Governance, Performance and Diversification: Evidence from African Microfinance Institutions

This study analyzes the relationship between performance of MFIs and their organizational, income, and fund structure. This includes governance mechanisms and product and service diversification.

African financial systems are weak due to inefficiency and concentration of credit allocation in short-term and speculative activities. This is partly due to lack of stable long-term finance and banks' risk aversion. The study focuses on three aspects of MFI performance, namely, sustainability, outreach and portfolio quality. The study examines a panel of 281 MFIs in 34 African countries from 1996 to 2008. Findings include:

• Different types of institutions have different levels of performance, sustainability, outreach and portfolio quality;
• NGOs perform better than other institutions, in terms of depth of outreach and profitability, but they are not necessarily operationally more self-sufficient;
• Asset expansion leads to higher number of clients, but lower depth of outreach;
• External governance leads to higher efficiency and productivity, but does not necessarily improve portfolio quality;
• MFIs that focus on loans are less sustainable and have higher risk;
• MFIs that offer health and education services have better portfolio quality.

Use of factor analysis method further strengthens study results.