Skip to main content

Advertisement

SpringerLink
Log in

Do regulations and governance quality impact performance of MFIs in India?

  • Research Article
  • Published:
DECISION Aims and scope Submit manuscript

Abstract

We explore the relationship between performance, regulations and governance quality of Microfinance Institutions (MFIs) through a survey conducted among CxOs and board of directors of top 55 MFIs in India. We study the effect of AP ordinance (2010) (taken as a proxy for regulation), boardroom conflicts (taken as a proxy for governance quality) and the recent demonetization policy of Government of India on the performance of the MFIs in India. The results show that AP ordinance and boardroom conflicts have had a negative impact on the performance of the MFIs. As per public interest theory, regulations are good for correcting market failures and upgrading the existing practices and hence have a positive impact on the performance. However, our research proves that AP ordinance has a negative impact on the performance of the firm and hence does not support the theory in the Indian context. Diversity and experience in the board could lead to conflicts and delayed decision making, having a negative impact on the performance of the firm. Our research survey confirms this theory. Managers’ powers are limited by the external environment, and the state has more powers to set the field. However, our empirical model does not support the negative impact of demonetization on the performance of MFIs. There is a dearth of study on Indian MFI industry, and this paper contributes to narrow that gap.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10
Fig. 11

Similar content being viewed by others

Notes

  1. Source: https://rbi.org.in/scripts/NotificationUser.aspx?Id=6857&Mode=0.

  2. Source: The Bharat Microfinance Report 2016. Available at http://indiamicrofinance.com/wp-content/uploads/2016/09/The-Bharat-Microfinance-Report-2016.pdf.

  3. Source: Microfinance Sector: Evolution and Impact of Demonetisation a report by CARE Ratings. Available at http://www.careratings.com/upload/NewsFiles/SplAnalysis/Microfinance%20Sector%20Evolution%20and%20Impact%20of%20Demonitization.pdf.

  4. Source: The data are for 50 + MFIs that are member of Microfinance Institutions Network (MFIN), which are taken from MFIN Micrometer. Available at http://mfinindia.org/resource-center/mfin-publications/.

  5. Source: The data are for 50 + MFIs that are member of Microfinance Institutions Network (MFIN), which are taken from MFIN Micrometer. Available at http://mfinindia.org/resource-center/mfin-publications/.

References

  • Adams A (2017) Performance of microfinance institutions in Sub-Saharan Africa: a cross country analysis of outreach, sustainability, efficiency and regulation. Doctoral dissertation, University of Zululand

  • Aranson PH (1989) Theories of economic regulation: from clarity to confusion. JL & Pol 6:247

    Google Scholar 

  • Armendáriz B, Morduch J (2010) The economics of microfinance. MIT Press, Cambridge

    Google Scholar 

  • Augustine D (2012) Good practice in corporate governance: transparency, trust, and performance in the microfinance industry. Bus Soc 51:659–676

    Article  Google Scholar 

  • Balkenhol B (ed) (2007) Microfinance and public policy: outreach, performance and efficiency. Springer, Berlin

    Google Scholar 

  • Buchanan JM (1972) Theory of public choice. University of Michigan Press, Ann Arbor

    Google Scholar 

  • Chin WW, Todd PA (1995) On the use, usefulness, and ease of use of structural equation modeling in MIS research: a note of caution. MIS Q 19:237–246

    Article  Google Scholar 

  • Chopra R (2017) Financial inclusion or financial destruction: a case study of microfinance institutions. Glob J Enterp Inf Syst 9(1):85–89

    Google Scholar 

  • Christen RP, Rosenberg R, Jayadeva V (2004) Financial institutions with a “double bottom line”: implications for the future of microfinance. In: Consultative group to assist the poorest (CGAP)

  • Estapé-Dubreuil G, Torreguitart-Mirada C (2015) Governance mechanisms, social performance disclosure and performance in microfinance: does legal status matter? Ann Public Co-op Econ 86(1):137–155

    Article  Google Scholar 

  • Evans PB, Rueschemeyer D, Skocpol T (1985) Bringing the state back in. Cambridge University Press, Cambridge

    Book  Google Scholar 

  • Freeman RE (1984) Strategic management: a stakeholder approach. Pitman Press, Prudhoe

    Google Scholar 

  • Henseler J, Ringle CM, Sinkovics RR (2009) The use of partial least squares path modeling in international marketing. Adv Int Mark 20(1):277–319

    Google Scholar 

  • Herbst J (1989) The creation and maintenance of national boundaries in Africa. Int Organ 43(04):673–692

    Article  Google Scholar 

  • Joskow PL, Noll RG (1981) Regulation in theory and practice: an overview. In: Fromm G (ed) Studies in public regulation. The MIT Press, Cambridge, pp 1–78

    Google Scholar 

  • Ledgerwood J (1999) Sustainable banking with the poor: microfinance handbook: institutional and financial perspectives. The World Bank, Washington, DC

    Google Scholar 

  • Mitchell RK, Agle BR, Wood DJ (1997) Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts. Acad Manag Rev 22:853–886

    Article  Google Scholar 

  • Nunnally JC, Bernstein IH (1994) Psychometric theory. McGraw-Hill, New York

    Google Scholar 

  • Olsen TD (2017) Political stakeholder theory: the state, legitimacy, and the ethics of microfinance in emerging economies. Bus Ethics Q 27(1):71–98

    Article  Google Scholar 

  • Phillips RA, Berman SL, Elms H, Johnson-Cramer ME (2011) Stakeholder orientation, managerial discretion and nexus rents. In: Phillips RA (ed) Stakeholder theory: impacts and prospects. Edward Elgar Publishing, Cheltenham, pp 163–192

    Chapter  Google Scholar 

  • Ramesh SA (2014) An idea which went wrong: commercial microfinance in India, CreateSpace Independent Publishing Platform

  • Rice RE, Aydin C (1991) Attitudes toward new organizational technology: network proximity as a mechanism for social information processing. Adm Sci Q 36:219–244

    Article  Google Scholar 

  • Stevenson WB, Radin RF (2009) Social capital and social influence on the board of directors. J Manag Stud 46(1):16–44

    Article  Google Scholar 

  • Thorat YSP, Arunachalam RS (2005) Regulation and areas of potential market failure in micro-finance. In: High level policy conference on microfinance in India, organized by NABARD on, pp 3–5

  • Viscusi WK, Vernon JM, Harrington JE Jr (1992) Economics of regulation and antitrust, 2nd edn. The MIT Press, Cambridge

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. FISAT Business School, Angamaly, Ernakulam, Kerala, 683577, India

    K. P. Saraswathy Amma

  2. Research and Development Centre, Bharathiar University, Coimbatore, India

    Gopalakrishnan Kannan

  3. Department of Management Studies, Indian Institute of Technology Madras, Chennai, India

    Lakshmi Parthasarathy

Authors
  1. K. P. Saraswathy Amma
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Gopalakrishnan Kannan
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Lakshmi Parthasarathy
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Lakshmi Parthasarathy.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

Questionnaire

Regulation (A1)

Did the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) ordinance (2010) have an impact on your company’s performance?

Yes (1)

  

No (0)

Governance Quality (G3)

How frequently is there a conflict in the board regarding the agenda points?

Very frequently(5) to no conflicts(1)

Demonetization (D2)

What was the impact of demonetisation on the performance of your organisation?

Highly positive (5) to highly negative (1)

Performance

Turnover (P1)

< 5000 lacs

  

5000–15,000 lacs

  

> 15,000 lacs

 

Products (P2)

 1. Loans

  

 2. Insurance

  

 3. Savings

  

 4. Capacity building

  

 5. Payments and remittances

  

 6. Cross-selling of utilities

  

 7. Others

 

Core competencies (P3)

Products

  

Services

  

Both

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Saraswathy Amma, K.P., Kannan, G. & Parthasarathy, L. Do regulations and governance quality impact performance of MFIs in India?. Decision 46, 3–14 (2019). https://doi.org/10.1007/s40622-018-0199-3

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40622-018-0199-3

Keywords

Search

Navigation