Many development programs, ranging from microfinance to technology adoption to health projects, are affected by the social relationships and trust between community members. However, what types of social connections foster the most trust and what types of communities have high or low levels of trust is not well understood. Additionally, it is not always clear through what mechanisms trust and social connections impact microfinance and other development projects. Finally, a major problem in microfinance is reaching borrowers who don’t qualify for or who don't want to join communal banks. Therefore, a better understanding of the role and value of social connections in communities can help practitioners design more efficient and successful interventions as well as extend credit access to those not reached by traditional microfinance.

In Peru, IPA is working with PRISMA, a Peruvian NGO with a large micro-lending program, to investigate trust in social networks in poor communities. The current project aims to (1) measure trust in different communities and analyze the community determinants of the different valuations, and (2) test a novel microfinance model combining individual loans with screening and enforcement features originally developed for group lending schemes.

The study introduces a new loan product in 20 low-income communities. Existing communal bank members act as a pool of potential sponsors who can co-sign small, individual loans for residents of the community who are not bank members. Social network surveys conducted in the communities before the implementation of the loan program allow us to map the relationships between clients (residents of the community who receive a loan) and sponsors (members of existing communal banks who cosign on loans). By varying interest rates between sponsors we can examine the extent to which a lower interest rate is valued over (or under) a close relationship to the sponsor. After the loans are given, IPA can track how repayment rates vary by sponsor-client relationship. Additionally, because the program relies on the savings guarantee of the sponsor, it is a low-risk way for PRISMA to explore extending credit to people that lack the traditional prerequisites. It also provides an opportunity to study the incorporation of individual lending practices into an existing group-lending structure.