Title: The impact of external governance quality on the economic and social success of microfinance institutions
Authors: Oliver Müller; André Uhde
Department of Economics, University of Bochum, 44780 Bochum, Germany
Department of Taxation, Accounting and Finance, University of Paderborn, 33098 Paderborn, Germany
Abstract: Employing a Hausman-Taylor instrument variable (HT-IV) estimator to data from 558 microfinance institutions (MFIs) in 80 developing countries for the period from 2002 to 2007, this paper provides empirical evidence for a positive impact of a country's external governance quality and outcome on local microbanks' economic success in terms of profitability and sustainability. Evidence as well suggests a negative relationship between external governance and the microbanks' social success measured by the depth of outreach. In this context, our analysis reveals that a country's political stability, governance effectiveness, regulatory quality and rule of law are significant key elements of external governance affecting the MFIs' functional performance. Moreover, results from sensitivity analyses indicate that the relationship between external governance quality and microfinance functional performance significantly depends on the microbanks' business concepts, their lending methodologies and sources of funding.
Keywords: microfinance; external governance; economic success; social success; developing countries; profitability; sustainability; microbanks; outreach; political stability; governance effectiveness; regulatory quality; rule of law; governance quality; lending methodologies; funding sources.
Int. J. of Monetary Economics and Finance, 2013 Vol.6, No.2/3, pp.116 - 149
Available online: 13 Sep 2013