Social Capital and Group Lending: Evidence from Joint Liability Seed Loans in Zambia's Southern Province (Draft)

This paper aims to identify the factors that are associated with high repayment performance by seed borrowers in Southern Zambia, in particular those associated with the growing literature on social capital.

The paper states that:

• The existence and continuing operation of farmer seed groups indicate that they can succeed where the private market fails;
• This success is a result of lower transactions costs, compared to private firms;
• But all farmer groups are not equal. Some are relatively successful at enforcing repayment; and others are less successful.

The paper explores reasons for this and finds that:

• The size of the group facilitates collective action and is associated with higher repayment performance;
• The age of the group, and the distance between members' houses and plots, do not affect repayment, probably due to membership fluidity and fear of witchcraft;
• The frequency of group meetings negatively affects repayment rates;
• Measures of structural social capital such as participation in associations and networks fail to explain group repayment behavior;
• However, membership in the same church is negatively related with repayment rates, suggesting that the strength of bonds linking co-parishioners override the peer pressure from members of the same seed group;
• Cognitive social capital, such as trust toward strangers, is strongly associated with repayment performance, suggesting that attitudes and values shared by community members create an environment in which actors put value in honoring their engagements.