2025, Vol. 7, Issue 9, Part B

Small financial institutions such as community banks, rural microfinance providers, and credit unions are increasingly subject to complex regulatory requirements designed to promote systemic stability, consumer protection, and anti-money laundering (AML) compliance, and while these measures improve oversight, they impose significant costs that may disproportionately burden smaller entities. This study quantifies the direct and indirect costs of regulatory compliance on small institutions, analyzes cost variation by asset size, and evaluates the broader economic consequences of these compliance expenditures by employing a mixed-methods cross-sectional design in which quantitative data were collected from 120 small financial institutions across three asset categories (< USD 50 million, USD 50-200 million, and USD 200-500 million). Direct costs measured included compliance staff salaries, IT systems, legal and audit fees, training, and fines, while indirect costs comprised foregone lending opportunities, administrative delays, and strategic constraints; in addition, qualitative interviews with compliance officers and executives provided insight into cost drivers and institutional coping strategies, and statistical analyses incorporated ANOVA, multivariate regression, and thematic coding of interview transcripts. The results show that mean annual compliance cost was USD 2.7 million, representing 2.1% of total assets and 5.6% of net income, with smaller institutions (< USD 50 million assets) bearing proportionally higher costs at 3.4% of assets compared to 1.3% for the largest group (p<0.01), and indirect costs, particularly opportunity losses from reduced lending capacity, accounting for nearly 60% of the total burden; moreover, interviews highlighted regulatory complexity, frequent rule changes, and reporting misalignments as the main cost escalators. Overall, compliance obligations exert a substantial economic burden on small institutions, with disproportionate effects on the smallest players, and policymakers should consider proportional regulatory frameworks and streamlined reporting processes to preserve the competitiveness and survival of small financial entities.