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.

Citation

Singh, P. and Kapoor, S. (2019), "Transaction costs in microfinance – study from clients’ perspective", International Journal of Development Issues, Vol. 18 No. 1, pp. 34-50. https://doi.org/10.1108/IJDI-06-2018-0081