Does Money Matter? The Effect of the Group Lending Model on Women Borrowers

Abstraksi

Over the past couple of decades, the importance of investing in women as a way to alleviate poverty has been widely recognised. Having a strong participation of women in the economy will lead to an increase in productivity and improve the family well-being, which is key for sustainable development (Moser, 1989; Subbarao, 1994). Micro and small businesses play a significant role in developing countries such as creating job opportunities and providing resources to the poor (Humprey and Schmitz, 1996). Past research has revealed that women in developing countries predominantly work in micro and small businesses within the informal sector (Chant & Pedwell, 2008; Meagher 1995). Women entrepreneurs are more likely to work in the informal sector due to the time flexibility and the possibility to work closer to home (Chen, 2001; Manning, 1998). The majority of businesses which are owned by women are small-scale, self-financed, have low technology, and have labour-intensive operations (Klapper & Parker, 2011). Considering these issues, it is important to focus on a developing country’s case study such as Indonesia, where approximately 61% to 70% of the total labour force work in the informal sector (Alatas & Newhouse, 2010; Firdausy, 2000). As one of the development tools, microcredit which is targeted specifically for women, has been a popular poverty-alleviation and women’s empowerment strategy (Kabeer, 2005; Karlan, 2007). The rationale for providing women with loans has been that they are considered to be the poorest in society who are discriminated in the formal labour market (Leach & Sitaram, 2002, Yunus, 2007) while their repayment rates and contributions to family well-being are often higher than men (Mayoux, 1999). In providing credit to low income people, many policy makers in developing countries have implemented group lending as a possible alternative for lenders to provide credit aside from individual loans (Karlan, 2007). The loans are made to a group of women using a peer monitoring repayment system that serves as a social collateral replacing an actual collateral (Hermes, Lensink, & Mehrteab, 2005). The group lending system with joint liability creates a peer-pressure mechanism to prevent the loan being used on non-productive activities and ensures a stable loan repayment (Wenner, 1995). This study investigates the effects of various components of a microcredit group lending system - staff facilitation, group social capital, and the loan itself – on the business performance of women borrowers. This study also examines whether involvement in a microcredit scheme improves psychological capital (PsyCap) such as self-efficacy, hope, optimism, and resilience and whether PsyCap plays a role in increasing their business performance. Past studies on microcredit have sought to examine the impact of the program on its borrower’s well-being. Early research mainly focused on the positive impact of microcredit on improving family income, consumption smoothing and women empowerment (Pitt, Khandker, & Cartwright, 2006). However, there is a growing debate as to whether microcredit initiatives benefit participants since the findings of these earlier studies are inconclusive (Banerjee, 2013; Newman, Schwarz, & Borgia, 2014). This study will identify the gaps in the literature by using a mixed-method to better understand the mechanisms by which microcredit can improve the well-being of women borrowers. In the context of the research background and research purposes explained above, this study investigates the following research questions. The first research question is does a microcredit group lending system influence the PsyCap and business performance of women borrowers? The second research question is does PsyCap provide a channel by which certain features of a microcredit group lending system influence business performance? To answer the two research questions, this study is utilising a mixed-methods research to address the growing debate in the literature about the impact of microcredit on the well-being of borrowers. The sample for this study is coming from a large microcredit institution (MFI) in Java, Indonesia, that has a direct reach to more than 500,000 households. The institution follows the Grameen Bank model, and explicitly targets women who are from poor households. The participants of this research are women who are part of a loan group established by MBK and who are recipients of loans through the Loan Group. Non-probability convenience sampling was utilised and participants were identified in the study primarily due to ease of accessibility (Tharenou et al., 2007). To deal with potential endogeneity, this study selected participants from two separate areas with similar socio-economic conditions. The regression results show that both the loan and group social capital directly affect the women borrowers’ business performance. Meanwhile, PsyCap mediates the relationship between group social capital and business performance. The study also finds that PsyCap is influenced by group social capital and staff facilitation. The results suggest that the provision of the loan and involvement in the loan group both directly increase the business performance of women borrowers, while loan staff facilitation does not directly affect business performance. The study finds the mediating effect of PsyCap in explaining the relationship between group social capital and business performance. This study highlights the important role of all the aspects of microcredit’s group involvement in improving not just the business success of women but also their quality of life through stronger PsyCap. Overall, this research is contributing to the goals of improving financial inclusion for low-income women in Indonesia who are not covered by the banking system.