LEARNING BY ASSOCIATION: MICRO CREDIT IN CHIAPAS, MEXICO

I. INTRODUCTION The very poor have a difficult time accessing formal credit markets. They do not have collateral, payroll income, or a credit record. The inability to obtain credit contributes to a variety of problems, including malnutrition, low levels of investment in human capital, inadequate medical care, lack of women empowerment, and high dependency ratios. Female heads of households who have little or no education, lack physical capital, and tend to be self-employed in the informal sector are especially hurt. The World Bank Development Report 2003 says, "in many places, traditions, limited mobility, and lack of voice or access to information make women the most marginal group" (p. 71). Micro credit (also known as microfinance) is a financial alternative for people in the lowest bracket of the income distribution that aims to promote economic development by breaking the poverty cycle through access to credit and fostering entrepreneurship. "The hope is that much poverty can be alleviated--and that economic and social structures can be transformed fundamentally--by providing financial services to low-income households" (Morduch 1999, p. 1569). Micro credit differentiates itself from standard financial institutions by making small loans (as low as US$40) under a variety of schemes that usually include but are not limited to no initial collateral needed, group lending, progressive loan structure, immediate repayment arrangements, regular repayment schedules, and collateral substitutes. Understanding the role and impact of micro credit programs is a difficult and complicated task. The authors identify two main streams of analysis. First, the article offers an approach focusing on the evaluation of the financial efficiency of the providers, such as recovery rates on loans. Models of optimizing agents in game-theoretic settings have been developed to analyze group formation, peer monitoring, and the role of dynamic incentives in credit markets (e.g., Armendariz de Aghion 1999; Banerjee et al. 1994; Besley and Coate 1995; Smith 1983; Stiglitz 1990; Stiglitz and Weiss 1983; Van Tassel 1999; Varian 1990; and others). Alternatively, researchers evaluate results from the perspective of the recipients and society, asking, "Does micro credit alleviate poverty and raise standards of living?" (Khandker 1998; Pitt and Khandker 1998; Rosintan et al. 1999; Zaman, 2001). Morduch (1999) provides an excellent review of the literature. The main contribution in this article is to construct a consistent measure of learning by association (peer mentoring) and determine its effects on repayment performance, using reliable data from AlSol (Alternativas Solidarias), a micro credit program in Mexico. Using a cross-section analysis for 1,508 participants, the results indicate that learning by association is at the core of the success of micro credit. The authors argue that the role of micro credit programs as a tool to teach clients how to manage funds, develop entrepreneurial skills, and succeed in a market-based society through shared endogenous learning from within groups has been mostly neglected. At the core of a successful micro credit program, spillover learning effects must be developed and promoted from within and across borrowing groups. Peer monitoring is often used to mean that group members will enforce sanctions against nonpaying members, thereby helping the lender collect on loans that would default under conventional, independently lending arrangements (Stiglitz 1990, p. 353). The authors believe there are other ways that poor performers are helped. Instead of simply punishing those falling behind, successful individuals should actively coach and teach those who are struggling. The authors call this peer mentoring. Like peer monitoring, peer mentoring has its roots in self-interest-successful individuals who know that the entire group must succeed and, thus, they help others help themselves. …