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
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