Where Does Microfinance Flourish? Microfinance Institution Performance in Macroeconomic Context

This paper looks into the macroeconomic and macroinstitutional reasons for the success of MFIs. It analyzes data from 373 MFIs across 74 countries, and evaluates it against country-level economic and institutional data.

The paper finds evidence of complementarity between overall economic performance and MFI performance. Study findings include:

• Growth appears to improve MFI financial performance;
• Breaking even appears easier to do in richer countries;
• Developed financial sector is associated with lower operating costs, lower default, and lower interest rates, suggesting that broad financial competition benefits microborrowers;
• Signs of rivalry is observed between microfinance and industry-led growth;
• Workforce participation and manufacturing's share of GDP predict slower growth in outreach of MFIs;
• MFIs do not always do better, and sometimes seem to do substantially worse, where institutions are more advanced.

MFI success, in terms of financial sustainability and extensive and intensive growth, is significantly affected by the national context. Therefore, rigorous MFI evaluation must factor in country environment.