Empirical studies on culture, individual finance choices, and the performance of financial intermediaries
Date
2021-03
Authors
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Publisher
Stellenbosch : Stellenbosch University
Abstract
ENGLISH SUMMARY : Finance represents an important axle of economic growth and development globally. Through financial intermediation, savings can be transmitted into investment, which then has an impact on growth and development. Across the developing world, Microfinance Institutions (MFIs) play a key role in harnessing savings of low income earners who make up majority of the populations therein. To ensure reduced intermediation costs wherein a smaller proportion of such savings is lost or left untransmitted into investment, more efficient financial sectors are needed. Where financial sectors are weaker and less efficient, higher intermediation costs result. This may have an effect on the important intermediation function of harnessing and transmitting saving to investment, and on the performance and ultimately sustainability of intermediaries like MFIs which are active in the developing world. In some cases, this may even give rise to large informal finance sectors, wherein exploitative practices of informal finance service providers then leads to even higher intermediation costs. In recent decades however, financial sector reforms like liberalisation and innovations stemming from technological advances like mobile money have significantly reduced intermediation costs across the developing world and strengthened the financial sectors of countries therein. However, informal finance has remained popular and resilient in some countries and regions. The continued popularity of informal finance mechanisms in some parts of the world has baffled researchers for a long time. It has been easy, and logically so, to blame credit market imperfections like the cost of using formal financial services for the growth and popularity of informal finance. Continuing down this path of blaming credit market imperfections for the resilience of informal finance may however only tell part of the story given a lot of the cost drivers which have been behind the imperfections in credit markets have been reduced. In this study, we hypothesis that the cultural environment in which individuals undertake financial transactions and in which financial intermediaries operate has an effect both on the individual decision to use formal or informal financial services, and on the performance of financial intermediaries, MFIs in this case. Theoretically, culture, depending on its enshrined values – what a society considers good or bad – has important bearings on the cost of designing, delivering, and finally using formal financial services. Four standalone studies are conducted to assess the effect of culture on finance decisions and outcomes, the first two on individual finance choices wherein cross-sectional data is used and probit models applied in the empirical estimation; and the last two on performance of MFIs, with the use of panel data, and a random effects model in the third, and Data Envelopment Analysis, followed by a tobit model in the fourth. Individual- and firm-level data from both developed and developing economies relating to finance choices and performance respectively is extracted from global sources like the World Bank, and culture data from Hofstede‘s cultural dimensions database and the World Values Survey. Stellenbosch University Findings of the empirical analysis indicate that culture has an effect on individual finance choices, and firm performance. Individuals are more likely to use formal financial services in more individualistic, longer-term oriented, and more indulgent cultures. The use of informal finance mechanisms is more likely in high uncertainty avoidance, high trust, and more religious cultures. These findings are supported by empirical and theoretical literature on differential levels of trust and social capital in different cultural contexts, which then affect the level and costs of financial intermediation. At the firm level, MFIs achieve better financial performance in high power distance and more individualistic cultures, and better social performance in more masculine and more indulgent cultures. Empirical and theoretical literature on the level of information asymmetry and asymmetry reduction strategies and related costs in different cultures support these findings. These findings have policy implications for developing and emerging economies. The findings highlight the need for global development partners, policymakers and practitioners to consider cultural influences in formulating and pursuing their development-related objectives, especially in relation to financial services provision. In particular, development-related policies must be customised to respective regions and countries due to cultural differences which may influence the cost and ultimately ability to reach these objectives. The empirical evidence presented here opposes the application of a ‗one-size fits all‘ rule with respect to development strategies as has been the case in much of the past. From a theoretical perspective, the present research provides further understanding on individual finance choices in different cultural contexts and how these choices go on to affect the performance of financial institutions, MFIs in this case. It is a first-hand attempt to link individual choices, firm performance, and culture. The study introduces the Technology acceptance model (TAM), a model which has been applied more to technology and innovation, to financial inclusion. It additionally links culture to market imperfections like information asymmetry, arguing that these imperfections have a dual effect on both the supply and demand sides. Thirdly, the study links social capital to cultural measures like trust, providing deeper insight on the importance of this capital and its effects on financial services provision in different contexts.
AFRIKAANSE OPSOMMING : Geen opsomming beskikbaar.
AFRIKAANSE OPSOMMING : Geen opsomming beskikbaar.
Description
Thesis (PhD)--Stellenbosch University, 2021.
Keywords
Microfinance -- Cultural aspects -- Malawi, Finance, Personal -- Decision making -- Malawi, Finance, Personal -- Cultural aspects -- Malawi, Intermediation (Finance), Microfinance -- Government policy -- Malawi, Credit analysis -- Malawi, UCTD