Economists find kinship networks play key role to access credit

Nov 01, 2012

In times of financial hardship, or when opportunities arise, the ability to borrow can be critical. Some people rely on commercial lenders, while others depend on relatives, especially in developing countries. But a new study shows that the presence of banks and relatives together are better than any one source individually.

The research, funded by the Consortium on Financial Services and Poverty (CFSP), suggests that not every household in a village needs to use the banking system directly in order to benefit in terms of buffering , if interpersonal gifts and lending are widespread.

"Strikingly, an indirect connection [to a bank] is as effective as a direct connection," Cynthia Kinnan and Robert Townsend wrote in a paper published in the , "suggesting that borrowing and lending among acts to distribute capital from formal ."

In their study "Kinship and Financial Networks, Formal Financial Access and Risk Reduction," Kinnan and Townsend used unique data from rural Thai households to examine the relationship between kinship networks and the access to formal financial institutions. Their findings show that most people smooth over short-term income shocks either by borrowing directly from a financial institution, or borrowing from someone in the village who in turn had access to bank credit.

These findings caution against evaluating financial access by comparing those who directly use the to those who do not. This is likely to yield significant mis-estimates of the effect of financial access. Such comparisons may underestimate the gains from financial development in terms of smoothing consumption, because part of the "unbanked" group is actually benefitting through indirect connections to banks.

As well as examining how households smooth consumption, the authors also studied how the households finance large investments for their businesses, farms or homes. Without the ability to borrow, such investments will only be possible when a household's is high, but this may not be the ideal time to make investments. Therefore, Kinnan and Townsend examined whether connections to banks or the presence of relatives helped households to finance investments when cash flow was low. They found that to finance large investments, the presence of a kinship network was vital: those who have kin manage to finance investments even when cash flow is low. Those who are connected to banks, but lack a kinship network, could only undertake investment when cash flow was high.

Kinnan and Townsend argue that borrowing and lending from banks typically uses tangible collateral as a guarantee for the loan and without this some other guarantee is needed. The importance of kinship networks in facilitating investment is found primarily for those in occupations, such as business owners, where investments tend to be large relative to a household's net worth. In these situations, households need to borrow a large amount for investment, but may be tempted to not repay and cannot guarantee the loan with their own initial wealth. The relationships among kin guarantee the loan. "If your grandmother and other kin are keeping an eye on you, you'll do your best to repay the loan no matter what—no collateral is needed," Kinnan said.

The study relies on data from the Townsend Thai Monthly Survey, which observed a total of 531 households in 16 villages over 84 months from 1999 to 2005. Data on loans and transfers among households were matched with census data to construct a financial network of each village. The authors note that the importance of kinship networks and financial access are each well-documented, but the channels through which these effects occur and the relationship between them were not yet well understood. The unique data from the Thai survey has enabled researchers to examine the interplay between the two for the first time.

These findings illustrate that, even within poor villages, some households are much more vulnerable than others. Those without direct or indirect access to banks still rely on kinship networks to imperfectly smooth out short-term income fluctuations, and those with neither bank access nor kin remain the most vulnerable to financial disruptions. This suggests that efforts to provide a social safety net should focus especially on those who lack bank access and kin networks, such as recent migrants.

Explore further: The economics of age gaps and marriage

Provided by Consortium on Financial Systems & Poverty

not rated yet
add to favorites email to friend print save as pdf

Related Stories

The wealth of Thai villages

Apr 24, 2012

Examining Thai villages as smaller versions of a national economy provides a new understanding of the dynamics of economic growth and yields fresh insights to the financial lives of villages and households.

Microfinance programs: Benefits not clear-cut, study shows

May 11, 2012

(Phys.org) -- Large-scale microfinance programs are widely used as a tool to fight poverty in developing countries, but a recent study by University of Notre Dame Economics Professor Joseph Kaboski and MIT colleague Robert ...

Bailed-out banks issued riskier loans

Sep 15, 2011

Banks that received federal bailout money ended up approving riskier loans and shifting capital toward risky investments after getting government help, say University of Michigan researchers.

Recommended for you

The economics of age gaps and marriage

6 hours ago

Men and women who are married to spouses of similar ages are smarter, more successful and more attractive compared to couples with larger age gaps, according to a paper from CU Denver Economics Assistant Professor Hani Mansour ...

Do financial experts make better investments?

Oct 28, 2014

Financial experts do not make higher returns on their own investments than untrained investors, according to research by a Michigan State University business scholar.

Lack of A level maths leading to fewer female economists

Oct 28, 2014

A study by the University of Southampton has found there are far fewer women studying economics than men, with women accounting for just 27 per cent of economics students, despite them making up 57 per cent of the undergraduate ...

Insider trading study shows stronger enforcement

Oct 23, 2014

The first major study of the enforcement of Australia's insider trading laws has shown the number of insider trading cases brought by the Australian Securities and Investment Commission (ASIC) is increasing, ...

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.