The Quality of Social Interaction Based On Homophily and Its Impact on Default of Group Based Lending

Abstract

Islamic Microfinance Institution with a lending group financing system was originally intended to provide easy access for individuals who were classified as non-bankable due to limited personal resources. This study highlights the impact of characteristics including: the status of social relations that may be different from each individual who receives financing benefits at the Islamic Microfinance Institution; whether classified as low or high homophily; on their default probability. The study was conducted by taking primary data from a sample of 240 customers from 2 different locations, each of 120 respondents in the province of West Sumatra and 120 respondents in Lampung province who received funding from the Islamic Microfinance Institution. To compare homophily variable relations; on the probability of default, the respondent is also combined from the debtor who experiences the default installment of financing or non-default. The data collection process uses a questionnaire that contains questions about basic demographics, in addition to questions that aim to bring up social relations status preferences. In addition, the impact of the characteristics of the external environment is also estimated using logit regression. Group-based financing, one of which is to reduce adverse selection, can have the opposite effect. The ineffectiveness of the group's role for various reasons, can be contagioned to trigger moral hazard for other group members. The study found that in addition to the status of social relations, as internal factors, the effectiveness of financing groups as an external factor determining timely payment compliance also plays an important role.