A Critical Review of the Link Between Social Capital and Microfinance in Indonesia

This paper critically reviews the role of social capital in microfinance performance in Indonesia.

Social capital in the form of social trust and networks plays an important role in microfinance. In group lending methods, the trust and interaction among group members generate peer pressure and sanctions to loan defaulters. In Indonesia:

• Government and local NGOs have replicated the Grameen model in rural and urban areas;
• Progress of these replications have been unsatisfactory;
• Many microbanks have implemented individual lending that has brought them financial self-sufficiency and operational scale;
• Building close relationships with poor clients help these microbanks reduce loan defaults;
• Credit cooperatives have achieved high rates of loan repayment by combining individual lending methods with friendship;
• Although group-lending is replicated nation-wide, knowledge about the role that social cohesion plays in the success of group lending methods is limited.

Finally, the paper suggests further research on the role of social cohesion, the norms of solidarity and reciprocity and the role of formal and informal leaders in the performance of group lending.