Economic Governance of MFIs: Inside the Black Box

Investigating relation between economic governance and the objectives of MFIs
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This paper examines the relationship between economic governance and the dual objectives of MFIs, namely poverty reduction and financial viability.

The study conducts a detailed enquiry into internal and external governance structures and their functional roles that provide checks and balances for MFIs. It is based on data for 200 MFIs from 61 countries obtained from Microfinance Information Exchange and the ‘Doing Business’ and ‘Governance’ surveys of World Bank. The study uses Hausman-Taylor Test and Fixed Effect Vector Decomposition for econometric discussion. Major findings include:

  • Credit information availability and shorter duration in registering a property significantly help poverty reduction efforts of MFIs;
  • Product diversification resulting in economies of scope increases outreach of MFIs;
  • External governance indicators do not affect MFIs’ profitability.

The paper states that it is imperative for government and development partners to ensure an enabling environment for enhancing the achievement of microfinance social objectives.