Microfinance, country governance, and the global financial crisis

Abstract

This study examines the influence of country institutional and governance characteristics on the performance of microfinance institutions (MFIs) during the global financial crisis of 2008–2009. Using a dataset of 364 MFIs from 47 countries during the 2004–2011 period, we investigate whether MFIs operating in environments characterized by higher institutional quality were more resilient to the effects of the global crisis. We find that microfinance performance is positively related to institutional country characteristics and that MFIs located in countries with stronger governance are less severely impacted by the global financial crisis. Also, our results show that the influence of country governance on microfinance performance is prevalent across MFIs subject to different degrees of regulation and with different individual characteristics. Our objective is to contribute to the body of research that attempts to identify the country institutional characteristics that influence how severely financial institutions are impacted by financial crises. This analysis, which to our knowledge, is the first attempt for the microfinance industry, is particularly relevant since the negative effects of financial and economic shocks are specially felt by the low-income individuals that MFIs serve.