Regulation, Outreach, and Sustainability of Microfinance Institutions in Sub‐Saharan Africa: A Multilevel Analysis

Abstract

The paper examines the effect of regulation on microfinance institutions' (MFIs) sustainability and outreach in Sub-Saharan Africa (SSA). Using unbalanced panel data from 2002 to 2012 for 30 countries and a multilevel estimation technique, we find that regulation helps improves the sustainability and breadth of outreach but not the depth. We also find that MFIs that accept deposits have better sustainability but tend to serve the marginal poor. Finally, regulatory quality has a positive impact on outreach and sustainability. Overall, the paper casts new light on the contribution of regulation to the dual objectives of microfinance.

Effect of Regulation on Outreach of Microfinance Institutions in Ghana

“…Women are among the poor who often demand small loans which are costly to administer, therefore loans to women clients may be sacrificed for loans to wealthier clients as regulation increases. The findings agree with that of Nyanzu and Peprah (2016) whose study showed that regulation can result in the marginalization of the poor in order to serve wealthier clients to cover up additional cost associated with regulation. Additionally, many MFIs lend to borrowers organized as groups as well as to individuals.…”

“…Regulations therefore, helped the MFIs to reach out to more clients. The findings confirm that of Nyanzu and Peprah (2016) and Mawumba (2012, cited in Nyanzu andPeprah, 2016) whose findings revealed that regulation help to improve the outreach of MFIs.…”

Are interest rate caps a relevant tool to cool down overheating microfinance markets?

“…This second phase was the “adolescence” of microfinance, characterized by the emergence of various developments and practices. Microfinance has entered a third phase: regulators are inclined to foster microfinance but want to make sure that it is effectively implemented the way they envision it (Nyanzu, Peprah, & Ayayi, 2019). Numerous governments have therefore considered imposing interest rate restrictions.…”

From the top to the bottom: The global environment and microfinance institution (MFI) performance in the West African Economic and Monetary Union countries

“…We capture the social performance using the social outreach of MFIs in the population; social outreach is measured as the logarithm of the number of active borrowers (lnNAB). This proxy, though questionable, is often used by monetary authorities or rating structures (e.g., GCAP, MIX and PlaNet Rating) to measure the social outreach of MFIs (Ayayi & Sene, 2010;Hartarska & Nasdolnyak, 2007;Hartarska, 2005;Mersland & Strøm, 2009;Nyanzu et al, 2019). This indicator assumes that MFIs' contribution to poverty reduction is proportional to their number of beneficiaries (Adair & Berguiga, 2010;Hartarska, 2005).…”