Are Regulatory Microfinance Institutions of India Better Off than Non-regulatory Ones? A Comparison of Performance and Sustainability

Abstract

In this article, an empirical study has been made to compare the social (outreach related) and financial (cost, profit and sustainability related) performances of regulated microfinance institutions (MFIs) with non-regulated MFIs and to identify the causal variables of such performances. With the help of a panel data set of the last five years, that is, from 2008–2009 to 2012–2013 it is found that the preference of Indian MFIs for regulatory structure has not culminated with better performance. Through the causal study, which is performed through the fixed-effect regression model, no impact of regulation is visible. Among the important explaining variables capital structure, the size of operating expenditure and quality of assets are found to be prominently responsible for outreach and sustainability of Indian MFIs.

Keywords

Sustainability performance outreach regulation return on assets

Get full access to this article

View all access options for this article.

References

Bennett

Cuevas

C. E.

(1996). Sustainable banking with the poor. Journal of International Development, 8(2), 145–152.

Brau

J. C.

Woller

G. M.

(2004). Microfinance: A comprehensive review of the existing literature. Journal of Entrepreneurial Finance and Business Ventures, 9(1), 1–26.

Brinkerhoff

D. W.

(1991). Improving development program performance: Guidelines for managers. Boulder: Lynne Rienner Publishers.

CGAP. (2010). Andhra Pradesh 2010: Global implications of the crisis in Indian microfinance. Focus Note (67), November.

Chaia

Dalal

Goland

Gonzalez

M. J.

Morduch

Schiff

(2009). “Half the world is unbanked.” Financial access initiative framing note. New York: Financial Access Initiative.

Chen

Rasmussen

Reille

Rozas

(2010). Indian microfinance goes public: The SKS initial public offering. CGAP Focus Note (65), September.

Christen

R. P.

Rhyne

Vogel

R. C.

McKean

(1995). Maximizing the outreach of microenterprise finance: An analysis of successful microfinance programs, Program and operations assessment report No. 10. Washington, DC: USAID.

Conning

(1999). Outreach, sustainability and leverage in monitored and peer-monitored lending. Journal of Development Economics, 60(1), 51–77.

Cuevas

(1996). Enabling environment and microfinance institutions: Lessons from Latin America. Journal of International Development, 8(2), 195–209.

10.

Cull

Demirgüç-Kunt

Morduch

(2011). Does regulatory supervision curtail microfinance profitability and outreach? World Development, 39(6), 949–965.

11.

Demirgüç-Kunt

Klapper

(2012). Measuring financial inclusion: The global findex database. Policy Research Working Paper: 6025, World Bank.

12.

Feasley

(2011). SKS microfinance and for-profit MFIs, unscrupulous predators or political prey? Examining the microfinance credit crunch in Andhra Pradesh and assessing the applicability of the UN global compact “protect respect remedy” framework. Retrieved 15 December 2014, from http://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=1078&context=lps_clacp

13.

GOAP. (2010). Andhra Pradesh micro finance institutions (regulation of money lending) ordinance 2010, government of Andhra Pradesh, (G.O. Ms. No. 356 Dated: 19.10.2010). Retrieved 20 October 2014, from http://apmfi.cgg.gov.in/downloads/2010PR_MS356.PDF

14.

GOI. (2011). The Micro Finance Institutions (Development and Regulation) Bill, 2011. Retrieved 20 October 2014, from http://finmin.nic.in/the_ministry/dept_fin_services/micro_finance_institution_bill_2011.pdf

15.

Hartarska

Nadolnyakb

(2007). Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence. Applied Economics, 39(10), 1207–1222.

16.

Hulme

Mosley

(1996). Finance against poverty: Effective institutions for lending to small farmers and micro-enterprises in developing countries (Vol. 1). London: Routledge.

17.

Kar

A. K.

(2013). Does capital and financing structure have any relevance to the performance of microfinance institutions? International Review of Applied Economics, 26(3), 329–348.

18.

Khawari

(2004). Microfinance: Does it hold promises? A survey of recent literature. HWWA Discussion Paper, 276.

19.

Kyereboah-Coleman

(2007). The impact of capital structure on the performance of microfinance institutions. The Journal of Risk Finance, 8(1), 56–71.

20.

Ledgerwood

Earne

Nelson

(2013). The new microfinance handbook—A financial market system perspective. Washington, DC: The World Bank.

21.

Mahajan

Ramola

V.G.

(1996). Financial services for the rural poor and women in India: Access and sustainability. Journal of International Development, 8(2), 211–224.

22.

Mahajan

Nagasri

(1999). Building sustainable microfinance institutions in India. Paper presented in the Seminar on New Development Finance, Frankfurt, September 1999. Retrieved 20 October 2014, from www.Proliant400\mdoffice\Microfin-policy\Frankfurt\Frankfurt-8.doc

23.

Manos

Yaron

(2009). Key issues in assessing the performance of microfinance institutions. Canadian Journal of Development Studies, 29(1–2), 101–122.

24.

Mersland

Strom

R. O.

(2009). Performance and corporate governance in microfinance institutions. Journal of Banking and Finance, 33(4), 662–669.

25.

Meyer

R.L.

(2002). Track record of financial institutions in assisting the poor in Asia. ADB Institute Research Paper, No. 49.

26.

Morduch

(2000). The microfinance schism. World Development, 28(4), 617–629.

27.

Oreto

Rhyne

(Eds). (1994). The new world of microenterprise finance: Building healthy institutions for the poor (pp. 76–93). West Hartford, CT: Kumarian Press.

28.

Puhazehendhi

(2012). Micro finance—State sector report. New Delhi, India: Access Publications.

29.

Quayes

(2012). Depth of outreach and financial sustainability of microfinance institutions. Applied Economics, 44(26), 3421–3433.

30.

RBI. (2009). Master circular on micro credit (RPCD. MFFI. BC.No.09/12.01.001/2009-10, July 1).

31.

RBI. (2011). Report of the sub-committee of the central board of directors of Reserve Bank of India to study issues and concerns in the MFI sector (Malegam Committee). RBI, Mumbai.

32.

Rhyne

(1998). The yin and yang of microfinance: Reaching the poor and sustainability. The Microbanking Bulletin, 2, 6–8.

33.

Sane

Thomas

(2011). A policy response to the Indian micro-finance crisis. Working Paper-2011–2017, Indira Gandhi Institute of Development Research (IGIDR). Retrieved 15 December 2014, from http://www.igidr.ac.in/pdf/publication/WP-2011-007.pdf

34.

Schreiner

(2002). Aspects of outreach: A framework for discussion of the social benefits of microfinance. Journal of International Development, 14(5), 591–603.

35.

Sriram

M. S.

(2012). The AP microfinance crisis 2010: Discipline or death? Vikalpa, 37(4), 113–127.

36.

Woller

Dunford

Woodworth

(1999). Where to Microfinance. International Journal of Economic Development, 1(1), 29–64.