MICRO‐LENDING INSTITUTIONS: USING SOCIAL NETWORKS TO CREATE PRODUCTIVE CAPABILITIES

Financial service institutions design commercial lending mechanisms for small businesses with specific kinds of business owners in mind, that is, owners who already own or have access to both capital and productive resources. Given the conventional mechanisms devised by traditional lenders, individuals without productive capital appear to be costly, high risk borrowers. Today a new financial service institution called micro‐lending offers credit to just these high risk borrowers by constructing alternative lending mechanisms based on peer networks. These alternative mechanisms reduce the costs of lending to a higher risk population while providing access to business information and human capital skills, creating opportunities to build productive capabilities and other, less tangible resources, such as community networks. Using a case study of a neighborhood‐based inner‐city micro‐loan program in New England, I investigate how micro‐lending operates to reduce the costs of lending, as well as examine the group interaction that emerges among program participants.