Academic journal article South Asian Journal of Management

Social Performance of Microfinance Institutions in India: Developing an Impact Index Based on Firm Variables

Academic journal article South Asian Journal of Management

Social Performance of Microfinance Institutions in India: Developing an Impact Index Based on Firm Variables

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

In order to counter financial exclusion and to bring in financial inclusion, a set of financial institutions were established in the rural unbanked parts of India. These financial institutions called Microfinance Institutions (MFIs) aim at providing access to financial services to low income households who are outside the purview of formal financial system. Even though such institutions are profit-oriented, the investors in MFIs are more interested in achieving its social goals (Copestake, 2007). Over the years, it has been noted that even though MFIs serve to address the phenomenon of institutional exclusion and adverse incorporation, they vary considerably in their philosophy, vision and strategies (Kabeer, 2005b). It is of utmost importance that the policy makers as well as the investors have a complete view of the social aspects of microfinance. This paper aims to propose a multi-dimensional index of gauging the social impact created by the microfinance institutions in India. The index uses certain dimensions for measuring social impact which could be used in assessing the compliance of the MFI with its mission of serving the poorest of the population.

The term microfinance refers to the provision of financial services to low income clients, including the self-employed. The MFIs provide services including savings, credit, insurance and payment services (Ledgerwood, 1999). This path of financial inclusion in India was further promoted by Small Industries Development Bank of India (SIDBI) which used the microfinance model for delivering micro loan products to the unbanked rural areas, with special focus on the women population. After 1990's, the group based model of microfinance got popular in regions of Southern India (states of Kerala, Tamil Nadu, Karnataka and Andhra Pradesh) which was adopted across the country later on.

In recent times, Microfinance Institutions have also been acting as Business Correspondents (BC) for banks, collecting savings from the rural households for the purpose of depositing in banks, and as insurance agents providing micro insurance services, which helps in accentuating the attainment of complete financial inclusion.

The paper is organized as follows: a brief introduction on financial inclusion in India is given in section one. Social Impact Assessments and its significance are described in section two. Methodology of the present study is explained in detail in section three. Section four gives results and its interpretation, followed by implications of this study, conclusion and scope for future research in the subsequent sections.

SOCIAL IMPACT ASSESSMENT OF MICROFINANCE

Conventional financial institutions very seldom lend to the needy and the vulnerable sections of the society (Kim, 1995). Poverty reduction and alleviation has been the primary goal propagated by various development policies and programs, including microfinance programs (Hulme and Mosley, 1996; Copestake, Dawson, Fanning, McKay and Wright, 2005; Arun, Imai, Sinha, 2006; Adjei and Arun, 2009). Literature provides us with positive views of the impact of microfinance on poverty alleviation (Mosley, 2001; Kaboski and Townsend, 2005; and Khandker, 2003) as well as negative views (Coleman, 1999; Morduch, 2006).

As the impact created by the MFIs started being questioned in the recent years, impact assessment became an increasingly important aspect, demanded particularly by aid donors to ensure that the grants are well-utilized. "An Impact Assessment (IA) is a study to identify changes that result from a program by employing methods to establish plausible association between changes experienced and participation in the program" (Barnes and Sebstad, 2000).

The interest in social impact assessment arises from the fact that while financial sustainability is of importance to a firm, the social benefits arising from it are equally vital. …

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