Institutional framework in developing economies. Do all dimensions matter for financial intermediation by microfinance deposit-taking institutions?
Pages | 271-286 |
Date | 14 May 2018 |
Published date | 14 May 2018 |
DOI | https://doi.org/10.1108/JFRC-02-2017-0025 |
Author | George Okello Candiya Bongomin,Charles Akol Malinga,John C. Munene,Joseph Mpeera Ntayi |
Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Institutional framework in
developing economies
Do all dimensions matter for financial
intermediation by microfinance
deposit-taking institutions?
George Okello Candiya Bongomin
FGSR, Makerere University Business School, Kampala, Uganda
Charles Akol Malinga
Bank of Uganda, Kampala, Uganda
John C. Munene
FGSR, Makerere University Business School, Kampala, Uganda, and
Joseph Mpeera Ntayi
FEEM, Makerere University Business School, Kampala, Uganda
Abstract
Purpose –The purpose of this paper is to establish the relationship between institutional framework of
regulative (formal rules), normative (informal norms) and cultural-cognitive (cognition), and theireffects on
financial intermediation by microfinance deposit taking institutions (MDIs) in developing economies like
Uganda.
Design/methodology/approach –Data collected from a total sample of 400 poor households and 40
relationship officerslocated in rural Uganda were processed using statistical packagefor social sciences and
analysis of moment structures to establish the relationship between institutional framework of regulative,
normative and cultural-cognitive, and their effects on financial intermediation by MDIs in developing
economies.
Findings –The results showed that the three dimensions of regulative(formal rules), normative (informal
norms) and cultural-cognitive(cognition) significantly affect financial intermediation by MDIs in developing
economies like Uganda. In addition, as a unique finding, two new dimensionsof procedural and declarative
cognition emerged from cultural-cognitive framework to determine financialintermediation among MDIs in
developingeconomies, specifically in Uganda.
Research limitations/implications –The study collected data from only poor households and
relationshipofficers located in rural Uganda. It ignored peri-urbanand urban areas in Uganda. In addition, the
study focused only on MDIs and ignored other financial institutions. Besides, the study was purely
quantitative, therefore,further research through interviews may be useful in future. Furthermore,the study
was carried out in ruralUganda as a developing economy. Thus, future researchusing the same variables in
other developingeconomies may be useful.
Practical implications –Managers of financial institutionsand policy makers should know that market
functions of financial intermediaries in developing economies are promoted by institutional framework of
regulative, normative and procedural and declarative cognition that lowers transaction cost and promotes
information sharing. Therefore, more efforts should be directed towards strengthening the existing
institutional framework of regulative, normative and cognition to promote financial intermediation by
financialinstitutions such as MDIs.
Originality/value –This paper is the first to test the relationship between institutional framework
and their effects on financial intermediation by MDIs in developing economies. The results revealed
Framework in
developing
economies
271
Journalof Financial Regulation
andCompliance
Vol.26 No. 2, 2018
pp. 271-286
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2017-0025
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
existence of two new factor structures of procedural and declarative cognition in explaining financial
intermediation by MDIs in developing economies like Uganda. This is sparse in financial intermediation
literature and theory.
Keywords Structural equation modeling, Developing economies, Financial intermediation,
Institutional framework, Microfinance deposit taking institutions, Rules of the game
Paper type Research paper
Background to the study
According to North (1990), institutions consist of both “formal constraints”suchas codified
rules and laws, and “informal constraints”such as norms, customs, culture and shared
beliefs, which help people to form expectations of what others will do in the presence of
uncertainty and imperfect information for efficient transactionalagreements to be achieved
in the market (Coase, 1937). In addition,Scott (2001) also conceived institutions to “consist of
regulative (legal), normative (social) and cultural-cognitive elements that together with
associated activities and resources, provide stability and meaning to social life”. Hence,
drawing from the institutionaltheoretical perspectives, institutions through its institutional
framework define and specify the rules for competition and cooperation in both developed
and underdevelopedmarkets.
Indeed, Olsson (1999) suggests that the rules of the game may involve sharing of
information about the service or product being traded in the market. Under circumstances
where wealth-maximizing agentsexist in the market, economic agents find it worthwhile to
cooperate with other agents (players) to make a gain because of repeated interaction and
availability of complete information about the other agent’s (player’s) past performance.
Thus, institutions promote efficient transactions in the market guided by the rules of the
game, which lowers transactioncost resulting from information asymmetry.
Additionally, Gurley and Shaw (1960) argue that financial intermediaries arise to solve
the problem of market frictions and imperfection such as information asymmetry.
Therefore, financial intermediaries exist to eliminate transaction cost that arise from
information asymmetry in financial markets between the surplus and deficit units (savers
and borrowers). They try to limit the cost of information search, contracting, negotiation,
monitoring contracts and costs of enforcement by collecting information from both the
surplus and deficit units to completethe market (trade).
However, during the intermediation process, financial intermediaries may fail to
collect all the required information to complete the market, thus, leading to re-current
problem of information asymmetry. Thus, to complete the market, financial
intermediaries require cooperative behaviour between the surplus and deficit units,
hence, the need for institutions. This is supported by Lin and Nugent (1995) who argue
that institutions through its institutional framework reduces the transaction cost of
exchanges between surplus and deficit units in the financial market. According to
North (1990), institutions reduce the cost by setting the “rule of the games”for
cooperation among economic agents in exchange.
Whereas studies exist to explore the role of institutions in influencing economic
exchange and performance between agents (North, 1990;Scott, 2001;World Bank, 2001;
Olsson, 1999; Hodgson,1998;Lin and Nugent, 1995), a critical review of these studies largely
ignores the role of institutional framework in promoting financial intermediation by
microfinance deposittaking institutions (MDIs), especially in developingeconomies.
Therefore, the purpose of this studyis to establish the relationship between institutional
framework of regulative, normative and cultural-cognitive and their effects on financial
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