Evaluating the Socio-Economic Sustainability of Microfinance Institutions through System Dynamics Approach

Abstract

Financial services in India are majorly offered by Banks, Non-Banking Financial Companies, and Microfinance Institutions which serve the rural and urban communities providing them financial aid to run their day-to-day business needs. But, these financial institutions specifically Microfinance Institutions, as they are known to serve a major chunk, need to be well-networked and more sustainable. This study attempts to analyse the sustainability of Microfinance Institutions within economic and social contexts. The objectives undertaken of this study are to identify the sub-factors impacting the economic and social performance of Microfinance Institutions and to assess how these socio-economic performances of Microfinance Institutions impact their overall sustainability. The methodology used to justify these objectives is Systems Dynamics Modelling technique which includes building a model as a Causal Loop Diagram showing positive or negative relations of the considered variables. The results obtained by the empirical study show the positive impact of the economic and social sustainability of Microfinance Institutions on their overall sustainability. The conclusions imply the managerial and future implications of the study highlighting the need to promote the economic and social performance of Microfinance Institutions so that their overall sustainability can be improved. This also helps Microfinance Institutions enhance their profitability margins and develop social boundaries along with contributing to economic development and growth of the economy.