Trustful Banking: A Psychological Game-Theoretical Model of Fiduciary Interactions in Micro-credit Programs

In many underdeveloped areas, rural villages in Asia or Africa as well as poor and segregated neighborhoods in Western cities, micro-credit initiatives have revealed to be an efficient instrument to overcome the credit-rationing problem and to promote social, economic and human development of the ‘poorest of the poor’. The success of many of these programs is difficult to account for within the traditional explanatory framework, that, mainly because of the assumptions of self-interested behavior and asymmetric information, predicts adverse selection, opportunistic behavior and, as a consequence, credit rationing. In practice that means that credit will be provided only to those able to back it with collateral. However, micro-finance initiatives (MFIs) that require neither collateral nor joint liability2 tend to experience unusually high rates of repayment. Many authors suggest that in micro-finance programs traditional material incentives to repay the loan are substituted by other forms of social and dynamic incentives (i.e. loss of reputation, the risk of ostracism, non-refinancing threats). Although such explanations stress the importance of key factors, they nevertheless neglect another, more pristine element, most notably, interpersonal trust.