Microfinance practitioners have emphasized that appropriate control mechanisms are critical for the success of a microfinance institution (MFI). The purpose of this paper is to study the effects of external governance mechanisms on MFIs' performance, whereby external governance is defined as the control exercised by stakeholders and markets, and accountability mechanisms that operate to enforce internal governance.
This paper uses a database of 108 MFIs operating in over 30 countries and analyzes their performance by adopting an empirical approach usually employed in cross‐country banking research on the impact of market forces and regulation on performance. MFI performance is measured by sustainability and outreach indicators and is modeled as a function of external audit, microfinance rating, and regulatory status and controls for MFI and country‐specific characteristics.
Results indicate that regulatory involvement and financial statement transparency do not impact performance, while some but not all rating agencies may play a disciplining role.
At the time of the study, available data are limited to 108 organizations and since then more MFIs have made their financial statements available, therefore, the hypotheses of this paper can be retested.
Stakeholders should be aware that external control mechanisms in microfinance are weak, thus adequate internal governance mechanisms are important.
This paper offers empirical evidence that external governance mechanisms have limited impact on MFI performance.
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