Nadiya Marakkath

Can microfinance crowdfunding reduce financial exclusion? Regulatory issues

Purpose – The purpose of this paper is to discuss how regulatory environment can be a fundamental constraint or lever in defining the scope of operations of a social innovation. Design/methodology/approach – Semi-structured interviews with top-level executives of pioneers of crowdfunding were run in India and France, two of the three leading countries in this field. Findings – Four main issues rise: choice of legal status, constraints for the operations model, compliance with anti-money laundering measures and challenges in marketing and sustainability. Originality/value – This paper contributes to knowledge advancement in the field of this new funding actor that could challenge the banking system. This is the first paper to explore these regulatory issues and their impact on marketing practices.

Technology and Innovation for Social Change: An Introduction

Tension exists between technologists and social thinkers because of the impact technology and innovation has on social values and the norms which are often viewed as damaging the cultural fabric of a nation or society. Global business environment being the context in which implementation of technology and innovation takes place is widely accepted as the major reason for such conflicts. The current debate in India for and against the globalised and liberalised economic policies is the best case to cite. Social values and norms are dynamic constructs of economic development and social entrepreneurs are the actors to drive such changes. Though the outlook of economic development must be modern and contemporary, it should address all-round growth and well-being in the society. Growth is expected to be inclusive in nature, without any bias towards particular socio-economic groups. However, data on the development and growth trajectories of many developing countries reveal undue favours to some specific groups, which have resulted into some kind of divide. The divide between rich and poor, rural and urban, educated and uneducated, upper and lower castes, indigenous and modern societies and technologically forward and backward societies are common in these countries. At times, high cost of technological innovation, access and ease of adoption of technologies are considered to be the chief reasons for such non-inclusion. Information technology being the most adopted and accepted technologies is at the core of this debate which on other hand has also affected the major changes in social and political systems in many countries in the recent past. Also many other product and process technologies have affected favourably or otherwise the skill, livelihood and social norms in specific regions. This almost necessitates a fresh discourse, beyond anti-globalisation debates and bottom-of-pyramid market phenomenon. This volume is one such first attempt to identify the relevant areas of new search, and research into them without labelling social entrepreneurs, the social change agents, as heroic figures. In developing countries, social entrepreneurs have already established innovative and inclusive methods and systems such as micro-finance to impact social change. They are trained within the existing institutional set-up to practice social entrepreneurship processes; innovative educational models are developed for such focused training. These social entrepreneurs design systems and processes for high social impact while adapting in countries, societies or communities and adjusting to the specific local cultural norms or traditions or vocations. In this volume, an attempt has been made to compile many independent research cases by the authors from across the globe. India, Mexico, Ethiopia, Nigeria, Thailand, Cambodia, Laos, Vietnam and other African countries are selected as contexts to report on multiple aspects of social change.

Relevance of Social Enterprises for Micro-entrepreneurial Growth: A Case-Based Discussion on Indian Microfinance Models

Social enterprises have contributed immensely in the area of micro-entrepreneurial growth and development. The popular example of such enterprises is microfinance institutions in developing nations. This study uses the theoretical concepts of ‘Financial Depth’ and ‘Financial Breadth’ used in microfinance literature, to demarcate Indian microfinance service providers into semi-formal and formal microfinance institutions. Within this demarcation, two case studies are conducted, to understand how the philosophical and approach diversities among Indian MFIs result in two different microfinance models, having diverse impact on their clients’ micro-entrepreneurial growth. By understanding these contradictory views that exist at the interface of microfinance and micro-entrepreneurial growth, this study depicts that a welfare-oriented demand-driven microfinance model has more potential to foster entrepreneurial growth than a mere minimalist supply-driven microfinance model.

Intermediate Participant Selection Phase: Assessment of Efficiency and Sustainability

This chapter presents the intermediate participant selection phase, pursued in this research investigation. This phase is incorporated in the three-phased sequential explanatory mixed-methods research design, to accomplish the third objective of the research investigation. The third objective aims to identify the efficient and sustainable Microfinance Institutions (MFIs) in India. The Data Envelopment Analysis (DEA) Model, the Sustainability Diamond Model and Benchmarking Process used to fulfil this objective are presented in this chapter. Using these analytical models, the author identifies seven efficient Indian MFIs, which remained sustainable by levying a reasonable interest rate, even before the onset of the crisis and ceilings imposition, in Indian microfinance market. Among these identified MFIs some are found to be charging interest rates ranging from 13–16 per cent, which is much lower than the prevailing regulatory cap of 26 per cent. The managerial practices of these MFIs can be considered to be a reference point for the lesser efficient players in the sector, which aim to enhance their efficiency levels. The extent of inefficiencies that each of these lesser efficient MFIs can trim-off from their operating structure is also depicted in this chapter. Thus overall, this chapter presents a performance analysis on a sample of 50 Indian MFIs, using efficiency and sustainability assessment techniques. The author concludes this chapter by presenting the results of a regression and discriminant analysis undertaken on the efficiency scores of the sample MFIs. The results of this analysis depict the efficiency and sustainability statuses of Indian MFIs, to be independent of their institution specific variables. This makes the author inquisitive to know more about the sustainability management practices of these MFIs, and hence she subsequently pursues as a follow-up qualitative study.

Summary of Findings, Implications and Conclusion

The preceding three chapters presented a discussion on the three-phased mixed-methods analysis undertaken in this study. In this concluding chapter the author revisits the findings from these three analytical phases. The inferences drawn from these findings are discussed in detail in this chapter and are categorized as theoretical, managerial and policy implications. Over all, the research investigation undertaken in this book through the three analytical phases explains the diverse issues associated with sustainability of Indian Microfinance Institutions (MFIs). The findings of the research depicts that with proper strategies in place, efficient Indian MFIs are able to sustain operations, at the capped rate of 26 per cent or even much lower rates, ranging from 13–16 per cent. It was found that age of MFI, size of MFI, credit model, regulatory status or area of operation had no significant influence on the efficient and sustainable status of these MFIs. Efficient and sustainable MFIs attribute this solely to be the effect of the managerial strategies used by them. Thus the study shows that if the MFIs regard operational efficiency and sustainability as a strategic issue that requires proper managerial attention and do not leave it to serendipity, it can sustain well within the existing capped interest rate or even much lower. But while striving for sustenance, as an unintended consequence of the best of the intentions, MFIs may experience the tendency to deviate its focus from the larger picture of client welfare and therefore the author warns the MFI management to pre-empt any such acts which goes against the spirit of the industry.

Literature Review: The Sustainability Debate

In this chapter the author portrays the research problem addressed in this book, against the larger canvas of microfinance literature. The existing debates in literature, pertaining to the challenges and issues associated with the sustainability of microfinance institutions (MFIs), are surveyed in detail in this chapter. Based on the inferences drawn from this review, the author identifies the relevant research gaps in microfinance literature. The research objectives formulated to address these gaps are revisited in this chapter, in the light of its associated literature. Thus by undertaking this review process, the author explains ‘what we know’ and ‘what we probably are yet to know’ about the sustainability of Indian MFIs. This enables the author to discuss the relevance of the phenomenon under study and the rationale for conducting this research. The author concludes this chapter by enumerating the value additions that this research is expected to bring to Indian microfinance literature.

Qualitative Phase: Management of Factors Affecting and Discriminating Sustainability

In this chapter four out of the seven efficient and sustainable Microfinance Institutions (MFIs) identified in the intermediate participant selection phase of the study, are interviewed by the author. These interviews mark the beginning of the qualitative phase of the study. This phase aims to understand about the managerial aspects of the factors that affect and discriminate the sustainability of Indian MFIs. As per the findings of the quantitative phase, Growth Factor, Portfolio Risk Factor, Development Factor and Institutional Factor are the significant factors found to affect the sustainability of Indian MFIs and Cost Efficiency Factor is found to discriminate the sustainability of Indian MFIs. The intent of undertaking the interviews in this phase of the study, is to understand how these four efficient and sustainable MFIs are managing these five determinant and discriminate factors, found significant in the quantitative phase. The strategies used by these MFIs to manage these five factors are documented for the reference of other MFIs in the sector. Prior to the discussion on the strategies used to manage the five factors, confirmation is sought from the MFI managers about the observed relationships shared by the factors with Operation Self-Sustainability (OSS) ratio, as seen significant in the quantitative phase of the study.

Qualitative Phase: Mismanagement of the Factors Affecting and Discriminating Sustainability—Learnings from Indian Microfinance Crisis

In the preceding chapter, the strategies used by the efficient and sustainable Indian Microfinance Institutions (MFIs), to manage the determinant and discriminant factors of their sustainability are documented. This documentation is expected to serve as a reference for other relatively less efficient Indian MFIs to understand how their efficient and sustainable counterparts are managing sustainability. Though this knowledge is important for them to improve sustainability, it is also pertinent for MFIs to understand the dangers that are imminent, if they mismanage the sustenance factors. Mismanagement occurs if MFIs become overly conscious of sustainability, oblivious of its impact on client welfare. By referring to Indian microfinance crisis and the literature associated with it, the author portrays such mismanagement issues and the adverse affects it can have on microfinance clients. This discussion ends by reminding the MFI players of an old tenet that governs the sector: sustainability is only a means to achieve the goal of poverty alleviation, and not an end in itself.

Quantitative Phase: Identification of Factors Affecting and Discriminating Sustainability

A three-phased sequential explanatory mixed-methods research framework is designed to conduct the research investigation presented in this book. The first phase of this design, which is quantitative in nature, is presented in this chapter. This quantitative phase is pursued to accomplish the first and second objectives of the study, which aims to identify the determinant and discriminant factors for the sustainability of Indian Microfinance Institutions (MFIs). Identifying these factors is pertinent, as it calls for managerial attention from any Indian MFI aiming to augment its sustainability. Therefore to fulfill these objectives, the author undertakes a quantitative analysis on the data sourced from 50 Indian MFIs. Regression and discriminant analysis techniques are used to conduct this analysis. The results of this analysis depict, Growth Factor, Portfolio Risk Factor, Development Factor and Institutional Factor as the significant factors affecting the Operational Self-sustainability (OSS) of Indian MFIs and Cost Efficiency Factor as the factor discriminating its OSS status. Thus at the end of this chapter, the author narrows done to five significant factors that determine and discriminate the OSS status of Indian MFIs.

Research Objectives and Design

A mixed-methods approach, that reaps the synergies of both quantitative and qualitative research methods, is used in this book to investigate about the sustainability of Indian microfinance institutions (MFIs). This chapter explains, ‘why’ the author goes for this combined approach and ‘how’ she frames a three-phased sequential explanatory mixed-methods research design, to accomplish the objectives of her investigation. The author’s preference to use a research design that has ‘pragmatism’ as its underlying philosophy is revealed in this chapter.