A New Index of the Business Environment for Microfinance. (June 2015)

• Record Type: Journal Article
• Authors: Cull, Robert; Navajas, Sergio; Nishida, Ippei; Zeiler, Renate
• Is Part Of: World development. Volume 70(2015)
• Page Start: 357
• Page End: 388
• Publication Date: 2015-06
• Subjects: microfinance -- business environment -- developing countries; Economic history -- 1990- -- Periodicals; Economic assistance -- Developing countries -- Periodicals; 330.9
• DOI: 10.1016/j.worlddev.2014.11.023
• Languages: English
• ISSNs: 0305-750X

Abstract

Highlights: We describe and validate a new index of the microfinance business environment. Index components for supporting institutions are linked to microfinance penetration. Components for supervisory quality are linked to better MFI financial performance. However, supervisory quality is negatively linked with outreach to poorer borrowers. Many of these relationships also hold using instrumental variables regressions. Summary: This paper describes a new index of the quality of the business environment for microfinance institutions (the Global Microscope on the Microfinance Business Environment). Regressions are used to validate the index by linking it and its sub-components to microfinance outcomes. The main findings are that the components of the index related to the supporting institutional framework are strongly linked to measures of microfinance penetration (such as microfinance borrowers as a share of total population). 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, but not all, of these relationships are robust to using instrumental variables estimation in which a country's general stringency with respect to financial regulation is used as an instrument for the index and its components.