The introduction of financial institutions in communities may generate long-lasting externalities, including losses in informal social linkages

Read “Changes in social network structure in response to exposure to formal credit markets” by Abhijit Banerjee, Emily Breza, Arun G. Chandrasekhar, Esther Duflo, Matthew O. Jackson, and Cynthia Kinnan here.

Social networks are key for communal cohesion, mutual financial support, and information sharing, and are of critical consideration in social policy design. However, a new working paper finds evidence that the introduction of microfinance schemes can trigger a shrinkage in social networks, among both borrowers and non-borrowers of credit.

In this VoxDevTalk, Matthew Jackson discusses insights from his research with Abhijit Banerjee, Emily Breza, Arun G. Chandrasekhar, Esther Duflo, and Cynthia Kinnan, and suggests why these social networks could be shrinking.  Significantly, their research reveals that non-borrowers might suffer the greatest material losses as they lose out on community ties that they would otherwise utilise to smooth income variations. A better understanding of these externalities, as well as the complex interrelations between economic networks and social interactions, can be deeply relevant for the design of future social policy and financial programmes. 

Social networks Formal credit markets India Social linkages Microfinance