The impact paths of social capital and the effects of microfinance

Purpose - The purpose of this paper is to investigate the impact paths of the social capital and the effects of microfinance in rural China, and address effective methods to enhance the effects of microfinance for rural China. Design/methodology/approach - Using a structural equation model with survey data from 350 rural households in China, this paper analyzes empirically whether greater level of social sanctions and social relations caused more tangible effects of microfinance, and whether tangible effects of microfinance are associated with social capital formation of households. Findings - The results indicate that social capital promotes the effects of microfinance and the process of providing microfinance service is also the process of building social capital. Moreover, social sanctions diminish the effects of microfinance while social relations boost them and enhance the effects of microfinance that can encourage social capital formation. Results also show that a reverse causal relationship exists between social sanctions and social relations. Research limitations/implications - The empirical results imply that actively utilizing and creating social capital is vital to improve the effects of microfinance, and microfinance institutions (MFIs) should concentrate more on harmonious social relations and deliberately build social capital. Practical implications - These findings imply that actively utilizing and creating social capital is vital to improve the effects of microfinance, and the MFIs should concentrate more on harmonious social relations and deliberately build social capital to enhance the effects of microfinance while prudently use social sanctions. Social implications - Enhancing the effects of microfinance, while prudently using social sanctions, increases households income. Originality/value - This paper originates to investigate the links between the social capital and the effects of microfinance in a mutual way, and the results urge more attentions on the harmonious social relations which have been ignored to enhance the effects of microfinance.