Accepted version of article published in the journal: Journal of Banking & Finance Published version available on Science Direct:
http://dx.doi.org/10.1016/j.jbankfin.2008.11.009

/pdf/performance-and-governance-in-microfinance-institutions-2pc5b0tnw1.pdf

Performance and governance in microfinance institutions

In spite of increasing pressure on microfinance institutions (MFIs) operating in developing countries to transform into regulated financial intermediaries, to date, no study has investigated whether regulated MFIs actually achieve better financial results and reach more poor clients than nonregulated MFIs. This article explores the impact of regulation on MFI performance using newly released data for 114 MFIs from 62 countries in an empirical model where performance is specified as a function of MFI-specific, regulatory, macroeconomic and institutional variables. Consistent with recent cross-country evidence on the impact of banking regulations on bank performance (Barth et al ., 2004), this article finds that regulatory involvement does not directly affect performance either in terms of operational self-sustainability or outreach. The article also finds that less leveraged MFIs have better sustainability. The policy implication is that MFIs’ transformation into regulated financial institutions is may not...

Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence

http://deepblue.lib.umich.edu/bitstream/handle/2027.42/40063/wp677.pdf?sequence=2

Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States

Policy advocates argue the case for the transformation of non-government Microfinance Organizations (MFOs) into shareholder owned firms. The argument is that this will bring about superior performance. This paper investigates whether the superiority of shareholder owned MFOs is empirically supported. The findings indicate that the difference between shareholder owned MFOs and non-government MFOs is minimal. Our results contradict established paradigms and policy guidelines in the industry. However, the results are not necessarily surprising since ownership theories do not predict a clear preference for one type of ownership in the microfinance market. Furthermore, findings in general banking markets as well as the pro-poor banking history indicate that mutual and non-profit ownership can compete successfully with investor ownership.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1728719_code769087.pdf?abstractid=970513&mirid=2

Performance and Trade-offs in Microfinance Organizations - Does Ownership Matter?

This article analyses the cost of ownership in microfinance organizations. We specifically compare the ownership-cost of Shareholders Firms (SHFs), Non Profit Organizations (NPOs) and Cooperatives (COOPs). A paradoxical situation motivates us: most providers of microfinance, both historically and today, are NPOs or COOPs, while several policy papers advocate SHFs. Based on an extension of Hansmann's (1996) economic theory of ownership we propose that cost variables related to market contracting of microfinance services favor NPOs and COOPs, whereas most cost variables related to the practice of ownership favor SHFs. We conclude that in severe imperfect markets, where most microfinance organizations operate, NPOs and COOPs are still needed.

The Cost of Ownership in Microfinance Organizations

The continuum of institutions providing microfinance cannot develop fully without a regulatory environment conducive to their growth. Without such an environment, fragmentation and segmentation will continue to inhibit the institutional transformation of microfinance institutions. The authors recommend a tiered approach to external regulations, one that takes into account the different types of microfinance institutions, the products they offer, and the markets they service. A tiered approach can be useful in designing regulatory standards that recognize the basic differences in structure of capital, funding, and risks faced by different kinds of microfinance institutions. The model they develop for a regulatory framework identifies thresholds of financial intermediation activities, thresholds that trigger the requirement that an institution satisfy external or mandatory regulatory guidelines. It focuses on risk-taking activities that must be managed and regulated. They illustrate the usefulness of the model by practically applying prudential considerations to various categories and values of financial risk for each of three broad categories of microfinance institution: 1) Those that depend on other peoples' money (such as donor or public sector funding). 2) Those that depend on members' money. 3) Those that leverage the general public's money to fund microfinance loans. For each category, the model highlights: 1) The observed value ranges for selected indicators of financial risk. 2) Recommended ranges of value suitable for consideration under internal governance. 3) Suggested threshold values that indicate the need for external regulation. A transparent, inclusive framework for regulation will preserve the market specialties of different types of microfinance institutions - and will promote their ultimate integration into the formal financial system. One example of the kind of regulation the authors recommend: Require standard registration documents and procedures - no different from those required of regular corporations - including the designation of a central government agency with which they should register as corporate entities.

/pdf/a-framework-for-regulating-microfinance-institutions-1fqkanvigq.pdf

van Greuning

Papers

A framework for regulating microfinance institutions