Social capital and loan credit terms: does it matter in microfinance contract?

Purpose - To enhance the loan repayment performance of microfinance institutions (MFIs) in Pakistan, this study aims to analyze the direct impact of social capital and loan credit terms on loan repayment performance and microenterprises' business performance while considering the mediating role of microenterprises' business performance on the relationship between social capital, loan credit terms and loan repayment performance. Design/methodology/approach - The analysis was conducted based on the data gathered via a questionnaire distributed to 316 microenterprises owners. The respondents were selected using the stratified sampling technique by dividing the target population into three influential groups of manufacturing, trading and services microenterprises. The reliability and validity of the constructs were established using (1) factor loading, (2) Cronbach's alpha, (3) composite reliability, (4) average variance extracted, (5) the variance inflation factor, (6) the Fornell-Larcker criterion and (7) the heterotrait-monotrait ratio. The structural equation modeling technique was then applied, and the hypotheses were tested based on the structure model generated through bootstrapping by using partial least squares structural equation modeling. Findings - The results confirm the direct impact of social capital and loan credit terms on microenterprises' business performance and loan repayment performance. It also supports the mediating role of microenterprises' business performance toward the relationship between social capital, loan credit terms and loan repayment performance while considering the direct impact of microenterprises' business performance on loan repayment performance. Originality/value - To date, the direct impact of social capital and loan credit terms on microenterprises' business performance and loan repayment performance has been hardly investigated in the context of Pakistan. This study also examines the mediating role of microenterprises' business performance toward social capital, loan credit terms and loan repayment performance. The findings will enable both MFIs and microenterprises to improve their business performance and loan repayment performance through enhanced social ties and the development of more flexible credit products that protect the borrowers' interests and the interest of lenders.