The Effect Of Profit Orientation And Regulation On Social Performance Of Microfinance Institutions In India: An Appraisal

Abstract

Several studies, articles, and incidents have raised allegations against the relentless profit seeking nature of microfinance institutions, and shown their limited social impact. Microfinance is no longer attributed to be the panacea to poverty as it once was. However, the industry continues to show resilience and grow, in utter defiance of economic shocks and downturns, and with it grows the body of research on its performance. As much of the literature nudges the sector to achieve high profitability while in their pursuit of social impact, co-existence of these goals is not without conflict and several studies point to ‗trade-offs‘ when double-bottom line growth is sought. Several studies have shown evidence that these institutions abandon social goals in pursuit of profits. As a result, stakeholders and customers have been vociferously demanding interest rate caps, and other regulations to curb profits in the sector at the expense of the well-being of the poorest of the poor customers that these institutions serve. This dissertation goes one step further and raises the question of what are the various legal forms, and profit orientations of MFIs in India and questions the premise that differences in profit orientations and regulatory statuses bear any impact at all on social performance in the Indian context. Using a panel of 156 unique MFIs from India over the period of 2014 to 2018 it addresses the effects that profit orientation, and regulation have on the social performance of MFIs. The results indicate that for-profits and non-profits are largely similar in terms of social performance. Further, contrary to hypothesis, it is found that regulatory statuses of MFIs also bear no significant impact on social outreach indicators. The results counter the popular rhetoric in favour of more regulations in the sector; however, it is difficult to generalize these results across the spectrum as different studies that have considered different measures of social outreach have found conflicting results. Yet, the implications are important for future research in the sector, for investors seeking responsible yet strong returns, for policymakers formulating regulatory governance frameworks and for MFIs in search of a balanced business model that maximizes social and financial returns.