Is Micro Financing Creating Social Value: The Effect of Impact Investment of Microfinance Banks on Borrowing Firms’ Financial and Social Performance and with the Mediatory Role of Principal-Agent Relationship

48 Pages Posted: 3 Sep 2020 Last revised: 23 May 2022

See all articles by Sher Abbas

Sher Abbas

Danish Ahmed Siddiqui

University of Karachi - Karachi University Business School

Date Written: August 28, 2020

Abstract

Impact investment has emerged as an idea for sustainable development and aims at creating positive change towards the environment and society besides increasing returns. There have been many debates regarding its functionality and viability and argue that is made in favor of “financial returns” and “social returns” by various practitioners. The microfinance banking system in Pakistan is still in the infancy phase concerning impact investment. This study explored the relationship between impact investment and how various dimensions of impact assessment influence financial performance and social performance and how it will in turn affect the social value creation. For this we developed a theoretical framework, modifying financial intermediary social value equation model developed by that conceptualized the mediatory role of principal-agent relationship in impact investment and performance nexus. Impact of investment. To measure impact investing, we used a 3 tier Business Performance measurement matrix conceptualized by Rowe-Haynes, M. D. (2017). These included Job, Business Survival, Ethnicity and minority, Business, and Bank Impact. We hypothesized that these impact investing dimensions affect both financial performances as well as social performance through strengthening Principal-Agent Relationship. Higher financial and social performance would in turn lead to social value creation in the society. Empirical validity was established by conducting a survey using a close-ended questionnaire. Data were collected from 100 small/ medium scale businesses using confirmatory factor analysis and structured equation modeling. The survey of each business included its owner who got loans as well as conducting another round of survey with the bank managers who sanctioned those loans. The results suggested that ethic and minority impact positively and significantly influence the financial performance along with the principal-agent relationship. Also, the social performance of organizations seems to be a key contributor to social value creation. This implies that social inclusion in society to integrate all segments along with a focus on the management of principal-agency problems is imperative for financial performance. Hence, the findings imply that impact investment is not increasing financial value as much as it addresses social performance indicators. This social performance leads to social value creation in the society hence impact investment creates social value.

Keywords: impact investment, financial value performance, social performance, microfinance, social value creation, Pakistan

Suggested Citation

Abbas, Sher and Siddiqui, Danish Ahmed, Is Micro Financing Creating Social Value: The Effect of Impact Investment of Microfinance Banks on Borrowing Firms’ Financial and Social Performance and with the Mediatory Role of Principal-Agent Relationship (August 28, 2020). Available at SSRN: https://ssrn.com/abstract=3682793 or http://dx.doi.org/10.2139/ssrn.3682793

Danish Ahmed Siddiqui (Contact Author)

University of Karachi - Karachi University Business School ( email )

University Road
Karachi, Sindh 75270
Pakistan
3333485884 (Phone)

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