A New Index of the Business Environment for Microfinance

Abstract

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.

Sustainable Development and Microfinance: The Effect of Outreach and Profitability on Microfinance Institutions' Development Mission

“…In line with prior literature (see, for example, Assefa et al ., ; Bos and Millone, ; Cull et al ., ; Hermes et al ., ; Vanroose and D'Espallier, ) and with the World Bank's Consultative Group to Assist the Poor (CGAP) (Rosenberg, ), MFIs' outreach focus is referred to as a measurement of their social responsibility and is quantified by indicators such as number of borrowers, percentage of female borrowers and average loan balances. In order to quantify MFIs' striving for profitability, we utilize a dummy variable indicating MFIs' profit orientation as well as their profit margin and return on assets as metric variables (Cull et al ., ; Kumar and Gupta, ; Mersland and Strøm, ).…”

“…In fact, they ought to achieve financial self‐sufficiency – to generate enough income to cover their expenses (Dehejia et al ., ; Jackson, ; Prior and Argandoña, ) through interest revenues and independent of subsidies (Rosenberg, ). Accordingly, when it comes to MFIs' performance, current microfinance literature and practice differentiate between financial and social achievements and equate MFIs' outreach to the poor with their social responsibility performance (Bos and Millone, ; Cull et al ., ), quantifying it by indicators such as number of borrowers, percentage of female borrowers and average loan balances (Rosenberg, ).…”