The Impact of External Governance Quality on the Economic Success of Microfinance Institutions- Empirical Evidence

This paper examines the impact of a country's external governance quality on the economic success of microbanks. It uses data on 558 MFIs in 80 countries for the period 2002 to 2007.The study provides evidence that a country's institutions-based and outcomes-based governance quality positively affects a microbank's economic success in terms of return on assets and operational self-sufficiency. It draws the following policy implications:

• Government is able to support microbanks through effective and gradual implementation of good governance;
• Lasting financial services provision to the poor and poverty alleviation become achievable goals as governance determines MFI profitability and sustainability;
• Particular needs of microfinance must receive attention in order to support a sustainable local microfinance industry;
• Growing trend of MFIs adopting formal banking strategies and banks providing microfinance increases the need for good governance.

Study findings indicate that the status of regulation is less important for microbanks than the actual implementation of the same. Advising against putting MFIs under traditional banking regulation, the paper suggests adapting regulatory instruments to the particular needs of microfinance.