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The Use of Microfinance and Power of Networks

A recent economist article remarked on the importance of using social networks in developing countries to encourage the participation in micro-finance. As to be expected, a study saw that the friends of people who used micro-financing were more likely to use the service themselves. Not all people are equally influential, so the individuals with the most “central” importance to a particular network have a much greater influence on the participation rates of the network as a whole. This concept of “centrality” was the explanation for why there was a significant variance in the usage rates between the friends of the users across villages. If the person who originally used micro-finance was a marginal individual on the outer edge of a village’s social network, than there friends could be substantially less likely to use the program than the village leader.┬áThe definition of centrality is explained to be close to the way that search rankings are developed at firms such as Google. Therefore, centrality depends on both one’s number of friends and how connected those friends are themselves in a self-feeding cycle.

Centrality, then, could reduce the cost of implementing micro-finance as well as reduce the sale of marijuana in schools. The Economist article suggests that both economists and school officers should utilize cork boards to find the most central member of a community; in the cases of school drug rings, stopping the most central member rather than the most active member could reduce the sale of further drugs by 35%. In another recent study, the weather insurance adoption rate was measured to find the influence of social networks. For the average farmer, having one more (not just one, only one additional) friend who used the insurance creates the same take-up rate change as a 15% price reduction. As well, the combination of a price-reduction for central members of the community may combine network and price-reduction effects for maximum cost efficiency.




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