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

Abstract

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 ., Citation2004), 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 lead to improved financial results and outreach. However, the finding that MFIs collecting savings reach more borrowers suggests that there may be indirect benefits from regulation, if regulation is the only way for MFIs to access savings.