The next in a series of open research seminars was held at the National Bank of Ukraine on 26 October 2017. Dr. Vadym Volosovych, Associate Professor of Erasmus University Rotterdam, delivered the seminar on the impact of social capital on financial development (the joint research project “‘Good’ and ‘bad’ social capital and financial development: Evidence from household financial markets participation” co-authored with Araceli Carvallo).
From very beginning, Prof. Volosovych underlines the relevance of the problem from psychological, sociological and economic perspectives. The study explores the peculiarities of the interaction between financial development and the level of trust in society using rich household-level data from Mexico.
The speaker argues that the impact of social capital on financial development can be either positive or negative but researchers often neglect the negative effects. Therefore, this study revisits the role of social capital for financial development at the micro level taking into account both effects. According to the hypothesis put forward by authors, social capital can generate trust within narrow social circles, which are associated with heavy reliance on informal financial arrangements. Obtained results show that the individuals that associate themselves with a narrow locality, such as city as opposed to the entire country, rely more on informal financial arrangements, which has negative implications for financial development. In contrast, trust in broader networks is hypothesized to be associated with individuals favoring formal finance, which, in turn, boosts the development of financial markets. The authors also found the evidence of this mechanism. Overall, the empirical evidence from this study contributes to the understanding of relationships between the structure of social capital and financial development.
During discussion, the speaker was asked to comment on a possible application of the conclusions to Ukrainian reality. Prof. Volosovych expresses his opinion that an improvement in confidence to institutions, such as legal system or Ukrainian banking sector, will enhance financial development in Ukraine, what corresponds to the additional findings of presented research. Besides that, it would be highly valuable to consider various aspects of social capital when taking policy decisions. Policies aimed at the inclusion of households in formal financial markets should focus on the development of civic society that develops “trust in wide networks”, reduction of drastic disparities in neighborhood quality and other costs of operating in formal economy, and facilitating bank credibility.
The video of the seminar is available at the following link.
We invite potential contributors to participate in the upcoming seminars and present the findings of their research studies. To this end, please send your submissions (presentation materials and/or an article, CV, with an indication of a suitable date for the seminar to take place) to the Research Division of the Monetary Policy and Economic Analysis Department for consideration via e-mail to: [email protected].