Business Environment and Microfinance Performance

Much of the literature on microfinance performance has concentrated on the effects of institution-specific practices, but there have been comparatively few attempts to analyze how the broader economic environment affects the performance of microfinance institutions (MFIs). Drawing on the work of Ahlin and Lin (2006), who find that numerous macroeconomic indicators affect MFI performance, this paper uses a demand-based model to study empirically how the broader business environment in a country affects MFI performance. Most of the results indicate that factors that are supportive of development generally are also supportive of microfinance activities. MFIs tend to perform better in terms of sustainability and outreach in countries that are business-friendly and have relatively developed credit markets. The quantitative impact of the business environment on MFI performance is also substantial, although most of the variation in MFI performance appears to be due to differences at the institution level.