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This paper describes a new index of the quality of the business environment for microfinance institutions. Regressions are used to validate the index by linking it and its sub-components to microfinance outcomes. We find that the components of the index related to the supporting institutional framework are strongly linked to measures of microfinance penetration. Components related to the framework for regulation and supervision are more strongly linked to outcomes at the MFI level, including loan portfolio quality, financial self-sufficiency, average loan size and the share of lending to women. Many of these relationships are robust to using instrumental variables estimation.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.