Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States

This paper presents the first evidence on the impact of external governance mechanisms, board diversity and independence, and management compensation on outreach and sustainability of microfinance institutions (MFI) in Central and Eastern Europe (CEE) and the Newly Independent States (NIS).

Further, the paper:

• Uses unique data from recently conducted surveys in CEE and in the NIS;
• Studies the relationships between governance and the MFI performance;
• Presents theoretical considerations and the empirical model.

The findings of the study are as under:

• Among external governance mechanisms, only auditing affects outreach;
• Regulation and rating do not affect performance;
• While board diversity improves both outreach and sustainability, larger and less independent boards lower sustainability;
• Performance-based compensation is not effective in aligning the interest of managers and stakeholders, and underpaying managers reduces outreach.

This study concludes that:

• In microfinance, larger boards and boards with higher proportion of insiders have worse financial results;
• Traditional mechanisms, designed to align the interests of managers with those of other stakeholders, have a limited role in microfinance;
• Performance based compensation of managers does not improve MFI performance;
• Manager experience does not affect sustainability and its impact on depth of outreach is small in magnitude.