinance, which is expressed in the maintenance of group mechanisms. However, vertical social capital is not synonymous to managerial or institutional systems in that the former still use trust and relationships in achieving goals while the latter uses more impersonal means to achieve them, such as employing technology in screening and monitoring the members. 3) Both vertical and horizontal social capital are necessary in effectively running a microfinance program and systems alone will not suffice. The basic assumption is that the lower-income segments tend to be less trusting than those who are better off and that poverty is linked to the depletion of social capital. Systems and/or the use of technology will not likely earn the trust of the borrowers. In addition, statistical analysis shows that the MFIs employing group liability than those with individual liability program, implying that social capital may still have been at work in group membership. Data also shows the positive influence of religious orientation on outreach. This paper further proposes a framework of analysis (Figure1): an MFIs weakness in systems, structures, and managerial skills can be compensated by the presence of social capitaleither horizontal or vertical, or bothand vice versa to effectively implement microfinance programs. Weakness in social
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capital may either be complemented by strong institutional systems or be built or strengthened using institutional mechanisms. On one end of the figure is ROSCA with social capital as its sole foundation; on the other end is Safesave, which utilizes advance technology in operations. Figure 1

VI. Direction for Further Research


Several hypotheses about social capital remain untested and many questions left unanswered, thus the need for further research. Among them are the following: Why do communities differ in their stock of social capital? (Putnam, 1993) How is social capital created and destroyed? (Putnam, 1993) There is no good theoretical account of how to build social capital although there are many accounts of how social capital can be destroyed by various social and economic factors (Kawachi, Kennedy, Lochner, & Prothrow-Stith, 1997). What strategies for building social capital are most promising? (Putnam, 1993)
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How can social capital be used for constructing substantive development programs? (Woolcock, 1998)

The variables Putnam (1993) and Woolcock (1998) associated with social capital can also be tested in the Philippine microfinance context: education and economic affluence, age, location, marital status, employment, electronic revolution, inequalities, and law enforcement, among others. Although this study attempted to establish correlations between PAR and outreach, and the MFIs religious orientation and lending methodology, having bigger sample size of MFIs and lower margin of errors will provide conclusive evidence. Still another study can be written to examine the role of social capital in the success of micro entrepreneurs, as theorized by several authors. Finally, a study centered on the microentrepreneurs perspective on social capital in the context of microfinance operations can also be done, which can likewise test the validity and applicability of Narayan and Cassidys (2001) framework using various dimensions in measuring social capital in a group or community in the Philippine context. The scope of this study may be expanded to test the hypothesis presented in Figure 1: an MFIs weakness in systems, structures, and managerial skills is compensated by the presence of social capitaleither horizontal or vertical, or bothto be effective and vice versa. However, just as Narayan and Cassidy have developed an instrument to measure social capital horizontally, another instrument still have to be developed to measure separately and distinctly an MFIs vertical social capital and its institutional capacity or strength. The proposed hypothesis can also be further tested by including banks and paluwagan groups in the study, which stand at the opposite ends of the social capital-system diagram in Figure 1.

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