VOL 18 NO -143 REGD NO DA 1589 | Dhaka, Friday April 1 2011

The model that contributed most to social capital

M S Siddiqui

Values and beliefs that are embodied and culture play an important role in political and
social development of a country. Culture can be defined as the ways of life including arts,
beliefs and institutions of a population that is passed down from generation to generation.
The individual's beliefs, attitudes, values, self-respect, compliance of laws, and rules of
the society indicate how a citizen thinks about what things are, or ought to be. Nations are
poor because their attitude are poor and do not feel themselves the need to change.

Poverty makes people uneasy, leading to their loss of trustworthiness and engendering
mutual disbelief. Economic inequalities also lead to isolation and mistrust. Economic
development and fair distribution of wealth are the answer to revive the values. In order
to promote economic development, we need to restructure our social values and it is
through economic development, we can bring about social change for nourishing culture
values and creating a distinctive identity. Development needs investments of three forms
of capital -- economic, cultural and social capital.

One scholar defined social capital as 'the aggregate of the actual or potential resources
which are linked to possession of a durable network of more or less institutionalised
relationships of mutual acquaintance and recognition'. Social capital is important for
efficient functioning of modern economies and democracy. It is a precondition for
economic reform but unlike economic policies or even economic institutions, it cannot be
so easily created or shaped by public policy. It is a combination of social, cultural and
economic processes that can gradually build social capital.

Social capital is an instantiated informal norm that promotes cooperation between two or
more individuals and reciprocity between members of the society. Individuals must be
instantiated in an actual human relationship by way of trust, networks and co-operation.
Members need to cooperate in groups and do, in the process, embrace the traditional
virtues like honesty, the keeping of commitments, reliable performance of duties,
demonstration of reciprocity, and the like. Since cooperation is necessary for most
individuals as one of the means for achieving their selfish ends, it stands to reason that
they are in one way or other involved in process that help develop it in society.

Virtually all forms of traditional socio-cultural groups like tribes, clans, associations,
religious sects, etc. are based on shared norms and they use such norms to achieve
cooperative ends.

The economic function of social capital is to reduce the transaction costs associated with
formal coordination mechanisms like contracts, hierarchies, bureaucratic rules, and the
like. It reduces transaction costs of monitoring, negotiating, litigating, and enforcing
formal agreements. The fact of the matter is that coordination, based on informal norms,
remains an important part of modern economies. The existing political and administrative
system has failed to achieve the goals. The existing system is not wrong by itself but
some of the nations have failed to achieve the cherished goals since they have tended to
modify the system as per the desire of their policy-makers. The democracy is accepted as
a good political system but some of the society tries to re-design to make it suitable to
'requirement' of any given society. It is about not only rule of law but also a whole
political and social system and associated structure of norms and beliefs. Some societies
have not been taking tolerance, mutual respect, convention, tradition and co-operation
into considerations for running the system properly. Such values are critical for a smooth
functioning of democracy.

Social capital as instantiated, helps fostering of informal norms that produce cooperation.
If individuals interact with each other repeatedly over time, they develop a stake in a
reputation for honesty and reliability. Market interaction in a commercial society leads, as
Adam Smith observed, to the development of bourgeois social virtues like honesty,
industriousness, and prudence. A society, composed entirely of Kant's "rational devils,"
will develop social capital over time, simply as a matter of the devil's long-term self-
interest.

According to a philosopher, 'a modern democracy tends to wipe away most forms of
social class or inherited status that bind people together in aristocratic societies'. Men are
left equally free, but weak in their equality since they are born with no conventional
attachments. Modern democracy promotes excessive individualism which is a
preoccupation with one's private life and family, and an unwillingness to engage in public
affairs. The result of excessive individualism, however, is not freedom. Americans
combated this tendency towards excessive individualism by their propensity for voluntary
association. That led them to form groups, both trivial and important, for all aspects of
their lives.

The political function of social capital in a modern democracy is called the "art of
association". The weaker classes are vulnerable due to unfettered free economy and
democracy without substance. The association of people can protect them through
combined actions. They can learn it and gain strength through co-operation in social and
professional activities. Religion continues to be a factor in economic development and
social relations but it is blurred in the present societies since religion is not changing with
the change of societies. Apart from religion, the shared historical experience can shape
informal norms and produce social capital. Social capital is frequently a byproduct of
religion, tradition and shared historical experience.

Despite the possibility that a society can have too much social capital, it is, doubtless,
worse to have too little. For in addition to being a source of spontaneously-organised
groups, social capital is vital to the proper functioning of formal public institutions.
The policy-makers should know where social capital comes from and how to increase the
stock of social capital in their respective countries. States can both do some positive
things to create social capital and forebear from doing others that deplete a society's
stock.

The states do not have many obvious levers for creating many forms of social capital.
The governments can generate social capital through education by educating the norm of
social rules and practices and building trust and respect for individuals.

Policy-makers consider social capital as one of the factors that may contribute to a wide
range of beneficial economic and social outcomes for a society. Such outcomes include:
high levels of welfare and growth in gross domestic product (GDP), more efficiently
functioning labour markets, higher educational attainment, low level of crime, better
health and more effective governance institutions. And these expected outcomes provide
the main logic for public authorities and the government to intervene and promote
accumulation of social capital.

The policy-makers do need to consider pro-active measures in order to strengthen social

network, build social organisations, strengthen community ties and the civil society,
increased community access to services by citizens. But there are limitations on the part
of governmental agencies for properly encouraging the creation of social organisations.

Here comes the role of non-governmental organisations (NGOs). Grameen Bank,

Bangladesh Rural Advancement Committee (BRAC) etc., are such NGOs that have been
promoting the growth of social capital in the fitness of their organisational functioning.
The GB has reversed conventional banking practice by removing the need for collateral
for having access to credit. It has created a banking system, based on mutual trust,
accountability, participation and creativity. It has been providing credit to the poorest of
the poor in rural Bangladesh, without any collateral. At GB, credit has been a cost
effective weapon to fight poverty, serving as a catalyst for promoting the over all uplift of
the socio-economic conditions of the poor who had for long been kept outside the
banking orbit, on the ground that they are poor and hence not bankable.

The founder of Grameen Bank (GB) Prof Muhammad Yunus has proved it that if
financial resources can be made available to the poor on terms and conditions that are
appropriate and reasonable, "these millions of small people with their millions of small
pursuits can add up to create the biggest development wonder."

The GB methodology, as pioneered and developed by Nobel Laureate Prof Yunus, is

almost the reverse of the conventional banking methodology. Other banks have started
with a belief that credit should be accepted as a human right, and help build a system
where one who does not possess anything gets the access to a loan. Its methodology is
not based on assessing the material possession of a person it is based on the potential of a
person. Grameen has indeed demonstrated it very well in clear terms in Bangladesh and
elsewhere where its model has been replicated, that all human beings, including the
poorest, are endowed with endless potentials.
Conventional banking is based on the principle that the more you have, the more you can
get. In other words, if you have little or nothing, you get nothing. As a result, more than
half of the population of the world is still deprived of the financial services of the
conventional banks. Conventional banking is collateral-based but the Grameen system is
collateral-free.

GB has been giving the highest priority to women. About 97 per cent of its borrowers,
clients or members are women. Its branches are located in the rural areas of Bangladesh
to reach the poor borrowers money, technology, education, training and support for
management. The repayment of GB loans has also been made easy by splitting the loan
amount in tiny weekly installments. Doing business this way means a lot more of work
for the bank, but it is a lot convenient for the borrowers.

Under conventional banking charge of lending rates does not stop unless some specific
exception is made to any particular defaulted loan. Interest charged on a loan can be
multiple of the principal, depending on the length of the loan period. GB, total interest
charges on a loan under no circumstances can exceed the principal amount, no matter
how long the loan remains unpaid. No interest is charged after the interest amount equals
the principal.

Conventional banks do not have to bother about paying any attention to what happens to
the borrowers' families following the taking of loans from them. The Grameen system
pays a lot of attention to monitoring the education of the children. It gives scholarships
and provides loan for education of children of its clients, housing etc., and takes care of
their needs in areas of sanitation, access to clean drinking water, and their coping
capacity for meeting disasters and emergency situations. The system helps the borrowers
to build their own pension funds, and other types of savings.

In case of death of a borrower, the GB system does not require the family of the deceased
to pay back the loan. There is a built-in insurance programme which pays off the entire
outstanding amount with all interest accruals. No liability is transferred to the family.

The GB system has been encouraging the borrowers to adopt some goals in social,
educational and health areas. Such goals, embedded in its 16-point agenda, include,
among others, no dowry, education for children, sanitary latrine, planting trees, eating
vegetables to combat night-blindness among children, arranging clean drinking water,
etc. It has been helping its borrowers to educate themselves and enable them to be
confident about its ability to change their lives. The costs of such education and
motivation entail no extra burden other than the rate of interest on loans at an affordable
level. The very high recovery rate of its loans bears out the affordability and reasonable
nature of its existing lending rate.

Solidarity lending is a cornerstone of microcredit. It starts with process of building social

capital. Each borrower must belong to a five-member group; the group is not required to
give any guarantee for a loan to its members. Repayment responsibility solely rests on the
individual borrower, while the group and the centre oversee that everyone behaves in a
responsible way and none gets into a repayment problem. There is no form of joint
liability, i.e. group members are not obliged to pay, on behalf of a defaulting member.
However, in practice the group members often contribute to discouraging any default
loan culture.

The borrower-members of GB save very small amounts regularly in a number of funds

like emergency fund, group fund etc., to help supplement the lending operations by the
bank. Such savings help serve as an insurance against contingencies.

In general, microcredit programme requires the formation of horizontal networks and the
creation of well-functioning links between such networks and the higher levels of
management personnel involved in running such programmes. The GB system has been
replicated in over 43 countries in different parts of the world, in view of the great
functional relevance to helping widening the access to credit particularly to a wide array
of assetless people.

The lending policy of the GB has succeeded in creating an environment that facilitates
the rural women who knew each other before to form group for working with GP. They
are individual members of the group. Their interactions at regular meetings facilitate a
collective group identity and/or promote cohesion among small groups of women. This
social capital is now our national wealth and pride.

The writer is part-time teacher in The Leading University and pursuing PdD in
Open University, Malaysia. He can be related at e-mail: shah@banglachemical.com