Sharia File 5

8/4/2019 Sharia File 5

1/23

Prepared by TAZKIA

The Effect of Social Capital on Loan Repayment

Behavior: A Study on Group Lending Model(GLM) Application in Islamic Microfinance

Institution, Bogor

Yulizar D. Sanrego Nz

Lembaga Penelitian & Pemberdayaan Masyarakat

Forum Riset Perbankan Syariah Bank Indonesia

Universitas Muhamadiyah Yogyakarta (UMY)

9 Desember 2010 M/ 3 Muharam 1432 H

1


2/23


3/23

Prepared by TAZKIA

RESEARCH BACKGROUND

It is well established in finance theory that credit markets characterized with

high asymmetric information, notably, the existence of moral hazard andadverse selection problems, leads to severe distortion and sometimescomplete collapse of the formal credit market.

Financial contracts will not be written under this condition. Hence, goodsand services will be under-produced and under-consumed. The contracts

between borrower and lender will only be honored if the element of trustexists in such transactions.

Commercial banks distrust poor people for credit because they cannotenforce repayments without a presence of loan/physical collateral.

Informational problems arise as banks fail to distinguish 'good' among 'bad'borrowers, due to the poor lacking accounting report of their business


4/23

Prepared by TAZKIA

RESEARCH BACKGROUND

It has been recognized, however, that non-market institutions play the role in

overcoming such informational and enforcement problems.

In relation to the fulfillment of collateral, in group lending methods such as

interpersonal relations and cooperation among group members can become

'social collateral', substituting the lack of poor people to physical collateral.


5/23

Prepared by TAZKIA

RESEARCH BACKGROUND

IMFiwithGroupLendingModel

(GLM)

SocialCapitalBuilding

(SCB)

SCB=BeyondMicrocredit=

EMPOWERMENT

FINANCIALINSTITUTION(SupplySide/LENDER)

SCB is functioning as PhysicalCollateral. It is a TRUST for

LENDER

INDIVIDU

(DemandSide/BORROWER) SCB having dual functions:

1 Physical Collateral

2 AffectRepaymentRate

EQUILIBRIUM


6/23Prepared by TAZKIA

1) How social capital features can be implemented within the

community group.

2) How the attainment of social capital through group lending

model (GLM) in the Islamic microfinance institution would

lead to the soundness of microfinance performance

particularly in the loan repayment behavior of Ikhtiar

Program participants.

PROBLEM STATEMENTS



THEORETICAL FRAMEWORK & PREV RESEARCH



Economic-Psychology Theory of Reasoned Action (TRA)

Theory of Planned Behavior (TPB)

THEORETICAL FRAMEWORK



Background

factors

Individual

Personality, Mood,

Emotion,

Intelligence,

Values,

Stereotypes,

General Attitudes,Experience

Social

Education, Age,

Gender, Income,

Religion, Race,Ethnicity, Culture

Information

Knowledge,

Media,

Intervention

BehaviouralBeliefs

Attitudetoward

Behaviour

NormativeBeliefs

SubjectiveNorm

ControlBeliefs

PerceivedBehaviouralControl

Intention Behaviour

ActualBehaviouralControl

Theory of Planned Behavior



1) Those who view the relational aspects of socialcapital as key to the performance of group lending.

2) Those who view the informational aspects of social

capital as key to the performance of group lending;and,

3) Those who view the merits of group lending

(relative to individual lending) solely through its

innate properties as a joint-liability contract, where

social capital plays little or no role

PREVIOUS RESEARCH



NO NAME TITLE RESEARCH FINDINGS

First category those that view the RELATIONAL ASPECTS of social capital as key to the performance of group lending.

1 Sagrario L. Floro and Pan A.

Yotopolous

Informal Credit Markets and the New

Institutional Economics: The Case of Philippine

Agriculture (Boulder: Westview Press, 1990)

Demonstrate that where social ties are

strong, group lending can both improve loan

repayment and relax credit constraints

2 T imothy Besley and Stephen

Coate

"Group Lending, Repayment Incentives and

Social Collateral," Journal of DevelopmentEconomics, Vol. 46, No (1995): p. 1-18

Argue that without the potential for social

sanctions, group lending may offer little ifany advantage over individual lending.

However, given that sanctions are

sufficiently strong, group lending in their

model is able to curtail the moral hazard

associated with loan repayment

3 Stiglitz, Besley, Banerjee and

Guinnane and Armendriz de

Aghion

Joseph E. Stiglitz, "Peer Monitoring and Credit

Markets," The World Bank Economic Review,

Vol. 4, No. 3 (September 1990). Abhijit V.

Banerjee, Timothy Besley, and Timothy W.

Guinnane, "The Neighbors Keeper: The Design

of a Credit Cooperative with Theory and a Test,"

The Quarterly Journal of Economics, Vol. 109,

No. 2 (May 1994). Beatriz Armendriz de

Aghion, "On the Design of a Credit Agreement

with Peer Monitoring,"Journal of Development

Economics, Vol. 60, No.1 (1999)

Social sanctions, combined with peer

monitoring also play a role though in

focusing on peer monitoring, social

sanctions are typically assumed to be

exogenous

4 Bruce Wydick "Group Lending under Dynamic Incentives as a

Borrower Discipline Device," Review of

Development Economics, Vol. 5, No. 3 (200): p.

1-14

sanctions in the form of group expulsion are

endogenous in that they represent a credible

threat that comprises part of a perfect

Bayesian equilibrium punishment strategy



Second category those that view the INFO RMATIONAL ASPECTS of social capital as key to the performance of group lending

5 Eric Van T assel and

Maitreesh Ghatak.

Eric Van T assel, "Group Lending under

Asymmetric Information,"Journal of

Development Economics, Vol. 60, No. 1

(1999): p. 3-25. Maitreesh Ghatak, "Group

Lending, Local Information and Peer

Selection,"Journal of Development

Economics, Vol. 60, No. 1 (1999): p. 27-

50.

Demonstrate that the borrower self-selection process used in

most group lending schemes improves repayment rates

through mitigating adverse selection in credit markets. If

borrowers have clear information over the riskiness of one

another's projects, t hey sort themselves into homogeneous

groups through an assort ative matching process

Third category those that view the merits of group lending (relative to i ndividual lending) solely through its innate properties as

a joint-liability contract, where social capital plays little or no role

6 Armendriz de

Aghion and Gollier

"Peer Group Format ion in an Adverse

Selection Model," The Economic Journal,

Vol. 110 (July 2000): p. 632-643

They show that , in a pool of safe and risky borrowers,

if the higher return realized by a risky borrower in the good

state of nature is (uniquely) sufficient to cover for a

defaulting group member, then the group lending cont ract

can reduce the equilibrium interest rate and induce higher

repayment rates relative to individual lending



RESEARCH FRAMEWORK & HYPOTHESIS



RESEARCH FRAMEWORK

IKHTIAR PROGRAM

XI. Member's Role

X2. Progran Benefits

X3. Field Officer

X4. Financial Service

X5.Other Member's Role

FAMILYECONOMYY21.TotalIncomeY22.Income Source Y23.DependantY24.Expenditure

INDIVIDUALCHARACTERISTIC

YI. AgeY2 .EducationY3 .ExperienceY4 .PeriodofClient

REPAYMENT BEHAVIOR

Y31. Discipline

Y32.TrustY33. Burden

Y34. Loan TurnY35. Eco Increase

SUBJECTIVE NO RM

Y41. Husband

Y42. Parent

Y43. Son

Y44. Other Client

Y45. NeighborY46. Local Gov

Y47. Field Officer

RELIGIOUSNORMY51.Thrift/simplicityY52.PayingDebtY.53.Delay/In DueTimeY.54.BadIntentionY.55.Trusteeship

PERCEIVEDABLETOPAYY61.Routine PaymentY62.Notin Arrear

INTENTIONTOPAYY71.FollowOthersY72.AdhertoReligionY73.FulfillNorm/System

REPAYMENTBEHAVIORY31.DevelopmentY32.Frequency



1. Loan repayment behavior of Ikhtiar Programparticipant (Y) is influenced by the attainment of

social capital which is embedded within their attitude

of repaying loan, subjective norm, religious norm,perceived behavior, individual characteristic as well

as their family economic background.

2. Ikhtiar Program (X) itself has an effect to the groupmembers loan repayment behavior.

RESEARCH HYPOTHESIS



RESEARCH METHODOLOGY

In order to grab all the information from the primarydata (latent variables) and to have valid and robust

answer for the previous problem statement, this

research is employing parametric-structural equationModel (SEM) using LISREL 8.51.



DISCUSSION (1)

(

1)EARLY

SPECIFICA

TION

MO

DEL



2. The assessment to the offending estimates problem.3. The evaluation of SEM overall model fit.

4. Respecification Model.

DISCUSSION (2)



DISCUSSION (3)

(4

)RESPE

CIFICAT

ION

MODEL



CONCLUSION & RECOMMENDATION



1) This research concludes that loan repayment behavior of Ikhtiar Program

participant is very much affected by the existing social capital whichembedded in Ikhtiar Program, Repayment Behavior (Attitude) and

Intention to Repay the Loan. The role of Ikhtiar Program in this context is

affirmative in the process of capacity building of the entire participant

program in the form of attitude, subjective norm, religious norm andothers.

2) Such that, this research is, somehow, is similar to those that view the

relational aspects of social capital as key to the performance of group

lending and those that view the informational aspects of social capital as

key to the performance of group lending.

CONCLUSION



It is urged for Islamic Banks to have a partnership with those

IMFIs which apply group lending model (community based)

to run their linkage program.

There should be another research that having a wider

coverage of research, particularly in the different area or

region so that the finding will have a comprehensive

comparison analysis in term of community economicbehavior.

RECOMMENDATION


23/23

WASSALAMUALAIKUM

Sharia File 5

Documents

Transcript of Sharia File 5