Social sanctions or social relations? Microfinance in Mexico

Microfinance is a vital source of funding for micro-entrepreneurs in emerging markets and underdeveloped nations. The emphasis in the literature on social sanctions as a mechanism for ensuring high repayment rates may be misplaced. We propose that the construct of harmonious social relations needs to be added in order to explain repayment rates and that high repayment rates foster increased capital formation for micro-entrepreneurs. Using a sample of 182 respondents drawn from a microfinance institution in Mexico and structural equation modeling, the results support the main hypotheses. Unexpectedly, social sanctions had a negative impact on repayment rates.