Impact investments in microfinace in India (2010-2016)

Abstract

A key tenet in the definition of impact investing is that the investment must be made with the intention of making a social impact. Yet, there is little literature that addresses the constitution of such intentionality. Without clarity, the prospect of credibly implementing intention is bleak, which renders the whole definition of impact investing weak and practically useless. By specifically studying the intention of making investments in microfinance institutions (MFIs) in India, this research addresses the question of whether such investments qualify as ‘impact investments’ or not. Towards the objective, the Reasoned Action Approach (RAA) is applied to elicit a causal analysis to explain the behaviour of MFIs. The investors’ intention and influence on the behaviour of MFIs is germane. 67 semi-structured interviews and questionnaires were administered to five strata of strategic decision-makers of influencers viz., asset owners, investment managers, banks and service providers. Social impact is characterised by corporate governance, business behaviour, human resource and community involvement. Financial returns are analysed using the Du Pont formula - Net Profit Margin, Asset Turnover Ratio and Financial Leverage. Taken together, these seven characteristic behaviours unveil the behavioural predilection of each stratum of respondents. The study factors that the behaviour of MFIs is determined not only by the willingness but also by the ability of investees to manage social impact alongside financial returns. The Analytical Hierarchy Process (AHP) is deployed to disentangle complex decisions that are faced by MFIs. The AHP decrypts respondents’ choices, the ease with which such choices are made and unravels that there is a disposition to select financial return vis-à-vis social impact. MFI promoters and donors are brought in for validation. The key findings are: (i) the intention of social impact was limited, and the focus was primarily on financial returns; (ii) the relationship between social impact and financial return is complex and inextricably inter-dependent; therefore, ‘standards’ of evaluation will have to combine social impact and financial return (iii) both impact investors and MFIs, show a high degree of isomorphism, on both intention and behaviour of social impact. These findings have direct applications to (a) public policy on impact investments in India and elsewhere, (b) social enterprises’ strategy, (c) corporate policies of impact investors and (d) bridge the gap between theoretical definitions and practical applications. The literature section can also be applied for studies on behavioural finance, institutional structures and regulation of impact investments.