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.

An empirical investigation of the interplay between microcredit, institutional context, and entrepreneurial capabilities

“…As such, our findings suggests a more complex picture than extant research currently suggests and contribute to a better understanding of the use of microcredit at the level of the firm receiving it (Silva and Chávez 2015), with a need to consider institutional heterogeneities both within and across developing countries (Roth and Kostova 2003) and the interaction between a complex constellation of factors of institutions and capabilities (Nambiar 2013). It is therefore of key importance for future work to understand the dynamics through which microcredit is developed in contexts characterized by political institutional weakness.…”

Determinants of the Performance of Microfinance Institutions: A Systematic Review

“…Ashta and Fall () find a positive correlation between measures of good governance and the growth of MFIs. Silva and Chávez () make a similar claim by pointing out that MFIs in countries with better governance are affected less by the global financial crisis of 2007–2008. In particular, they point at the importance of a strong rule of law.…”

Entrepreneurship and financial inclusion through the lens of instrumental freedoms

“…Well-developed legal environments reduce uncertainties for firms, allowing them to form expectations about future performance (McMullen, 2011;Scully, 1988). Indeed, Silva and Chávez (2015) show that rule of law is particularly critical for MFI performance and outreach. Therefore, we would expect to see transparency as an important explanatory factor for inclusive microfinance activity amongst micro-entrepreneurs.…”

“…legal/regulatory) which influences how entrepreneurial finance is channeled to micro-entrepreneurs in developing economies (Eid 2005; Levine, 1998;Shleifer, 1997). However, current efforts reduce institutional explanations to the effects of their individual components; how the legal protection of lending activities and ease of starting a business influences an MFIs willingness to fund start-ups (Shahriar, Schwarz and Newman, 2015); the impact that a country's regulatory environment has on the performance of MFIs in periods of financial crisis (Silva and Chávez, 2015); the willingness of entrepreneurs to borrow from MFIs depending on the strength of political or economic institutions (Kimmitt, Scarlata and Dimov, 2016); or the moderating effect of different aspects of institutions on entrepreneurial outcomes (Chliova et al, 2015). This is problematic because it does not consider institutional elements together, which is central to further understanding how contexts, holistically, constrain or facilitate human agency and how agency and institutional complexity interact with each other Munoz and Kibler, 2016).…”