Low access to formal credit persists in most of developing economies also in Indonesia. Most of households especially in rural areas do not familiar with formal credit. Therefore, formal credit institution needs a mediation or substitution. Recent studies argue that social capital could to a better flow of information between creditors and borrowers and hence less adverse selection and moral hazard in the market for credit. The guarantee of groups and pressure by social network also are important techniques to improve credit performance. The relation between social capital and credit access is an interesting issue since the promotion of formal credit facilities in rural areas is argued as an important policy in reducing poverty level. The aim of this paper is to describe the connection between social capital and access to formal credit, especially from commercial banking in the case of a Javanese village. To describe the connection, this paper will seek what are the different characteristics between household that having access to commercial credit and the other group of households. However, since there is also an argument that social capital does not guarantee poor people to access formal credit, this paper also analyse other important variable namely ‘social position’ of the head of household in their rural community.
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Paper provided by EconWPA in its series Finance with number
0507016.