Dynamics of social capital and management systems in effective delinquency management of Philippine microfinance institutions

The various lending programs aimed at assisting the low-income population resulted in very low loan repayment rates for decades, making these development initiatives unsustainable. Hence, microfinance started gaining popularity in the 1990s as an alternative, sustainable credit mechanism for the poor. The design and control mechanisms of microfinance, however, do not guarantee that providers will not suffer delinquency problems. In the Philippines, microfinance institutions usually experience good repayment rates during the first two years of operation, but by the third year, delinquency problems set in. Still there are microfinance institutions that were able to sustain operations beyond this period and exhibited good delinquency management performance from 2008 to 2012. This study therefore aims to answer this research question: why are some microfinance institutions more effective than others in managing delinquency? The research problem was analyzed from the institutional standpoint and the borrowers\u27 perspective. The analysis was built on institutionalism, development studies, and agency theories. Comparative research method was used with ASA Philippines and Kasagana-Ka Development Center, Inc. (KDCI) as case subjects that consistently meet the 5% PAR standard. The resulting common variables between these MFIs were then examined if present in the MFIs that do not meet the said standard: Center for Community Transformation (CCT) and Tulay sa Pag-Unlad Development Corporation (TSPI). This study concludes that social capital makes the borrowers stay in the program and encourages good repayment. Although it is a necessary condition, it in itself is insufficient for effective delinquency management. Social capital is dynamic in that it may or may not work to the MFIs\u27 advantage and that it may compensate for the weakness of the MFI\u27s management system. In turn, the management system may make up for the low level or absence of social capital, and cushion and/or counter its negative externalities