In credit we trust: Building social capital by Grameen Bank in Bangladesh

In this paper we examine how a third-party – Grameen Bank in Bangladesh – created social capital that has been a boon to the explosive growth of Microfinance in Bangladesh and elsewhere. Using Putnam's definition, we show how Grameen Bank created social capital by forming horizontal and vertical networks, establishing new norms and fostering a new level of social trust to solve the collective action problems of poor people's access to capital. The fact that a Microfinance Institution (MFI) can create social capital has strong policy implications. Since social capital is a public good – non-excludable and non-rivalrous – the market will underprovide such good. This paper shows that Microfinance corrects another type of market failure—under provision of a public good, in addition to correcting the failure of the credit market. The social capital building aspects of an MFI need to be taken into account in the whole debate about the need for subsidy.