A New Index of the Business Environment for Microfinance

This paper describes a new index of the quality of the business environment for MFIs, the Global Microscope on the microfinance business environment. It uses regressions to validate the index by linking it and its subcomponents to microfinance outcomes. The paper tests whether Microscope can explain variation in the penetration and performance of MFIs. It undertakes multiple empirical analysis to:

• Test whether the links between the Microscope and MFI outcomes are robust to controlling simultaneously for other relevant variables;
• Identify which components of the index best explain variation in which outcomes;
• Examine where microfinance fits into the broader formal financial sector across developing countries;
• Study how the interplay between MFIs and formal providers of financial services is related to the Microscope and its components.

The paper concludes that the components of the index related to supporting institutional framework are strongly linked to measures of microfinance penetration such as microfinance borrowers as a share of total population. Moreover, the framework for regulation and supervision are more strongly linked to outcomes at the MFI level, including loan portfolio quality, average loan size, and the share of lending to women.