Social capital and credit risk in a financial cooperative of Ecuador

In finance markets with asymmetric information, the borrower’s relational characteristics of social capital are relevant for lenders and borrowers as they increase the possibility of access to financing and reduce default rates and transaction costs by expanding information channels while increasing the capacity to afford obligations. Especially in financial cooperatives, taking into account social capital implies recognizing the potential of the information generated by its governance structure, close relationships with local communities, and ties with members. This investigation analyses the relationship between social capital and credit risk, suggesting that social capital reduces the probability and intensity of default interaction increased during COVID-19. The quantitative analysis uses data collected from Ecuador from “Cooperativa de Ahorro y Crédito Jardín Azuayo” (COACJA), where the Hurdle econometric model with negative binomial distribution is applied. Results show that social capital variables identified on an individual and contextual level evidence limited but significant effects in reducing the probability and intensity of default on different risk levels. Moreover, it is observed that the effect of credit application mobility, volunteering, and trust between people increases during the pandemic year.