Social Networks and Credit Access in Indonesia

Summary: In this paper, we investigate how family and community networks affect an individual’s access to credit institutions usingnew data from the Indonesia Family Life Surveys. Our theoretical framework emphasizes the family and community’s role in providinginformation, thus loweringthe search costs of the borrower and monitoringand enforcement costs for the lender. From our empirical results, community and family networks are important in knowinga place to borrow, as well as for loan approval. Consistent with an information-based explanation of networks, family and community networks have a larger impact on credit awareness of new credit institutions with a lower impact on awareness of established credit sources. Interestingly, we find that women benefit from participatingin community networks more than men. There is no evidence that the rich benefit from community networks more than the poor. Our results on the benefits from participation in the community network are robust to the inclusion of community fixed effects.

 

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