Institutional framework in developing economies. Do all dimensions matter for financial intermediation by microfinance deposit-taking institutions?

Author:George Okello Candiya Bongomin, Charles Akol Malinga, John C. Munene, Joseph Mpeera Ntayi
Position:FGSR, Makerere University Business School, Kampala, Uganda
Pages:271-286
SUMMARY

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 their effects 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 officers located in rural Uganda were processed using statistical package for social sciences and analysis of... (see full summary)

 
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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
nancial intermediation by micronance 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 ofcerslocated 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 nancial 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) signicantly affect nancial intermediation by MDIs in developing
economies like Uganda. In addition, as a unique nding, two new dimensionsof procedural and declarative
cognition emerged from cultural-cognitive framework to determine nancialintermediation among MDIs in
developingeconomies, specically in Uganda.
Research limitations/implications The study collected data from only poor households and
relationshipofcers located in rural Uganda. It ignored peri-urbanand urban areas in Uganda. In addition, the
study focused only on MDIs and ignored other nancial 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 nancial institutionsand policy makers should know that market
functions of nancial 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 nancial intermediation by
nancialinstitutions such as MDIs.
Originality/value This paper is the rst to test the relationship between institutional framework
and their effects on nancial 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 nancial
intermediation by MDIs in developing economies like Uganda. This is sparse in nancial intermediation
literature and theory.
Keywords Structural equation modeling, Developing economies, Financial intermediation,
Institutional framework, Micronance deposit taking institutions, Rules of the game
Paper type Research paper
Background to the study
According to North (1990), institutions consist of both formal constraintssuchas codied
rules and laws, and informal constraintssuch 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 efcient 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 dene 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 nd it worthwhile to
cooperate with other agents (players) to make a gain because of repeated interaction and
availability of complete information about the other agents (players) past performance.
Thus, institutions promote efcient 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 nancial intermediaries arise to solve
the problem of market frictions and imperfection such as information asymmetry.
Therefore, nancial intermediaries exist to eliminate transaction cost that arise from
information asymmetry in nancial markets between the surplus and decit 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 decit units to completethe market (trade).
However, during the intermediation process, nancial 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, nancial
intermediaries require cooperative behaviour between the surplus and decit 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 decit units in the nancial market. According to
North (1990), institutions reduce the cost by setting the rule of the gamesfor
cooperation among economic agents in exchange.
Whereas studies exist to explore the role of institutions in inuencing 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 nancial intermediation by
micronance 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 nancial
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