Document Library

Social Exclusion and Insurance Failure for the Poorest: On Informal Finance through Social Networks in Kenya's Smallholder Sector

Author: H Hogset
Date: 2005
Size: 63 pages (362 KB)

Access full text: available online

Summary

Social networks may be the most important source of informal finance for African smallholder farmers, who have limited access to formal financial markets. This paper published by the Institute of Statistical, Social and Economic Research, Ghana examines informal finance through social networks in Kenya’s smallholder sector, exploring the patterns of economic transfers, the characteristics of the participants and the relationships between them. Participation in transfer networks (or networks in which people engage in borrowing and lending) depends on one’s resources. Consequently, the poorest are less active in these networks.

Borrowing and lending through social networks in Kenya takes place through collective arrangements called Rotating Savings and Credit Associations (ROSCA), or through bilateral transfers between two individuals. There are strong selection mechanisms determining who participates in these transfer networks. The probability of two individuals establishing a transfer relationship depends on factors such as the social ties between them. The quantity of transfers depends on the physical, human and financial capital and the social position of both individuals. These transfer relationships are examined in the paper drawing on data from smallholder farmers in the Eastern and Western Provinces in Kenya.

Participation in transfer networks depends on one’s resources. The poorest mainly participate in frequent, low-value transactions, mainly in-kind or as exchange labour. As people get wealthier, they engage more in cash transfers and less in-kind. The poorest are less active in these networks as they do not engage in cash transfers. Other findings are:

People prefer to network with persons of the same social status, education and wealth.
Women, especially married women, are more active in ROSCAs than men.
Individuals with no formal education and the elderly are less active in transfer networks.
The most common purpose of cash transfers is consumption. Other purposes include school fees and investments in farms and off-farm businesses. Transfers are not provided for households facing illness.
Transfer networks provide the greatest benefits to wealthy households, and to those who have been able to include some key persons like civil servants in their networks.
Family members are a major source of transfers.

Targeted interventions are required to improve access to financial services for groups excluded from social networks, mainly, the poorest, the uneducated and the elderly. Interventions are also required to provide support when social networks fail to do so, such as during sickness and death. This is especially important in light of the ongoing AIDS crisis in Kenya. Specifically, the following needs to be considered:

Socially excluded groups need both finance to invest in income-generating activities as well as access to appropriate savings instruments.
Policies to improve provision of health care are necessary as social networks are of limited help in situations of sickness and death.
Households who suffer sickness and death tend to undertake distress sales of their assets. The loss of productive assets makes it more difficult for the household to recover from the shock.
Public micro-finance schemes need to be designed to complement informal finance through social networks and avoid crowding out the benefits provided by these networks. They also need to ensure that the most vulnerable are not excluded from financial services.

Access full text: available online

Source: Hogset, H., 2005, 'Social Exclusion and Insurance Failure for the Poorest: On Informal Finance through Social Networks in Kenya's Smallholder Sector', Cornell University, New York
Author: Institute of Statistical, Social and Economic Research (ISSER), University of Ghana, http://www.isser.org/