The Janus Face of Embeddedness: Social Credibility, Risk, and the Politics of Informal Borrowing in Ghana

Economic sociologists have demonstrated that even the most technological measures of personal “creditworthiness” in modern Western countries can be imbued with moral meanings (Fourcade and Healy 2003). Financial instruments such as credit scores encode judgements about both the financial worth and the moral character of individual borrowers, with real implications for borrowers’ economic well-being. But how are credit and moral judgments related in markets where informal lending still dominates? Using original survey and interview data from Ghana, a lower-middle-income African country where the majority of the population remains “unbanked,” I argue that personal relational politics guide borrowers’ decisions about where to seek credit, including the choice to use formal or informal loans, and the choice of which particular relation(s) to ask for assistance. In particular, Ghanaians must balance their chance of receiving money from different sources with the perceived risk that each source will damage borrowers’ social credibility. On the one hand, banks and other formal credit sources charge high interest rates that make repayment more difficult, potentially damaging borrowers’ reputations through public arrests or property seizures in the event of a default. Loans from personal relations offer borrowers more flexibility and “understanding” in the face of delayed repayment, yet personal relations may also threaten borrowers’ reputations with gossip and insults about the borrowers’ inability to secure money. My respondents chose formal loans when the perceived threat of default was lower than the perceived risk of having one’s reputation damaged by a relation who publicly discussed a borrowers’ informal loan. Although Ghanaians across the socio-economic spectrum worried about being bad-mouthed by relations, higher-income Ghanaians perceived the risk of default on a formal loan to be only moderate to low, and thus were likely to use utilize informal loans only for especially risky investments. Because lower-income respondents perceived the baseline risk of default on formal loans to be much higher, lower-income borrowers turned to formal loans only when they had had suffered previous public “betrayals” of their borrowing by friends or relatives, a situation which was twice as common for low-income women. Thus, despite a wave of policy efforts to promote financial inclusion and “pull” people towards the formal sector, Ghanaians—particularly poor Ghanaians—utilize formal financial services primarily when they are pushed out of the informal sector by the experience of reputational damage from personal ties. Rather than being a trajectory from informal to formal loans, formal and informal financial markets are interpenetrated, with borrowers choosing sources of credit based on perceived relational and situational risk.