Transaction costs in microfinance – study from clients’ perspective

Abstract

Purpose The issue of transaction cost (TC) has always been the concern of both researchers and policymakers in microfinance. This paper aims to measure the TC of borrowers across various microfinance business models in India. Design/methodology/approach To identify sources of the TC of the clients in the entire process of borrowing loan, the technique of process mapping has been used in this study. Using the data collected from randomly selected 700 clients under different microfinance models, the study has computed the different components of clients’ TC. Findings The results show that although SHG-Bank linkage model has more robust organizational design, its sluggish operational modalities has resulted in a higher client TC as compared to that in MFI lending model. The indirect TC (in terms of clients’ opportunity cost of time) occupies major share in clients’ TC, and strategies are required by MFIs/banks to reduce it substantially by using the appropriate technology. Research limitations/implications The client TC can become one of the important factor to evaluate efficiency of the different models of microfinance. Policymakers can use the findings to reduce the clients’ TC by benchmarking best practices across all the microfinance business models. Originality/value The research paper offers an insight into different components of clients’ TC across different models of microfinance. So far, not much research has been carried out on the subject in Indian context.

A transaction cost explanation of the card-or-cash decision among Vietnamese debit card holders

“…Although this definition of transaction cost is not really consistent with that in the transaction cost economics theory, this study is an attempt to affirm consumers' tendency to minimise the cost involved with money transactions. In the context of microfinance, Singh and Kapoor (2019) defined transaction costs as the non-interest expenses incurred by borrowers and lenders, or ‘the cost of intermediation’, which is also a measure of the efficiency of the microfinance business model and the financial sector's performance in general (Cuevas, 1988). Based on an expansion of transaction cost economics theory proposed by Kang (2003), stating that contract choice depends on the transaction costs of the different contracts, Karduck and Siebel (2004), Singh and Kapoor (2019) and Tutlani (2016) analysed the efficiency and acceptance of microfinance models based on perceived transaction costs of microfinance clients, including various opportunity time costs and travel costs.…”

“…In the context of microfinance, Singh and Kapoor (2019) defined transaction costs as the non-interest expenses incurred by borrowers and lenders, or ‘the cost of intermediation’, which is also a measure of the efficiency of the microfinance business model and the financial sector's performance in general (Cuevas, 1988). Based on an expansion of transaction cost economics theory proposed by Kang (2003), stating that contract choice depends on the transaction costs of the different contracts, Karduck and Siebel (2004), Singh and Kapoor (2019) and Tutlani (2016) analysed the efficiency and acceptance of microfinance models based on perceived transaction costs of microfinance clients, including various opportunity time costs and travel costs. Upon the same perspective, Ramasamy and Yeung (2003) insisted that besides the size of fund, transaction costs represent an important determinant in the choice of mutual funds of financial advisors in emerging countries.…”

“…Finally, although transaction cost economics perspective is frequently considered to explain the make-or-buy problem, this theory has been expanded to explain customer choices among various modes of transaction even when they may not really reflect exactly the make-or-buy situation (Singh and Kapoor, 2019). Future researchers may apply this approach to use transaction costs in explaining customer choice over different financial institutional modes, such as using a debit card or a credit card, borrowing from informal sources or formal institutions, and purchasing/buying foreign currencies on the black market or from a mainstream bank.…”

“…Notwithstanding the fact that the transaction-cost perspective was originally rooted in the inter-organisational context, since consumers, like firms, are assumed to optimise their scarce resources to derive the greatest utility (Grønhaug and Gilly, 1991; Zaltman and Wallendorf, 1983), the framework is applicable to consumer transactions as well (Cannon et al , 2014; Cannon and Schwaiger, 2005; Bergen et al , 1992). The literature shows the wide adaptation of the transaction cost approach to explain customer behaviour in many contexts, such as the choice between online buying and traditional buying (Liang and Huang, 1998; Steinfield and Whitten, 1999; Teo and Yu, 2005; Yeh and Yang, 2012), the acceptance of e-banking (Bauer et al , 2005), the choice of mutual funds (Ramasamy and Yeung, 2003), the choice of microfinance models (Karduck and Siebel, 2004; Pal, 2002; Singh and Kapoor, 2019; Tutlani, 2016), the perception of banking service quality (Dauda and Lee, 2016) and customer dissatisfaction and complaint actions (Grønhaug and Gilly, 1991). The fundamental theoretical framework underlying the adaptation of transaction cost economics theory at individual level states that consumers, like firms, will act in a way that minimises transaction costs.…”

An integrated framework for analysing performance indicators of Indian microfinance institutions: a multi-stakeholder perspective

“…MFIs that are efficient in minimising operating cost and avail cheaper source of funds enjoy a higher rate of margin on investment. Furthermore, overhead cost or the transaction cost constitutes a significant part of total cost and can be reduced by leveraging technology (Singh and Kapoor, 2019). The study reveals that financial performance is ranked one.…”