Preliminary draft: For comments only of the Workshop on Finance of Solidarity

AN OVERVIEW OF SOCIAL CAPITAL
Towards an Understanding of the Normative Principles of 
Finance Of Solidarity  

by Benjamin R. Quiñones, Jr.

1.	Introduction

In many countries today, both developed and developing, the state pays for collective goods out of the taxes it collects, hence people are less dependent than in the past on voluntary joint action.  State action in creating certain collective goods is oftentimes not a good substitute for voluntary joint action of committed groups of people.  State-run projects purportedly for the benefit of certain disadvantaged groups of people do not always end up mitigating the problems they were meant to address, but rather they complicate or even aggravate the problems. On the other hand, the dearth of social capital or the lack of social arrangements that facilitate voluntary collective action by the people renders state intervention essential to overcome market failures and the absence of certain well-functioning market institutions in order to bring about the desired collective good. 

Definition of Social Capital

‘Social capital’ is defined by social scientists in several, yet inter-related, ways.  One approach is to define social capital as the ability of people to cooperate and act together in order to overcome collective action problems and achieve common objectives (John Montgomery, 1997).  Another way of putting this is to look at social capital as an accumulated stock of cooperation that facilitates social arrangements (Danny Unger, 1998). The stress here is on the social skills endowments or the capacity of a group of people to cooperate, construed as an accumulated asset.  This perspective allows researchers and analysts to treat social capital in much the same way as human or financial capital, i.e. as a development resource that can grow, diminish, or totally consumed. 

Another way of defining social capital is to view it in terms of enduring cooperative and cohesive groups (Unger, 1998) or dense networks of social groups (Robert Putnam, 1993) within which individuals can reach compromises and foster shared understandings of common problems.  Putnam suggests that dense networks of social groups facilitate cooperation in pursuit of common goals in several ways.  Networks promote recurrence of cooperative undertakings and the building of linkages among actors in different activities; they inculcate norms of reciprocity; they enhance information flows (including reputations for trustworthiness); and they establish common understandings of frameworks within which collaboration can occur.

Social capital is viewed in this instance as an institutionalized form of cooperation.  The focus here is on the institution that resulted from the cooperative efforts of individuals. Social capital in this context can be depicted in terms of the norms, values, practices, and behavior that arise from collective action and which distinguish a social organization.  Because institutions manifest only the features of successful processes of cooperation and conceal those that failed, social capital may also be defined as the fossil record of successful past efforts to institutionalize ongoing cooperation (Danny Unger, 1998)

As a stock concept, social capital displays only the features of cooperation that have materialized as of a given time.  But since social capital can grow, diminish or totally consumed, it is also important to consider the changes in social capital over time. Montgomery (1997) argues that social capital is not a static dimension of social organization, since it incorporates changing sets of attitudes and behaviors as they respond to challenges and issues of the moment. Thus, social capital may also be viewed as flows or processes of cooperation occurring over a given period and comprising of different, sometimes conflicting and divergent efforts of collective action undertaken by an organized group or groups of people.  As a flow concept, social capital depicts the dynamics of cooperation in which the different interests of individuals participating in the collective action are influencing and at the same time being influenced by the decisions of other individuals.

Objectives of the paper

This paper aims to shed some light on the process of social capital formation particularly in the microfinance sector and to propose certain normative principles of Finance of Solidarity, treated in this paper as a collective good.  The paper also aims to argue the case for a more in-depth study on the manner in which the normative principles of Finance of Solidarity are expressed in the social contexts of different communities in developed and developing counties. Towards this end, it is hoped that the issues flushed out in the ensuing discussions of the paper could aid in shaping the proposed research study and the subsequent roundtable deliberations of the Workshop on Finance of Solidarity.

Organization of the paper

This paper is organized in six sections. The first section is the introduction. It presents the definition of social capital and the objectives of the paper and its organization. 

Section 2 reviews the literature on the impact of social capital on development.  It is hoped that the review will help in visualizing how social capital can be applied to the context of Finance of Solidarity as a specific form of a collective good that results from collective action. 

Section 3 explains the dilemma of collective action and cites some cases for resolving the dilemmas which result either in the re-investing of social capital or its consumption.  

Section 4 looks at two facets of the process of social capital formation: the acquisition of knowledge, skills, attitudes and practices; and the building up of interpersonal trust. 

Section 5 examines the core values that influence the rational choice of individuals and the components of these values that are embedded in specific social contexts. Important in understanding the context of the discussions in this section is the assumption that Finance of Solidarity can be regarded as a collective good that could be attained by tapping on the social capital of local communities. An attempt is subsequently made to suggest certain normative principles that could represent people’s aspirations for such a collective good.  Two levels of perspective are presented in this section, one from the viewpoint of the author as a researcher, and another at the level of the client-entrepreneurs – the poor households – who were interviewed by the author to elicit their perceptions. 
 
Finally, Section 6 presents the summary and conclusions of the paper.  

2.	Impact of Social Capital on Development
 
Social capital increases the productivity of physical resources

James Coleman, regarded as the one who set the standard for work in this field, advance the argument that like other forms of capital, social capital is productive: it makes possible the achievement of certain ends that would not be attainable in its absence (cited in Alex Inkeles, 2000).  Coleman’s proposition finds support in a study in Thailand showing that Chinese entrepreneurs drew on community social capital in developing their economic enterprises. (Pongpaichit, Pasuk and Chris Baker, 1996).  Shunning formal contracts, the Chinese relied on relations of trust in gaining business opportunities. (Kunio Yoshihara, 1988)

Yoshihara further shows that social capital may work as a multiplier increasing the stimulus stemming from a given commitment of resources.  He noted the superior educational performance among South Korean children compared to Thai children despite comparable commitments of public resources.  

Danny Unger (1998) observes that, like physical infrastructure, social capital can increase economic productivity and has considerable positive externalities. The social capital endowments of a society influence the institutions that are likely to emerge, the ways in which they operate, and the degrees of success they enjoy in reaching the goals favored by their dominant members.  The dearth of social capital induces relatively small firms (primarily household enterprises employing family labor), most of which would not have linkages with large business groups with interests spread across economic sectors. Low social capital also induces relatively weak organizations of small and micro-enterprises, whether to secure the privileges of oligopoly or more economically beneficial forms of cooperation. 

Social capital increases prospects for reducing transactions costs and for alleviating poverty 

Bonacich and Modell (1980) advanced the idea that social capital can influence transaction costs that confront firms, the extent of agents’ opportunism, and the prospects of using norms of reciprocity and trust to overcome a variety of market failures. They observed that because of higher levels of social capital, middleman minorities in general have access to production factors at lower cost.  Specifically, they also noted that high levels of trust in communities, reinforced by overlapping economic and social memberships that foster community closure and concern to maintain reputations, can result in lower cost of funds and in enhanced access to information and economic opportunities, and may even induce workers to accept lower wages if they anticipate later assistance in setting up independent businesses. 

Given such positive impact on productivity and cost effectiveness, would social capital formation also contribute directly to poverty alleviation?  Putnam (1993) suggests a positive answer to this question. He cites Arrow to argue that poverty may result where there is little trust and the study of Montegrano in southern Italy by Banfield in support of this argument. Banfield found that poverty among people in the village was a consequence of villagers’ inability to extend cooperation beyond the nuclear family. Having reviewed the same literature cited in this paper, Danny Unger (1998) noted that in communities where there is little interpersonal trust among individuals, there are few and effective cooperative organizations of the poor or consumer groups designed to overcome collective action problems.

Social capital enhances good democratic governance, larger firms or organizations, and more successful alliances

Francis Fukuyama (1995) maintains that trust enables people to work cooperatively in large privately owned firms. It might then be expected that communities with abundant social capital would exhibit good democratic governance and would have comparatively more large private firms. In contrast, low social capital endowments would correlate with smaller firms, fewer and less successful distributional coalitions, and looser, more pluralistic forms of interest aggregation. Using Fukuyama’s reasoning, Unger stated that large public organizations should also operate more effectively where social capital is abundant.  After all, large organizations of any kind need much information exchange to operate effectively.    

Social capital induces more effective state apparatus

Given the dearth of linkages of the poor and their micro-enterprises with big corporate firms as well as with national networks of resource providers, there is a case for developing stronger ties between social organizations of the poor and the state.  We can use Unger’s three arguments to explain why building up social capital among the poor can strengthen the reciprocal interaction between state and social groups or networks of the poor.

First, autonomy of state agencies makes them better able to transform the society they govern; but autonomy can mean isolation, and it can undermine state officials’ efforts to achieve policy goals. Isolated, officials may have inadequate access to information and be unable to create effective political coalitions that reach out into society and draw on the support of social groups

Second, state officials draw on traditions of social organization and broad value-orientations similar to those of others in business and society more generally. State officials need footholds to extend their authority out into society, otherwise they face an undifferentiated, atomized society they must organize themselves with the help of an extensive bureaucratic apparatus. They need to draw on traditions and value-orientations of social groups in order to enhance their ability to govern.  

And third, the ability of top officials to shape both society and state depend on their capacity to harness the organizational resources of social groups as well as to create for themselves a degree of autonomy.   State officials draw on resources of social groups and authority structures to enhance their power.  

State officials’ links to social groups are important because they afford political support for officials’ initiatives and information about general political conditions.  Effective state-led economic growth or a functioning capitalist developmental state may be rooted in a society well enough organized to aggregate and express its interests to state officials and mobilize social support for state initiatives. 

Social capital facilitates mobilization of community savings and spread of credit

Close to the interest of the Workshop on Solidarity of Finance is the impact of social capital on the establishment of a financial system in local communities. The economic historian Carlo Cipolla observed that social capital and state enforcement worked together in the development and spread of credit during the Renaissance in Europe (cited in Putnam, 1993). Identification with communities helped broaden circles of trust and, with the backing of law, facilitated the mobilization of the community’s savings.

In Asia, Unger observed that kinship and informal business networks helped the Chinese raise credit overseas.  A typical progression for Chinese entrepreneurs was to begin in trade, then to move into financial activities, and, particularly with the manufacturing boom that began in the late 1980s, into industry.

3.	The Dilemma of Collective Action

It is instructive at this juncture to define a few terms that are instrumental in elaborating the concept of social capital. People cooperate and act together in order to overcome collective action problems and achieve something that benefits all members of their community.  The desired goal is called a collective good: something that none of the members of the community could achieve individually and that benefits the entire group, including those who have not helped to being it about (Abram de Swaan, 2001).  The kind of cooperation that produces the collective good is called collective action. 

One of the enduring problems of many communities in developing countries is the lack of access to the formal banking system. Households in these communities are largely dependent on agriculture and they try to survive on seasonal income from one harvest to the next.  These households have no recourse but to borrow, if they can, from private moneylenders at unusually high rates of interest at times when available cash is low or insufficient to meet their liquidity requirements. 

A solution to this problem is to pool the unspent income of households into a common fund from which one can borrow in times of need and at a reasonable interest rate.   But to set up a credit fund for the entire community is far too big a job for one household or individual. This gives rise to a collective action problem: an individual may not want to do anything about the desired goal, i.e. set up a community fund, for fear that his action may leave him worse off than before. This phenomenon is called the dilemma of collective action.

De Swaan depicts the dilemma of collection action as a choice of four possible decision outcomes that confronts an individual. From the viewpoint of the individual, the best outcome is if the credit fund is established without her having to do anything and she can still enjoy the fruits of the initiative.  The next best outcome is if the credit fund is set up even though she has to contribute some of her personal funds in it. The third option is a bad outcome - if the others do not contribute their own money it is better to follow suit, so nothing will be done. The fourth and worst outcome is if the others do not contribute, and she makes a contribution, her contribution is for nothing.  

Cooperation and solidarity as a means to resolving the dilemmas
 
How do people solve the dilemma of collective action?  Solutions to the dilemma may be arrived at through the use either of persuasion or the threat of force.  A solution to the dilemma can be provided by local leaders who could contrive collective action and form individuals into ‘self-help groups’.  Leaders who rely on persuasion must first dispel the mutual distrust among people in the community. They must then facilitate some kind of shared agreement about how the local credit fund system will operate, detailing the terms and conditions of the credit fund as well as the procedure for lending and collecting payments. 

In the Philippines, local initiatives at collective action are invariably called ‘bayanihan’.  In the Filipino mind, ‘bayanihan’ evokes the traditional image of a group of local people carrying on their shoulders a small farm house made of bamboo and grass to transfer it to a new site which may appear to be a ‘better’ location, at least from the houseowner’s viewpoint.  Thus, in the Philippine context, solidarity of a community is casually gauged in terms of the extent to which ‘bayanihan’ is practiced. 

Collective action induced through persuasion – the case of a local cooperative

The spirit of ‘bayanihan’ is plainly demonstrated in the case of the Sto. Rosario Credit Cooperative Inc. (SRCCI), a local cooperative established in the early 1960’s (B. Quiñones and H.D. Seibel, 2000). SRCCI was founded by a group of neighbors and friends in a village called Sto. Rosario. They saw the need for collective action in addressing their recurring need for credit to finance their farm operations.  The leaders fostered the policy of self-reliance, which meant relying on members’ savings and covering costs from revenues to make operations financially sustainable. This also meant that the leaders had to take painstaking and consistent effort to build and enhance mutual trust among households who contribute their savings to the common fund. 

Developing mutual trust is an on-going, oftentimes slow process. It involves balancing the organization’s desire to expand outreach by catering to the demands of both old and new members vis-à-vis the organization’s safeguards against ‘bad’ borrowers.  It took the cooperative 30 years to establish an outreach of 30,000 member-clients, an achievement certain modern MFIs can pull off in a few years with the help of donor funds.  But SRCCI possesses one enduring characteristic of a self-reliant local financial intermediary typically lacking in many contemporary MFIs: the capacity to withstand external shocks. The spirit of ‘bayanihan’ fostered by the cooperative from its inception helped it to withstand the shocks of financial repression in the 70’s and the 80’s, as well as the adverse effects of the Asian financial crisis in the late 1990’s.  SRCCI today holds the distinction of being one of the few really strong cooperatives in the country.   

Collective action facilitated by external threat – adverse impact on other cooperatives 

Few cooperatives in the Philippines have grown to become financially self-reliant local financial intermediaries.  In most cases, cooperatives were organized by an external agent – a governmental agency or a non-governmental organization – who comes to the village and introduces a pre-designed credit program.  It would no longer be advantageous to households in such situation to let others participate in the external agent’s credit program since this would mean missing out on the benefits of the program. So now everyone would assume that each of the other households would cooperate to adopt the credit program for fear of being excluded from it and the associated benefits.  Exclusion from a public good can be a form of ‘punishment’.  The threat of punishment prompts the households to cooperate with their neighbors and to take the collective action they most wanted to do, but which they not bring themselves to do because they were paralyzed by mutual distrust. 

Experience in the Philippines shows that external coercion or the threat of punishment can have the effect of voiding mutual suspicion.  In the early 1970’s, the Philippine government decreed that farmers should form into cooperative organizations in order to avail of low-cost credit from government-supported credit institutions. It was then a period of financial repression during which ceilings on interest rates to special target groups (e.g. farmers) were imposed and the government used local institutions such as farmers’ cooperatives and rural banks as conduits of government loan funds.  Those who did not join the cooperative were effectively barred from availing bank credit. Being denied the opportunity to borrow from the bank constitutes in itself a form of severe penalty, considering the great importance placed by farmers to having access to banking services.  Social ostracism is another form of punishment:  those disqualified from bank loans were looked down upon as ‘backward’ farmers, implying that they were eschewing modern farm techniques, while those who availed of bank credit were prevailed upon to use fertilizer and modern farm practices and were henceforth called ‘modern’ farmers.   

Government policy could actually weaken local organisations such as cooperatives when they are induced to adopt a pre-designed credit scheme in exchange for access to low-cost funds. Such policy could damage the resolve of cooperatives to adhere to the principle of self-reliance and to strive to become a financially self-sufficient local financial intermediary. The experience of Inner Wheel Multipurpose Cooperative (IWMC) illustrates this point.(B. Quiñones and H.D. Seibel, 2000).  IWMC started as a self- reliant organization, depending mainly on members’ savings for its loan funds and striving to be financially sound by covering costs from revenues.  But it abandoned its savings mobilization effort when the governmental agency, the Philippine Credit and Finance Corporation (PCFC), opened to the cooperative its lending program which extends wholesale loans to institutions at a low interest rate provided the cooperative adopts the Grameen Bank approach in lending to the poor.  

To be sure, this initiative has advantages.  The force of government policy dispelled doubts about the suitability to conditions at home of a microfinance approach (i.e. Grameen) ‘imported’from another country, and facilitated the adoption of a system that permitted cooperatives to do what they wanted to do – alleviate poverty through microcredit.  Moreover, more funds can be made available immediately to local borrowers than it would be if the cooperative relied on local funds. On the other hand, the policy of substituting cheap government money for local funds subverts the cooperative’s effort of savings mobilization and it undermines its long-term growth prospects towards becoming a self-reliant local financial intermediary.

4.	The Process of Social Capital Formation

The dilemma of collective action at the community level contains within its womb the seed of social capital.  As noted, dilemmas of collective action arise when a number of individuals or groups are aware that they have a common problem but which they cannot resolve through individual effort.  Individuals realize that a collective solution exists, that they need one another to achieve the collective good desired by everyone, but at the same time individual preferences, wants, and desires are not coordinated to produce a harmony of interests, and not one is yet capable to mediate and effectively coordinate these interests.  They do not yet constitute a solidarity (De Swaan, 2001). 

When an agency or actor succeeds in mobilizing people, enabling them to dispel mutual distrust and motivating them towards collective action, then the people start cooperating.  When people begin to cooperate, they create a new form of social capital.  It is from this cooperation that solidarity and the collective good result.
 
It is at this point that a coordinator (e.g. a local leader or an external agent from a governmental agency or NGO) will be most effective in mobilizing people for collective action. The coordinator’s first steps in social mobilization must be oriented to win the sympathy of the people, considering that distrust is not easy to dispel among poor households .  Nor would the poor immediately put their full trust on the coordinator especially when it concerns money.  The coordinator should, therefore, be able to capture the people’s attention so that she can sustain the process of social mobilization from its inception and gain time to train the members thoroughly until they gain confidence in governing their own affairs.  

Acquisition of knowledge, skills, views, and attitudes pertinent to collective action

An important aspect of the formation of social capital involves the acquisition of knowledge, skills, views and attitudes that are pertinent to the effective implementation of the collective action.  Individuals involved in a collective action go through a learning process in which each person develops into a competent member of a social organization or community.  

The kind of social organization that usually emerges from voluntary joint action of local people is typically called the self-help organization (SHO) or the self-help group (SHG).   Both leaders and members of SHOs learn how to manage their own funds and organizational affairs largely by doing.  In the course of their operations, they may get linked to governmental and non-governmental agencies as delivery channels of certain services and resources intended to benefit certain target group(s). 

Transforming informal to formal organizations

Many SHOs chose to register their group as a cooperative because the principles of cooperativism go well together with their beliefs and inclination towards collective action. Predominant as they are in rural settings, agricultural cooperatives are seriously handicapped by the low levels of literacy among their leaders and members. In microfinance, the member-clients of the SHO need to know the procedure for borrowing and repaying the loan, the procedure for saving money and drawals of deposits, the procedure for conducting weekly meetings, etc. Members must also learn the different types of financial products offered by the microfinance institution, and their terms and conditions.  Unfortunately, the training imparted to members by many agricultural cooperatives is severely constrained by the leaders’ own limited knowledge about banking and finance. Consequently, professionalism in managing savings and credit operations is generally low among agricultural cooperatives.  

Another weakness of cooperatives as potential delivery mechanism for financial services to the poor is that they are essentially ‘open’ networks which allow almost every household in rural communities to become a member - perhaps inevitably since majority of households in the rural areas depend on farming.  The relevant point is that, as borne by research findings, ‘open’ networks tend to be associated with lower levels of trust among members. We shall come back to elaborate this point in the next section, but for now this piece of evidence serves to indicate that the capacity and effectiveness of cooperative in mobilizing local communities towards building financially self-sufficient local financial intermediaries has been weakened by the lingering distrust of people in the cooperative as a vehicle for collective action. 

Reinvesting social capital to fight poverty

Notwithstanding the weaknesses of cooperativism, both governmental and non-governmental agencies use the cooperative organization as a means for mobilizing local communities for collective action.  Some of these agencies have refashioned the social arrangements inherent in the cooperative organization in pursuit of certain collective good.  Among them, Grameen is one of the most successful in reinvesting the capacity of people to cooperate, shaping it into a motive force to fight poverty. 

The Grameen Bank approach (GBA) gives rise to a ‘closed’ network of small groups of poor women, an important factor of its success.  It enforces stiff entry barriers to maintain its focus on poor women by gathering detailed information about the target group and by using a rigid selection criteria to bar the non-poor from access to its services. Grameen’s methodical and intensive training is purposely designed so that its staff and clients will learn by heart and adopt in their daily lives the attitudes, practices, and underlying norms and values of the Grameen Bank approach. Grameen clients are trained to participate in weekly center meetings with compulsory punctual attendance, where a pledge is sung and payments are transacted with a Grameen branch officer in the presence of all members. The clients are also trained to commit to memory and practice in their daily lives Grameen’s Ten Decisions of personal discipline. Even the financial contracts of Grameen - comprising a series of one-year repeat loans to individual borrowers, repayable in weekly  installments, with a five percent up-front deduction to be paid into the group’s emergency loan fund - are so designed to inculcate credit discipline (Quiñones and Seibel, 2000). 
       
The process of mobilizing and organizing people for voluntary joint action takes time and money. The question of who bears the cost of this process is largely settled by the coordinator.  In SHOs, the local leaders who take the initiative of mobilizing people to collective action are the first ones who make sacrifices in terms of both time and money, and they expect all cooperating individuals to follow their example.  What motivates SHO members to make sacrifices?  This is another issue that will be dealt with in the succeeding section. It is sufficient at this stage to recognize that the cost of social mobilization is largely borne by the cooperators themselves, but because voluntary services are often not assigned any monetary value in evaluation studies the substantial costs are virtually hidden from the public view.

Inevitably, the cost of social mobilization surfaces out when an external agency, be it governmental body or NGO, taps the people’s capacity to cooperate to achieve a collective good -  credit system  for the poor, for instance. Based on the experience of microfinance institutions working with the poor, the cost of social mobilization is generally known to be quite substantial. How this cost should be covered and by whom is an issue that remains unresolved even today.

Building Interpersonal Trust

Crucial in the process of social capital formation is the building up of interpersonal trust. A group of individuals may be able to acquire knowledge and new skills, but if they do not trust each another deeply enough, each individual’s level of commitment to the group will be low and the group is more likely to disintegrate sooner or later.  

Strong solidarity and bonds of trust are found in communities that have high entry barriers, such as Jehovah’s witnesses, Mormons, or Japanese. (Francis Fukuyama, 1995). It thus seems that interpersonal trust is directly related to the extent to which organizations exhibit “closure”.  The more restrictive the membership entry, the greater are the chances of the organization or community to attain high levels of commitment from their members (James Coleman, 1994). 

Why is this so? In small, closed networks, it is fairly easy for individual’s actions to impose costs on others (Coleman, 1994), such as when a member-client fails to pay her loans.  Norms of behavior are, therefore, easier to enforce in ‘closed’ networks and they become more effective in further strengthening the mutual trust of members and their confidence in their own organization. Because ‘closed’ networks adhere to a code of conduct, whether written or unwritten, they tend to make it easier for members to understand and learn the pattern of behaviors and practices that they must conform to in order to become trusted members. 

In contrast, it is rather difficult in ‘open’ networks to sanction those who impose costs on other members (Coleman, 1994).  Such costs may ensue from failure to comply with periodic loan repayments, poor attendance of weekly meetings, or unresolved inter-personal conflict with other members. These costs are burdens that weaken the capacity of people to cooperate.  Typically, an easygoing delineation of boundaries between ‘us’ and ‘them’ (e.g. between bona-fide members and non-members; between ‘good’ and ‘bad’ member-borrowers, etc.) is associated with lower levels of trust. 

Against this backdrop, the Grameen practice of exclusive targeting of poor women and the concomitant exclusion of the non-poor and not-so-poor elements of society from the credit program does not only serve the purposes of poverty alleviation. It also has the effect of facilitating interpersonal trust among individual members.  The strict entry barriers of Grameen Bank are even more effective in urban settings where individuals are strangers to their immediate neighbors, and are apt to encounter others only in specific contexts. 

5.	Values as goals and aspirations

Earlier, we asked the question: ‘What motivates the SHO members to make sacrifices?’ One might say the profit motive, but that is not totally correct in all cases. The winner of the 1998 Nobel Prize in Economic Science Amartya Sen suggests that not all utility or rational choice is a function simply of maximizing one’s economic self-interest (cited in John M. Heffron, 1997).  A father, for instance, may make a perfectly rational choice to sacrifice some of his welfare for the sake of his children, not seeking market goods and goals, but nonmarket aspirations such as love and trust. Sen argues that when individual preferences take into account altruistic social considerations they reflect “values” in general and not simply “preferences”. Moreover, the results of social interaction often produce unintended value formations for which it may be difficult to find a simple economic measure (Heffron, 1997).  

This is particularly true in the case of Finance of Solidarity, which is not simply a finance and microenterprise development activity but plays a social function as well.  Solidarity of Finance has led to a value formation that puts a premium today on empowerment of women, the poor’s right to development, and participation of the poor in policy determination. It has also produced new modes of individual freedom for the clients (e.g. access to education by children of clients, thus enhancing the status of their households in the community; Grameen clients subscribing to Grameen phone to engage in telephonic communication, boosting not only the business capacity of clients but also their social standing in the village). It has also spawned new coordinators of collective action (e.g. the modern ‘microfinance bank’ in the Philippines and in some Eastern European countries; the self-help promoting institutions of India; microfinance apex funds represented by Palli Karma Sahayak Foundation of Bangladesh, etc.), thus creating a new discipline in the art and science of finance and bestowing on the workers of the new discipline the singular distinction of belonging to ‘an entirely new breed of bankers for the poor’.        

Finance of Solidarity can therefore be construed as a collective good desired by people not only for its economic benefits but also for nonmarket aspirations or social considerations. Expectedly, the questions will be asked: “What are these nonmarket aspirations or social considerations?” “How can they be classified into core values unto which we can map the motley of beliefs and attitudes of people in different societies?”  Social scientists have dealt with these questions and came out with alternative ways of classifying values. 

A classificatory scheme used widely in social and political sciences is the Lasswell Value Dictionary (LVD) (cited in Heffron, 1997). It consists of eight (8) terms: Power, Enlightenment, Wealth, Well-Being, Skill, Affection, Respect, and Rectitude.  The Foundation’s Workshop on Finance of Solidarity substituted alternative terms for some of these categories, but for purposes of this paper, we will use the LVD terms. Montgomery (1997) offers a definition below that treats these eight core values as constituting the various facets of the individual’s basic human rights. 

Structuring the Normative Principles of Solidarity of Finance

With the Lasswell Value Dictionary providing the framework for classifying the aspirations of people with respect to the collective good ‘Finance of Solidarity’, we now need to construct suppositions or expectations of how ‘Finance of Solidarity’ will affect the core values of individuals. We shall maintain the assumption that Finance of Solidarity is a collective good desired by people.  What impact do we expect ‘Finance of Solidarity’ will have on value formations? Is‘Finance of Solidarity’ expected to enhance the empowerment of poor women? Will it improve the well-being of individual clients? Is it expected to increase the income and wealth of the clients? Will it increase the opportunities for gainful employment and income- generating activities of the clients?  Will ‘Finance of Solidarity’ enable the clients to fully attain all of these aspirations, or will it lead to the attainment of some but not the others?  

Shown below are the general suppositions suggested by the author on the normative principles of Finance of Solidarity – principles that guide the behavior of the practitioners of Finance of Solidarity.  To determine how member-clients of microfinance institutions perceive these values, the author conducted a panel interview of 60 sample members of Bayanihan Financial Centers (FCs) in MetroManila, Philippines with the help of VEDCOR (Ventures and Entrepreneurship Development Center in the Orient, Inc.), the NGO coordinating the FC program. Of the 60 interviewed, only four (4) were men, the rest were women. 

Due to time constraint and budget limitation, the panel interview was conducted in three groups, one after the other. The first group consisted of 20 respondents, the second group 10 respondents, and the third group 30 respondents.  The responses of the first group were validated by the second and third groups, and the responses of the second group were validated by the third group only. Owing to these limitations, the specific dimensions of the values suggested by the sample FC members should be construed as raw perceptions of a specific group of people. These dimensions may vary with the composition of the respondent group and over time. 

1.  Power – the right to exercise some influence in the decisions of groups and organisations.   Finance of Solidarity should increase the political capacity of individual clients to effect change not only in their own lives but in the lives of others.  When asked for specific dimensions of how they perceive the right to power, the 60 sample members of Bayanihan Financial Centers (FCs) suggested the following norms:

•	The Bayanihan FC should be owned and managed by the members.
•	All FC members should determine the terms and conditions of savings and credit
•	All FC members should decide the allocation and use of all FC money
•	All FC members should use the information supplied by external agencies for the benefit of their organisation and themselves individually
•	All FC members should share information on Bayanihan FC to family, friends, and neighbors
•	All FC members should decide on the legal personality of their organisation 
•	All FC members should be involved in approving loans
•	All FC members should have 100% attendance in weekly meetings
•	All FC members should have 100% remittance of weekly savings
•	All FC members should observe the rules and regulations of the organization
•	Every FC member should become a trainer-coordinator of new FCs

2.  Enlightenment – the right to gain and exchange information about the nature of one’s surroundings.  Finance of Solidarity should create the desire and capacity for further learning to develop the full potential of the individual. The sample FC members suggested the following norms on the right to enlightenment from their point of view:

•	All members should participate in the FC training programs
•	All members should have entrepreneurial skills 
•	All members should be a trainer of prospective FC members
•	All members should have leadership skills
•	All members should have basic financial management skills
•	All members should have skills in cooperation, social interaction/ interpersonal communication

3.   Wealth – the right to retain the fruits of one’s labor. Finance of Solidarity should raise capital-generating and income-earning potential through microfinance, enterprise development, and other associated services. The specific dimensions of the right to wealth suggested by the sample FC members are the following:
 
•	Amount of earning/total assets of each member should increase yearly
•	Amount of networth or equity of each member should increase yearly
•	Amount of loan of each member should increase yearly
•	More children of the members should be attending school/ taking higher education
•	All members should have property rights over their new assets
•	The FC should become a lending investor

4.   Well-Being -  the right to enjoy the positive attributes of one’s physical or psychological nature. Finance of Solidarity should contribute to an improvement of the health prospects of the people by enabling them to avail of health and hygiene services including physical, emotional, psychological and spiritual sources of wellness. Sample FC members suggested the following specific dimensions of the right to well-being:

•	All members should have good health (no physical/mental illness)
•	All members should be smiling more frequently
•	All members should be well groomed and clean
•	All members should participate in the discussions
•	All members should extend help to fellow members
•	All members should have fear of God

5.   Skill – the right to develop one’s talents for creative, recreational, or aesthetic purposes.Finance of Solidarity should improve the quality of the work force through entrepreneurship development, vocational skills training, apprenticeship programs, and basic literacy classes. The specific dimensions suggested by the sample FC members are:

•	All members should apply their latent and existing skills
•	All members should acquire new knowledge and skills and apply them
•	All members should contribute to skills development of others
•	All members should have new opportunities and options for employment and income generation as a result of new skills learned

6.    Affection – the right to associate with relatives, friends, colleagues, and others with whom one shares values. Finance of Solidarity should reaffirm family and community values through teach-ins during the weekly meetings.  The specific dimensions suggested by the sample FC members are:

•	All members should not exploit or take advantage of others
•	All members should help in conflict resolution/ problem solving
•	All active members should visit inactive or delinquent members
•	All members should feel safe in confiding their problems to others
•	All members should help the sick
•	All members who cannot pay their loans should be assisted to find a solution: expulsion should be the very last resort
•	All FC problems should be discussed by members among themselves only

7.   Respect  -  the right to participate in the social order without discrimination on grounds of ascriptive characteristics. Finance of Solidarity should raise the level of tolerance of diversity through multicultural learning and teaching during weekly meetings and exchange programs between FCs.  The sample FC members suggested the following specific dimensions:

•	All members should accept the diversity of savings capacity among individuals
•	All members should accept one another as they are, irrespective of creed, color, religious affiliation, and physical conditions (e.g. HIV-AIDS affected individuals)
•	All members should listen to and use the experience of others to increase their own understanding of the issues and concerns
•	All members should repay their loans in full on time (i.e. 100 % on-time repayment)
•	All members should observe and comply with the rules and regulations mutually agreed upon by the majority of members
•	The FC should publish regularly the FC income and expenditures statement for information of the members
•	All members should observe proper manners in speech (no cursing)   

8.   Rectitude -  the right to observe one’s moral standards freely and to award and receive just recognition of one’s lawful rights. Finance of Solidarity should provide a moral standard of right and wrong either through religious instruction or through more cognitive approaches such as values clarification or values formation classes.The specific dimension suggested by the sample FC members are:

•	All members should stop their vices
•	All members should register their respective marriages
•	All members should attend worship service in their respective churches
•	All membes should enroll their children in the savings program
•	All members should avoid financial fraud and corruption and be aware of the checks and balances of the FC to discourage corrupt practices
•	All members should be aware of the job description of each FC officer
•	Management audit should be conducted periodically
•	All members should study and apply the Word of God in their lives

In sum, results of the interview of FC members indicate that poor individuals have a robust understanding and definite perceptions of the core values that, incidentally, underlie the human rights proclaimed in the International Bill of Rights. What the quick interview had not dealt with was how these values in their specificity are being shaped and nurtured in the social organization of the poor, and how they impact the lives of the FC members and those of others in the communities where they live. . 
 
6.	Summary and Conclusions

Social capital, defined as the capacity of people to cooperate and/or the social organization of people involved in a collective action to attain a collective good, has been found by researchers to be productive. It enables groups of people to produce a collective good that would not be attainable in its absence.  One such collective good that results from the joint voluntary action of people is ‘Finance of Solidarity’.

Some communities are not able to initiate ‘Finance of Solidarity’ because they have not been able to resolve the dilemma of collective action: they know that they need one another to solve their problem but there is yet no one strong enough to mediate among autonomous units and coordinate their efforts.  Some other communities have overcome the dilemma and succeeded in establishing their own self-help organization (SHO) as a vehicle for collection action. But there are also SHOs whose capacity for voluntary joint action has been destroyed by intrusive policies of the government.  

If we acknowledge ‘Finance of Solidarity’ as a form of financial system organized by people through collective action, it is important to know two processes that are involved in mobilizing people for this purpose. First, we need to know the best approaches for acquiring knowledge, skills, attitudes and practices required by people to become competent members of their social organization. And second, we also need to know the best approaches for building up of interpersonal trust among the members. 

To be able to assess the extent to which ‘Finance of Solidarity’ meets the aspirations of people, we must be able to decode these aspirations which guide the behavior of people and motivate them to action.  Some suppositions on people’s aspirations were suggested in this paper to comprise the normative principles of ‘Finance of Solidarity’.  Given the normative principles, it should then be possible to evaluate existing models of ‘Finance of Solidarity’ to determine the extent to which they have met people’s aspirations on this collective good.  

It can be concluded that an empirical study of solidarity groups or social organizations undertaking collective action to organize a financial system should be considered as a priority activity of the Workshop on Finance of Solidarity. It can help explain how people can be mobilized to participate in producing a collective good through voluntary joint action and cooperation with other sectors of society.  In other words, a study of Finance of Solidarity as a collective good that results from the use or reinvestment of people’s capacity to cooperate is essential in shaping a freedom-centered, participatory development perspective (Amartya Sen, 1999). 

The proposed study will inescapably deal with the institutions formed as a result of collective action. If social capital varies across communities, then it is important to know how that variation manifests itself in terms of significant differences in institutions and performance.  The propensity to form different kinds of institutions result not only from the specific economic challenges people face and the preferences of the powerful, but also from the social capital endowments of the society (Danny Unger, 1998).  The proposed study would contribute to a deeper understanding of why certain types of institutions are better suited to perform in a given environment, or how an enabling environment can give rise to better performing institutions. The study would help governmental and non-governmental agencies to take actors seriously as agents of development who interpret their social contexts and who act and bring about change, rather than as ones who act on someone else’s behalf. 

A study of social capital formation will also contribute to a broader view of the costs and benefits of bringing about ‘Finance of Solidarity’ as a collective good. Coverage of this issue in the proposed study is important inasmuch as substantive costs accompany any approach in organizing a financial intermediation system for the poor and the disadvantaged. In order to be financially sustainable, financial systems for the poor have to overcome the considerable information problems related to banking with poor clients with no banking experience and unknown creditworthiness (Thierry van Bastelaer, ___). The proposed study will improve comprehension of how social capital can reduce the cost of imperfect information, and what values people would sacrifice or promote in order to bring about cooperation and solidarity in pursuit of a collective good. As noted elsewhere, different actors diverge in their perceptions of collective action obstacles, the means they select for trying to overcome them, and the costs and benefits they assign to the behavioral changes that will necessary to do so (Unger, 1998).  

The proposed study will certainly aid the current round of discussions initiated by the Foundation for Progress and Human Development (FPH) on such thematic issues as ‘solidarity-based economy’, ‘finance of solidarity’, and ‘socio-economy of solidarity’. 

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