Elsevier

World Development

Volume 34, Issue 10, October 2006, Pages 1788-1807
World Development

Trust in Lending: Social Capital and Joint Liability Seed Loans in Southern Zambia

https://doi.org/10.1016/j.worlddev.2006.02.007Get rights and content

Summary

This paper identifies factors associated with high repayment performance by collectively liable groups of seed borrowers in Southern Zambia. The results suggest that some factors facilitating collective action within seed groups, such as their size, are associated with a higher repayment performance. In addition, community-based cognitive social capital, proxied here by generalized trust, is shown to be strongly associated with repayment performance. This suggests that attitudes and values shared by community members create an environment in which seed borrowers honor their engagements, although church participation and fear of witchcraft can weaken mutual monitoring of loan use and peer pressure for repayment.

Introduction

When the concepts of social capital and group-based microfinance appeared—almost simultaneously—on the development scene, social scientists and practitioners quickly recognized the potential relevance of social capital to the study and development of group lending programs.1 It was hypothesized that the presence of social capital in a community would facilitate the selection of creditworthy co-borrowers, the mutual monitoring of their loan use, and peer pressure for repayment. To date, however, few studies have attempted to empirically test the role of social capital in explaining the performance of group loan programs.

This paper aims to make a contribution to the empirical literature by examining the factors that help explain the difference in repayment performance of seed loans among joint-liability groups in Southern Zambia, with a particular focus on those factors that are generally associated with the concept of social capital. In Southern Zambia, donor groups have led substantial efforts to encourage the formation of smallholder groups to facilitate the distribution of seed. There is a strong basis—in economic theory, in common sense, and in practical experience—for believing that these groups can improve the productivity and prosperity of the farmer members by improving their access to purchased inputs (Kähkönen & Leathers, 1998).

An important aspect of these farmer groups has gone largely unexamined: as with many institutional arrangements, the success of seed groups depends on the extent to which transactions costs can be reduced. The main focus of this paper is to analyze factors that result in lower transaction costs and therefore in more successful group operations. Are small groups more effective than large groups? Are groups that meet frequently more effective than groups that meet infrequently? Does social capital—in particular trust—within farmer groups or the surrounding communities affect repayment behavior?

To help provide answers to these and other questions, this paper analyzes data from 256 smallholder groups in southern Zambia, all of which are involved in distribution of seed. We identify some of the factors that contribute to seed loan repayment behavior and suggest in particular that norms of mutual trust play an important role in determining repayment rates. Interestingly, we also find that fear of witchcraft and strong fellowship among churchgoers can hinder mutual monitoring and loan repayment enforcement.

Zambia is a country of severe and seemingly intractable poverty. The per capita income is $800 per year (in 2004 Purchasing Power Parity equivalent) and is lower in real terms today than it was in the early 1960s. Sixty percent of the population lives in rural areas, where poverty is pervasive. The rural population predominantly comprises subsistence farmers who rely on their own production for food consumption. Agricultural productivity has failed to keep pace with population growth, and per capita food availability has dropped by about 10% since the early 1960s. Nearly half the population is estimated to be suffering from undernutrition.

Any successful strategy for development in Zambia will therefore include efforts to improve agricultural productivity, and improved access to seed will be a critical part of these efforts. Providing access to seed for small farmers can raise productivity by improving seed quality, by making genetically improved crop varieties available to farmers, and by introducing new crop alternatives.

The private market has largely failed to make seed available in the Zambian countryside. Markets do exist, but they serve the large commercial farm sector (Musona, 2000, Zulu, 2000). Their persistent failure to reach smallholders in Zambia is a result of high transactions costs, of which there are three interrelated sources: (1) small transaction size; (2) remoteness of farm locations; and (3) institutional factors that raise the costs of providing credit.

It is difficult to exaggerate the small size and the remoteness of the majority of farms in Zambia. To illustrate, the 1882 farmers belonging to the groups surveyed (and for which data were available) plant an average of 1.24 limas (0.31 hectares) per farmer. The groups are, on average, located 45 km from the nearest line-of-rail town. Their remoteness is intensified by the fact that roads to the respondents’ villages are non-existent or extremely poor and by the fact that the only form of transportation available to most smallholders is travel by foot.2

The small size and remoteness of farms make it infeasible for a seed dealer to set up a store in a town or other central location and expect a sufficient volume of business to cover the fixed costs of his/her operation. Only a few smallholder farmers would reach the store’s location and each of the customers would buy small quantities of seed. Any attempt to cover costs by increasing prices would further reduce the number of customers. For similar reasons, it is infeasible for a seed dealer to sell seed by visiting farmers. Although the seed dealer may have an advantage over many farmers in transportation options, s/he faces the additional disadvantage of not knowing the locations of potential customers.

In addition to the remoteness of farms, the extreme poverty of the smallholders makes it difficult or impossible for most of them to assemble sufficient cash assets to purchase seed at planting time. One obvious solution to this problem is to sell seed on credit, expecting payment after the crop is harvested. However, the problems associated with providing credit to smallholders are numerous and include

  • identifying and locating borrowers;

  • characterizing borrowers according to their integrity, farming ability, and potential for repayment;

  • communicating with borrowers about loan terms and conditions;

  • providing information and advice to borrowers in order to improve crop yields and loan performance;

  • verifying ability to repay at the point when repayment is due;

  • transforming in-kind repayments into cash;

  • identifying and verifying ownership of assets to be pledged as collateral; and

  • enforcing loan and default provisions through formal legal channels.

These credit-related transactions costs are magnified by the remoteness of farmers and the small transaction size. Costs of collecting information, for example, are high because of poor transportation and communications infrastructure, and these costs are not diminished in any way because the average loan size is small. Some of these transactions costs are high because of the existing institutional framework: for example, a slowly functioning legal system adds to enforcement costs, and communal land ownership constrains the use of collateral.

Regardless of the cause, the high transactions costs can make it nearly impossible to provide credit as a stand-alone commercial transaction and therefore private markets are not able to provide input marketing services to the smallholder sector. Farmer groups represent one option that has been proposed to lower these transaction costs (see Kähkönen & Leathers, 1998).

The development of farmer groups appears ideally suited for reducing transactions costs associated with seed distribution:

  • By joining a group, borrowers self-identify as having an interest in acquiring seed.

  • The borrowers, their creditworthiness, asset ownership, and farming ability, are known to other group members.

  • The group can organize meetings to disseminate information about production methods and loan contract provisions.

  • Peer monitoring among group members can serve as an efficient way of monitoring the ability to repay.

  • The threat of loss of social standing within the group and/or the community acts as a powerful incentive for individual loan repayment.

  • The group constitutes an alternative to formal legal institutions as means of enforcing contract and settling disputes.

  • Once launched, the group can become self-perpetuating, as group members undertake the seed sorting, treating, and storage functions.

In 1991, the system of government-managed seed distribution was eliminated. In its absence, a number of non-governmental organizations initiated efforts to develop small-scale seed distribution systems, primarily using farmer groups. The groups were set up in all parts of the country, but our survey concentrated on the Southern Province where the relative density of groups allowed us to maximize the number of groups surveyed.

The operation of seed groups in the Southern Province suggests that the groups were established with the specific objective of reducing the transactions costs described above.3 Our survey included groups organized by CARE (under their Livingstone Food Security Project), Africare, and various church organizations. Since more than 95% of groups in our survey were set up by CARE, we briefly review here how these groups operate.4

Our unit of analysis is the “village management committee” (VMC). Each VMC manages one or more sub-groups. The committee is to act as a conduit between the farmers and the Area Management Committee, which in turn acts as an intermediary with CARE. The village management committee performs the following functions:

  • storing seed repaid in previous years for distribution;

  • keeping records of farmer loans and repayments;

  • making decisions about whether to make certain seed loans, based on repayment histories and information about repayment capacity;

  • organizing seed requests from farmer subgroups and requesting seed (as needed after expending from VMC storage) from the Area Management Committee. The area management committee meets these requests out of its own stores, or by making a request to CARE;

  • delivering seed to farmer members;

  • making disciplinary decisions and hearing appeals in the case of non-repayment.

The rest of this paper is organized as follows. Section 2 presents the concept of social capital, its role in group liability lending models, and how it is expected to affect repayment behavior in Zambian seed groups. The next section examines the determinants of group repayment that are tested in the analysis. Section 4 briefly describes the primary and secondary data used for the analysis, the results of which are presented in Section 5. Section 6 summarizes the main results of the paper and presents recommendations for donors. Detailed econometric results and a description of the answers to the field questionnaire are presented in Appendix A Econometric results, Appendix B Description of answers to survey questions.

Section snippets

Social capital and its application to group lending models

To the extent that farmers are mutually responsible for the repayment of each other’s seed loans, the networks of social relations and attitudes among them—or the local social capital—can play a central role in enforcing repayment. This section will briefly present a simple framework for understanding social capital and apply it to the dynamics of joint liability that underlie group repayment schemes.

Determinants of seed loan payment

The main purpose of this paper is not to test whether the use of groups is superior to other arrangements in producing high repayment rates; rather, our focus is on the factors that make some groups more successful than others, with a particular interest in the role of social capital at the group and community levels. To identify these factors, three sets of proxy indicators of social capital are used in the present analysis: collective action at the group-level, membership in associations and

The data

Two types of data were collected for this research: primary or survey data, and secondary or recorded data. The processes and results of these two methods of data collection are described in this section. Descriptive statistics on the primary data are provided in Appendix B. Combined with the description of general group operations in Section 2, these statistics offer a picture of the setting within which data were collected.

Results

The discussion of the last sections identifies four categories of variables that may influence the performance of farmer groups:

  • —factors affecting collective action within groups;

  • —proxies for structural social capital within the community;

  • —proxies for cognitive social capital within the community;

  • —control variables.

The general model to be estimated is as follows:Group repayment rates=f(group-level collective action, community-level structural social capital, community-level cognitive social

Conclusion and lessons for NGOs and donors

The purpose of this paper is to identify the factors that are associated with relatively good repayment performance of farmer groups in Southern Zambia, in particular those identified in the growing literature on social capital.

The existence and continuing operation of farmer seed groups indicate that they can succeed where private markets fail. Undoubtedly, this success is a result of lower transactions costs, compared to private firms. But all farmer groups are not equal. Some are relatively

Acknowledgement

This work would not have been possible without the exceptional assistance of David Musona and M&N Associates, the Zambian firm that implemented the field survey and spared no effort in the face of difficult conditions to collect as much usable primary data as possible. The authors also express their gratitude to Sarah Bell for excellent research assistance, and to USAID/Zambia which financially supported this work through Purchase Order 611-0231-0-00-0110-00. They also wish to acknowledge the

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