Governance and Performance: Evidence from African Microfinance Institutions

Thierno Amadou Barry and Ruth Tacneng1

Université de Limoges, LAPE, 5 rue Félix Eboué, 87031 Limoges Cedex, France
January 2011

Abstract:

In this paper, we analyze how a microfinance institution’s (MFI) organizational structure

and external governance affect its performance. We analyze performance in three aspects:
sustainability, outreach, and portfolio quality or risk. Using a panel of 281 MFIs in Africa from
1996-2008, we find that non-government organizations (NGOs) perform better in terms of outreach
to the poor and higher profits compared to the other institutions. This suggests that NGOs may be
the best “conduits” in attaining the social goal of microfinance, which is to cater to poorer
households. However, the results indicate that they are not operationally more self-sufficient,
implying the possible need to raise additional grants to cover losses and questioning the viability of
NGOs to provide credit and other services to the poor on a sustainable basis or long term in nature.
Moreover, larger MFIs attract larger client bases but at the expense of lending to the less poor. On
the other hand, the presence of regulating bodies to oversee and monitor MFIs serves as an effective
external governance mechanism, which translates to higher efficiency and productivity but without
affecting portfolio quality. The results are robust even when the factor analysis method is employed.

JEL Classification: G30, I30, L31, N27, O16, O55

Keywords: Governance, Performance, Microfinance, African Economies, Risk, Non
Government Organizations
1. Introduction
1
Corresponding authors: Tel: +33-555-14-92-08, thierno.barry@unilim.fr (T.Barry); ruth.tacneng@gmail.com (R.Tacneng)

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 Microfinance has increasingly become a popular tool in the fight to reduce poverty and
promote economic growth especially in developing countries. Over the past twenty years,
microfinance institutions (MFIs) have generally been viewed as an important conduit to expand
access to finance especially among the poor, in order to improve their welfare (Morduch, 1999; De
Aghion and Morduch, 2005). As Bellman (2006) has reported, over 100 million customers
worldwide borrow small loans from around 10,000 MFIs.
In Sub-Saharan Africa (SSA), the informal sector, which includes microenterprises is large
and play an important role especially for those that cannot be employed in the formal sector. The
proliferation of MFIs has enabled increase in financial access as small enterprises and most of poor
population in SSA has very limited access to deposit and credit facilities and other financial services
provided by formal financial institutions. In Ghana and Tanzania, for example, only about 5-6
percent of the population has access to the finance from the banking sector (Basu and Yulek, 2004).
In addition, financial systems in SSA countries are still underdeveloped both in terms of the size
and scope of financial services offered. Even where capital markets exist, they are very shallow and
illiquid (Ndikumana, 2003). Despite the series of financial sector reforms that the African countries
have undertaken since the 1980s, financial systems still exhibit substantial degrees of inefficiencies
in their savings mobilization and allocations of resources into productive activities (Senbet and
Otchere, 2006). Financial systems in Africa are generally weak primarily because of two reasons.
First is the presence of high interest rate spreads due to lack of competition and weak management
in the banking sector. Second, credit allocation tends to be concentrated into short-term and
speculative activities, which may be explained by the lack of stable long-term finance and of the
high risk aversion exhibited by banks. Given these, MFIs may serve as an important alternative in
extending credit and even in providing other banking services when there’s limited access to formal
financial institutions.
Whether or not and how microfinance is able to make a significant and long-term
contribution to reducing poverty has been the subject of numerous studies. As discussed in the
literature, financial sustainability may be a prerequisite for microfinance in making a substantial
contribution to poverty reduction. It is determined by the extent to which MFIs are efficient in using
resources and turning them into services. Knowing that would help increase our understanding of
what determines financial sustainability and therefore the potential of microfinance in making a
significant and long-term contribution to poverty reduction. MFIs, especially those engaged in full

2
financial intermediation, may complement effectively the banking sector in extending financial
services and successfully draw on the rich experience of community-based development and
preexisting informal methods of financial intermediation in Africa (Basu and Yulek, 2004).
Outreach on the other hand is another aspect of MFI performance mainly indicating the social
benefits of microfinance. Schreiner (1999) identifies six important aspects of outreach – worth to
clients, cost to clients, scope, length, depth and breadth. The latter two however are the ones most
examined in the literature as data are publicly more available. While depth of outreach indicates
how the society values the net gain from microfinance, breadth measures the extent MFIs are able
to cater to more clients. Knowledge of the determinants and possible tradeoffs between
sustainability and outreach offer a more holistic approach to the investigation on MFI performance.
One of the factors stressed in the theoretical and empirical (small sized country specific)
literature that is key towards MFI success comes from its ownership and governance. Particularly,
these studies have focused on the impact of corporate governance in explaining performance and
find that the constitution, experience, monetary compensation and independence of the board of
directors as well as the establishment of a supervisory board and control of MFI’s management may
strengthen the MFI’s performance and improve its sustainability and outreach (Otero and Chu,
2002; Labie, 2001; Campion, 1998; Rock et al., 1998). However, more comprehensive, cross-
sectional studies by Mersland and Strom (2007) and Hartarska (2004) struggle to find statistical
evidence that best practice in corporate governance mechanisms of formal banks operating in
mature markets has an impact on the social and economic success of MFIs, more specifically
microbanks. Meanwhile some authors that focus their studies on institution types find that bank-
MFIs are the most efficient under intermediation approach while NGO-MFIs are the most efficient
under the production approach (Haq et al., 2010).
Another issue developed in the literature is the relationship between external governance
mechanisms and an MFI’s financial performance. Hartarska (2004) working on a small sample of
rated and unrated Eastern European MFI’s from 1998 to 2002 find a positive relationship between
public auditing and outreach, whereas banking regulation and rating systems do not have significant
impact on the MFI’s performance. Meanwhile, Hartaska and Nadolnyak’s (2007) study of the
impact of regulation on operational self-sufficiency and outreach of 114 MFIs from 62 countries do
not find any direct empirical evidence between regulatory involvement of MFIs and economic
success (either in terms of operational self-sufficiency and outreach) after controlling for the
macroeconomic and institutional framework as well as bank-specific characteristics. Moreover, as

3
the amount of savings has a positive impact on both dependent variables, the authors suggest that
MFIs do benefit indirectly from banking regulation if being regulated is the only way to access
savings. Mersland and Strom (2007) using a sample of 226 MFIs in 57 countries from 2000 to 2006
find that competition affects financial performance but not outreach, while regulation is not
significant in explaining performance. Mueller and Uhde (2010) on the other hand examine the
impact of a country’s institutions-based and outcome-based external governance quality on the
economic success of microbanks for a sample of 558 MFIs in 80 countries from 2002 to 2007. They
find that while quality of external governance positively affects an MFI’s economic success in terms
of increased profitability and self-sufficiency, it has negative impact on the depth of outreach. They
do not find evidence however of the presence of a trade-off between profitability and a microbank’s
ability to serve the poor.
While the recent studies stress the importance of looking into institutional characteristics
and macroeconomic factors in order to understand what makes MFIs stay in the business while
socially helping the poor obtain credit, the focus of this paper is to examine the determinants of MFI
success by looking both at MFI-specific characteristics (internal) and factors that are external to the
MFI. We particularly attempt to answer the following questions: Does regulation of MFIs matter? Is
there a significant impact of an MFI being audited or not? By understanding how and to what
degree of success depend on external governance, a clearer picture of institutional success and
failure can emerge.
The objective of this paper is to extend the existing literature dedicated to the economic
success of MFIs (risk, sustainability, outreach) in several directions. First, we work on the two
dimensions of governance – internal and external that includes types of institutions and the presence
of a regulating body that oversees MFI activities along with whether financial statements reported
are audited. While previous studies have looked into worldwide MFIs, we focus on African MFIs
where financial systems are not fully developed. Second, we use several measures of MFI
performance, proxying for outreach, sustainability and portfolio quality. We also employ factor
analysis along with the seemingly unrelated regression model to evaluate the determinants of MFI
performance. In doing so, we are able to translate several observable variables to one synthetic
indicator for the different dimensions of performance considered in this paper. Third, we consider
the impact of economy in explaining outreach. We disaggregate outreach in two components: the
growth of loans and the growth of active borrowers. This allows us to understand better how the
macroeconomy can effect how MFIs socially perform.

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 Working on a panel of 281 SSA MFIs from 34 countries over the period 1996 to 2008, we
highlight two main results from our econometric investigation. First, we find that non government
organizations are the most profitable, efficient, and productive in terms of outreach among all types
of institutions but are not necessarily operationally self sufficient. Second, we find that while
regulated institutions are more efficient and productive than the unregulated ones, the latter socially
perform better, accommodating poor clients more effectively. We do not find however evidence
linking external governance to lower portfolio risk. We also check the robustness of our results by
using interaction terms to examine the effect of the different institution types and external
governance mechanisms across size and age on MFI performance.
The reminder of the paper is structured as follows. Section 2 describes our data,
definitions of variables and their descriptive statistics. Section 3 presents the methodology and the
hypotheses tested. The empirical results are discussed in section 4. Section 5 reports robustness
checks and further issues. Section 6 concludes the paper.

2 Data, variables and descriptive statistics

2.1 Data collection and sample selection
We first consider in our study all the MFIs (299) in Sub-Suharan African countries
registered in the Microfinance Information Exchange, Inc. (MIX). Only 294 of them however report
their financial statements. From this sample, we apply several measures in order to check for the
presence of outliers and influential observations2. The final sample consists of 281 MFIs in 34 SSA
countries, over the period 1996-2008. These MFIs represent 4.8 million active borrowers with 1.4
billion USD in loan portfolio in 2008.
As Gonzalez (2007) puts it, there are several self-selection issues that must be taken into
account when analyzing the data set. First, all the MFIs in the sample have the ability to produce a
minimum set of financial indicators. This is related to the availability of information system used to
monitor the daily operations of the MFI. The MFIs that do not have the ability to report data to MIX
might not have the best tools in monitoring their portfolios. Second the MFIs in the sample are

2
We look at the leverage plot and also computed the DFBETA after estimation of the regression to determine the outliers. The DFBETAs
measure the distance that a regression coefficient would shift when an observation is included or excluded from the regression, scaled by the
estimated standard error of the coefficient (Baum, 2006). Belsley, Kuh, and Welsch (1980) suggest a cutoff of

Where are the residuals obtained from the partial regression, is their sum of squares, is the “hat matrix” where , where
is the jth row of the regressor matrix.

5
willing to share private data with MIX. 3 This willingness to share detailed financial information is
driven by the need of exposure to investors and donors that can invest in their institutions.
Gonzalez (2007) also notes that most MFIs reporting to MIX run their operations very
efficiently and pay attention to the portfolio quality and profitability of their operations. Thus, the
MFIs in the sample are expected to be a random sample of the best MFIs in Sub-Saharan Africa, but
definitely not a random sample of all MFIs.
2.2 Definitions of variables
We consider two dimensions in measuring the performance of microfinance institutions-
sustainability and outreach. The inclusion of the latter in assessing performance is brought about by
most MFIs’ social goal of helping the poorest people. In addition, we also consider portfolio quality
to determine MFI performance.
2.2.1. Sustainability
In this paper, we measure sustainability in three aspects: profitability, efficiency, and
productivity. Profitability indicators summarize performance in all areas of the institution. These
therefore reflect how efficient the institutions are, or if their portfolio quality is high or low.
Whether an MFI is profitable or not is manifested from its return on assets, and operational self-
sufficiency. However, looking just into profitability says little about why the MFI is in its current
state. In addition, looking into it in isolation can be misleading. As such, in order to understand
how the institution achieve its profits, operational efficiency and productivity must be taken into
account.
Efficiency and productivity indicators show how well an institution is streamlining its
operations. In general, productivity measures the amount of output generated by a unit of input
while efficiency takes into account the cost of the inputs and/or price of outputs. These indicators
have the advantage of not being easily manipulated by management decisions and are then more
readily comparable across institutions (Technical Guide 3rd edition). We include two measures of
efficiency – cost per borrower and operating expense over loans and another two for productivity-
number of borrowers per staff member and number of savers per staff member. The inclusion of
savers is important in our study as MFIs have increasingly provided services that allow their clients
to save as in banks especially in Africa.

2.2.2. Outreach

3
This is through their published profiles available at www.mixmarket.org

6
 Most MFIs’ primary mission is to improve the welfare of the poor. Outreach measures then
indicate the social benefits of microfinance. In this paper, we consider only two aspects of outreach
from the original six aspects proposed by Schreiner (1999)- depth and breadth. We do not take into
account the others (worth to clients, cost to clients, scope and length 4) as data are not available to
compute these aspects.
Depth of outreach indicates how the net gain from microfinance of a given client is valued
by the society. In welfare theory, depth is the weight of a client in the social welfare function. Since
direct measurements of depth through income or wealth are not readily available, indirect proxies
for depth are sex (women are preferred), location (rural is preferred), education (less is preferred),
access to public services (lack of access is preferred), among others (Schreiner 1999). We consider
five measures of depth of outreach in our study which includes average loan balance per borrower
(in US$), percentage of women borrowers, average loan balance per borrower/GNI per capita (%),
average savings balance per saver (in US$) and average savings balance per saver/GNI per capita
(%). In our estimations however, only three measures are taken into account as the other two give
the same information as with our chosen variables. Data on the percentages of clients below poverty
line (%), clients in bottom half of the population below poverty line (%), clients in households
earning less than US$1/day per household member (%) and clients starting microenterprse for the
first time (%) are also available but because only a few of the MFIs report these depth measures, we
do not take them into consideration.
The breadth of outreach measures the number of clients- both borrowers and savers. Breadth
is important because of budget constraints- the wants and the needs of the poor exceed the resources
they have. We make use of three breadth indicators: number of savers, number of active borrowers
and their sum, which we name number of clients.
2.2.3 Portfolio Quality in MFIs
The loan portfolio is an MFI’s largest asset and therefore the quality of this type of asset, the
risk attached to it may be difficult to measure. For MFIs, the quality of the loan portfolio is very
crucial as loans are not typically backed up by collateral. In the microfinance industry, Portfolio at
Risk (PaR) is the most widely used measure of portfolio quality. It measures the portion of the loan
portfolio “contaminated” by arrears as a percentage of the total portfolio. A loan is considered to be
at risk if a payment on it is more than 30 days late. This day-limit is stricter than what is practiced
among commercial banks given the lack of collateral to back up the borrowed loans.
4
Although Schreiner (1999) mentioned in his study that profits may be a reliable proxy for length, he says that in principle, profits are not sufficient
for an MFIs’ length of outreach or timeframe to supply microfinance.

7
 To measure risk, we use three measures of portfolio quality aside from Portfolio at Risk –
the loan loss reserve ratio, risk coverage ratio and write-off ratio. The loan loss reserve ratio gives
an indication of the expense occurred by the institution to anticipate future loan losses. Risk
coverage ratio meanwhile shows how prepared an institution is for a worst-case scenario. Lastly, the
write-off ratio represents the loans that the institution has removed from its books because of fear
that they will not be recovered.
2.3 Descriptive Statistics
We categorize the MFIs by type of institution, whether they are regulated or not and by
region (Table 1). Forty-four percent are in West Africa 5, while the other regions constitute only
nineteen percent each of all the MFIs in the study. Bulk of these MFIs is regulated (more than sixty
percent6 of total MFIs by region). Evaluating the distribution of institution types among the
different geographic regions, we observe that in West Africa, credit unions and cooperatives
dominate and constitute almost forty-five percent (45%) of the total MFIs in the region. On the
other hand, non government organizations and nonbank financial institutions make up thirty-eight
percent (38%) and forty-five percent (45%) of the total MFIs in South Africa, and East Africa,
respectively. Aside from other MFIs (including rural banks), which compose barely five percent of
total MFIs, only a few banks cater to microfinance services in all the regions throughout Africa.

Table 1: Number of MFIs, by type and by region

Central East West South
MFI Type Africa Africa Africa Africa
Bank 4 2 4 6
Cooperative 17 12 55 9
NGO 13 14 40 20
Nonbank 15 24 21 15
Other 3 1 3 3
Total 52 53 123 53
Regulated 35 37 94 39
Unregulated 16 4 20 11
Source: Data are computed from the Microfinance Information eXchange.

The financial volume and outreach indicators for African MFIs by region are reported in
Table 2. We account for both their average and median values for a more robust analysis. In terms
of average total assets, West Africa has the lowest and therefore, the MFIs in this region are
considered to be smaller than the other regions.
5
We note that West Africa is the most populated region in Africa.
6
Sixty-seven percent (67%) in Central Africa, seventy percent (70%) in East Africa, seventy-six percent (76%) in West Africa, and seventy-four
percent (74%) in South Africa.

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 Table 2. Summary of financial volume and outreach indicators for African MFIs, by region on average
Indicator Central Africa East Africa West Africa South Africa TOTAL
VOLUME
Number of MFIs 36 44 82 29 191
Total Assets (in US$) 25100000 10400000 9793401 12100000 13800000
GLP (in US$) 9459333 7694687 5958054 5736409 7303029
Total Savings (in US$) 12500000 3087106 3851967 4244391 5689391
OUTREACH
No. of borrowers 21934 40682 14957 24929 24035
No. of Savers 73363 19431 25813 25225 35675
Woman borrowers (%) 56.63 57.14 63.28 54.11 59.54
Average loan size 478.94 381.43 840.33 404.97 595.05
Loans below US$300 (%) 62.9 62.14 56.66 41.63 56.29

In terms of median
Indicator Central Africa East Africa West Africa South Africa TOTAL
VOLUME
Number of MFIs 36 44 82 29 191
Total Assets (in US$) 3508317 2248957 1549920 2251490 1895968
GLP (in US$) 1207755 1361864 867659 1468257 1164134
Total Savings (in US$) 56235 164782 170614 0 105361
OUTREACH
No. of borrowers 4082 8825 5581 6991 6625
No. of Savers 1230 3293 1646 0 1450
Woman borrowers (%) 52.6 64.85 66.1 55.7 62
Average loan size 285 153.5 213 289 214
Loans below US$300 (%) 75 65 59 16.5 64
Source: Data are from the Microfinance Information eXchange (MIX). All values are estimates in 2006.

With the exception of South Africa, the West African region has lower average gross loans
compared to the other regions. This is a little surprising since when we look at the median, West
Africa has lower gross loan portfolio (GLP) compared to South Africa, indicating that the latter’s
distribution in terms of loans may be concentrated at the both extremes, more particularly in the
upper percentile. Meanwhile, Central Africa has the largest financial volume among the four
regions, primarily marked by large amount of savings. In terms of outreach, East Africa has the
biggest number of borrowers, while Central Africa has the biggest number of savers. West Africa
meanwhile has the highest percentage of woman borrowers. It is surprising to note however that on
the average, West Africa has the highest average loan size despite having a very low gross loan
portfolio. While this may be partially explained by its low number of borrowers, a closer look on
their descriptive statistics7 reveals that one MFI in the West Africa have a very large average loan
size. This is further supported by the median amounts wherein it has actually the second lowest loan
size.
7
Not reported

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 We also look into the financial statistics of the MFIs in terms of MFI type and external
governance. In Table 3 (first two columns), we perform t-tests for the equality of NGO vs
Cooperative, Cooperative vs Non Bank, and NGO vs Non bank variable means. For this purpose we
use three subsamples by excluding respectively Bank, Non Bank, Rural bank, Other; Bank, Rural
bank, NGO and Other; Bank, Rural bank, Coop and Other. In comparing NGO vs Cooperative, we
document that NGO perform better than Cooperative in terms of both profitability and depth of
outreach. However, in terms of being operationally self-sufficient, the latter dominates the former.
In addition, we find NGOs more risky than their Cooperative counterpart in terms of the loan loss
reserve ratio. Meanwhile, comparing Cooperative vs Non bank, we find the non bank financial
institutions to behave like the NGOs. In addition, we find that in terms of portfolio at risk and write-
off ratio, cooperatives display higher risk. We also evaluate the differences in the behavior of Non
Bank and NGO. We find NGOs to be superior in terms of both sustainability and depth of outreach.
However, they are also more risky as evidenced from higher portfolio at risk and write-off ratio.
By comparing regulated vs unregulated MFIs, we are able to see that significant differences
exist between them in terms of sustainability and outreach but not in terms of portfolio quality. It is
thus observed that regulated MFIs are less profitable but are more self-sufficient than the
unregulated ones. The latter however are more efficient in converting inputs into outputs.
Unregulated MFIs socially perform better compared to their counterparts, catering to more woman
borrowers and lending loans of smaller size. Regulated MFIs moreover have more clients and
borrowers, in general.
To complete our external governance indicators, we also look into the differences in means
of the audited and unaudited MFIs. We find unaudited MFIs to be more profitable but at the same
time have higher risk compared to their counterparts. Although they have higher depth of outreach,
audited MFIs are able to accommodate and cater to larger number of borrowers and total clients.

3. Hypotheses tested, method and models

The empirical analysis aims at testing for differences in MFI performance that might be
explained by differences in institutional types and external governance mechanisms. We note that
we mainly use four measures of sustainability, three measures for depth of outreach, two for breadth
and three for portfolio quality.

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Hypothesis 1 : Different types of institutions vary in terms of both performance and portfolio
quality.

Performancei ,t =a 0 +a1DBanki +a 2 DCoopi +a 3 DNonbanki +a 4 DOtheri +a 5 DRurali

+ b1 ASSETit + b 2 AGEit + b3 LOANSit + b 4Yearsit + b5 LagRISK it + b 6log _ GDPit
+ b 7 INFLATIONit + b8GDP _ GRWTH it +e it

Where DBank i , DCoop i , DNonbank i , DOtheri , DRural i are dummy variables that indicate the type of

the microfinance institution. We remove the dummy for non-government organizations (NGOs) to
avoid singularity. In addition, NGOs are the reference institutions upon which we base and compare the
resulting coefficient estimates of our vector of dummies for MFI types. We control for the following in
our equation: asset size (ASSET), age of MFI (AGE), loan over assets (LOANS), lagged value of risk
(LagRISK), number of years reported by the MFI (Years), real GDP per capita (log_GDP), inflation
(INFLATION) and real GDP growth (GDP_GRWTH). For portfolio quality as measure of
performance, we do not include the lagged value of risk.
In microfinance, governance refers to the mechanisms through which donors, equity investors
and other fund providers ensure that their funds are used according to intended purposes (Hartarska,
2004). Such mechanisms are important not only because managers and fund providers may have
diverging preferences, but also each fund provider has objectives of its own. (i.e. Donors may prefer
outreach to sustainability, while private investors prefer sustainability to outreach). Furthermore, these
stakeholders may install their representatives on the board and influence the direction of the manager’s
effort.
Competition for donations and customers, as well as the presence of for profit firms affect the
behaviour of non-profit organizations and that of MFIs. These institutions may change their perspective
as they strive for survival if this would be in exchange for more donor money (Rose-Ackerman, 1986).
This means that some NGOs may want to signal donors that aside from catering the poorest people,
they are also sustainable. This therefore indicates that they are capable of improving the welfare of the
poor for a long timeframe. In addition, from the perspective of a borrower, it is much easier to borrow
from an NGO for smaller amount of loans compared to other types of institutions allowing NGOs to
price loans with higher interest rates enabling them to generate higher profit margins.
In terms of performance through depth of outreach, we expect the signs of the all the institution
types to be negative. This is because in comparison to NGOs, other organization types cater to less

11
poor people that may be explained by institutional constraints to borrowing from a borrower’s
perspective. However, in terms of breadth, we expect the signs to differ. For example, credit unions and
cooperatives may have wider outreach than NGOs because they have larger networks and where other
channels like offices are existing. Thus, we expect a positive sign for cooperatives. For the other
organization type, we expect a negative sign.
From the different institution types, most of the NGOs depend on grants (82% 8) followed by
nonbank financial institutions (71%) and credit unions and cooperatives (61%). Although the actual
shares of donors are not divulged, we assume that in these institutions, donors play very important roles
as providers of their funds. Therefore, in terms of sustainability, the sign would be dependent on which
of the above mentioned scenarios dominate.

Hypothesis 2: External governance is effective in lowering risk (increase portfolio quality) but at the
expense of lowering depth of outreach, by catering to more affluent clients. Thus, it also allows MFIs
to be more sustainable in the process.

Performancei ,t =a 0 +a1 Re gulatedi +a 2 Audited it + b1 ASSETit + b 2 AGEit + b3 LOANSit + b 4Yearsit

+ b5 LagRISKit + b6 log _ GDPit + b 7 INFLATION it + b8GDP _ GRWTH it +e it

Where Re gulated i , Audited i t are dummy variables, which indicate that an MFI is regulated and

audited at time t. We use the same control variables as in previous equations.

We expect the sign of our external governance indicators to be positive with respect to portfolio
quality (or equivalently, negative with respect to risk). Moreover, we also expect these indicators to
have negative signs with respect to outreach (or equivalently, positive signs with respect to loan and
saving size, and negative with respect to percentage of woman borrower).

The control variables in our regression models include:

This variable controls for the size of the MFI. A larger MFI
is expected to perform better as they have more funds to invest in technologies to screen higher quality
borrowers. We thus expect the sign of ASSET to be positive.
is the log of the age of the MFI, the number of years since its establishment. It controls for years
of experience of each MFI. This variable allows testing the hypothesis that older, more experienced
MFIs perform better. An alternative hypothesis however purport that older institutions have had to learn
practices by trial and error, whereas more recently established institutions may profit from the
8
In terms of number of observations.

12
knowledge that has been build up in the past years and may come out to be better performers than their
counterparts (Hermes et al., 2009). We therefore expect the sign of AGE to be ambiguous depending on
what hypothesis dominates.
is the ratio of the gross loan portfolio to total assets. This variable captures the performance of
an MFI’s lending strategy relative to their other earning assets.
is the number of years wherein the MFI report data for its financial statements.
is the lagged value of portfolio at risk >30 days. We control for this variable to account for
decisions of the MFIs to increase or decrease their risk-taking strategy for an increased performance
trade-off.
is the real gross domestic product growth. This variable controls for changes in
performance and/or portfolio risk that can be accounted for by economic growth.
is the average inflation rate, which controls for changes brought about by price changes.
is the real per capita gross domestic product. This controls for the effects of economic
development on the performance and portfolio quality of MFIs.
Adjusting for heteroskedasticity, we estimate all our equations via OLS regressions adjusted
to heteroskedasticity using Hubert/White estimator. The hypotheses and the corresponding
equations are discussed below.

4 Regression results
4.1 Does MFI performance vary according to institutional types?
We report the results of our estimations on the different institution types as determinants of
both financial and social performance in Table 4. We treat non-government organizations (NGOs)
as our reference institution upon which the other institution types are compared with. The results
show that in terms of financial performance, with the exception of banks, all institutions perform
less than NGOs. This is further reflected from the regressions on financial revenue, wherein
cooperatives and rural banks specifically have lower financial revenue ratios. However, when
taking into account self-sufficiency, we note that credit unions and cooperatives operate more self-
sufficiently than NGOs. Meanwhile, the results of our estimations on our efficiency measure
indicate that NGOs are less efficient than the other institutional types 9. We also look into the
variations in the productivity of member staffs. With the exception of OTHER, all the institutional
types are more productive in terms of the number of clients 10 the members are able to cater
9
With the exception of banks
10
The sum of total number of savers and active borrowers

13
compared to NGOs. However, when we decompose these productivity figures to account for the
number of borrowers and savers served by the staff, it appears that NGOs are actually more
productive than banks and cooperatives in terms of the number of borrowers that each staff is able
to serve reflecting more stringent lending mechanisms in banks and coooperatives. Moreover, the
advantage of these institutions and rural banks over NGOs lies on the number of savers that they are
able to offer their services. This additional product, on top of the lending products may be one of
the factors that borrowers take into consideration when choosing the MFI where he/she will get
involved. Thus, setting aside the actual values of loans and/or savings, we find banks and
cooperatives more productive in terms of number of savers they are able to accommodate, and less
productive in terms of borrowers.
Meanwhile, we also look into the aspect of social performance, in terms of outreach using
two dimensions: depth and breadth. The findings indicate that NGOs perform better compared to all
other institution types (excluding nonbank financial institutions) in terms of average loan size
(which measures the depth of outreach). This may reflect the borrowers in these types of
institutions. This is binding even after the GNI per capita has been adjusted. Furthermore, we find
the percentage of woman borrowers catered by the MFIs highest for NGOs. We also look into
another aspect of outreach – breadth, which is measured by the number of clients of the MFIs. The
results indicate that consistent with our findings in terms of the depth of outreach, NGOs perform
better by catering to more borrowers. This is in contrary to the number of savers they accommodate,
wherein cooperatives and nonbank financial institutions fair better. We also examine both of the
client types (savers and borrowers) added together. The findings indicate that banks and nonbank
financial institutions have higher breadth of outreach than the NGOs. Credit unions and
cooperatives and rural banks, meanwhile have higher scope of outreach compared to NGOs, marked
by more products and other services offered.
We also investigate if there are marked differences among the different institutions in terms
of their portfolio quality. In comparison with NGOs, there are significant variations only with
cooperatives and OTHER. We find cooperatives to have higher percentage of their portfolios that
are at risk (>30 days), but have lower loan loss reserve ratio. OTHER meanwhile have lower
riskiness in terms of these measures.
4.2 Does MFI performance vary according to external governance mechanisms?
We also examine the external governance of MFIs to determine the different aspects of
performance. Although the return on average assets and operational self sufficiency doesn’t vary

14
according to the external governance mechanism employed by the MFIs, we find regulated MFIs to
be more efficient and productive than their counterparts. Although not tantamount to saying that this
group is more sustainable than the unregulated ones due to the non-significant relationship between
the presence of regulation and the traditional profitability indicator, the Technical Guide (3rd
edition) cites the advantage of efficiency and productivity indicators than the former two. The latter
measures are not easily manipulated by management decisions and are therefore more readily
comparable across institutions. In terms of external governance through the auditing of financial
statements, we find that when audited, MFIs are less efficient and productive.
In all our outreach measures (breadth and depth), we find regulated MFIs to perform less
than the unregulated ones. This therefore implies that unregulated MFIs are the institutions that
really cater to the poorest of the poor and at the same time cater to more borrowers. Thus, they
socially perform better than the regulated MFIs. Meanwhile we do not find significant results
between AUDIT and outreach which implies that external governance through this mechanism does
not really cause variations within sub-groups.
Meanwhile, we do not find external governance to be effective in lowering portfolio risk.

5 Robustness check and further issues

5.1 Factor analysis
We investigate the determinants of performance using factor analysis. This method has the
advantage of translating several observable variables to one synthetic indicator for the different
dimensions of performance considered in this paper: sustainability, depth and breadth of outreach.
Each dimension is composed of a combination of the observed variables we describe in Appendix
A1.11
From prior classifications we have imposed in our main regressions, we expect OSS,
FINREV and ROA to capture sustainability. Meanwhile, it is expected that factor analysis will
combine the variables SAVERS and BORROWERS to denote breadth of outreach, and LOANSIZE
and WOMAN, depth of outreach.
Theoretically, it is assumed in factor analysis that each measured variable is due to some

unobserved common factors and an idiosyncratic effect .

11
We do not include the other variables previously taken into consideration in our main regressions for the sake of simplicity

15
Where includes all observed (standardized variable). meanwhile denote the factor loadings

and are the latent common factors. is similar to a residual and includes what is known as the
variables’ unique factors.
We note that since our variables are all continuous, the Pearson’s correlation matrix is
unbiased and is thus the basis of our factor analysis. The factor loadings defined above however are
not uniquely determined. As a solution, several constraints to the parameters in the original model
must be introduced. In general, the first factor is required to have maximal contribution to the
common variance off the observed variables; the second to have maximal contribution to this
variance subject to being uncorrelated with the first, and so on (Luzzi & Weber, 2006). Moreover, a
more interpretable solution can be achieved using a transformed model called as factor rotation.
While various methods are available to implement this, we use the oblique one (promax with power
3), which allows the factors to be correlated, rather than independent. This is relevant to our study
as we expect the different dimensions of performance to be linked. There can be trade-offs but
synergies among different dimensions and aspects are also possible (Zeller & Meyer, 2002).
In choosing the appropriate number of latent factors, we rely on standard statistical tools
commonly used in factor analysis. One method excludes factors with eigenvalues smaller than one.
This allows retention of only the factors that account for more variance than the average for the
variables. Another method is to keep just enough factors so that the cumulated variance explained is
no less than 70%. In applying these methods, factor analysis reveals an appropriate 3 latent factors
to be used. We then apply oblique rotation that involves the introduction of correlations between
factors. The resulting loadings are presented below.

Rotated factor loadings (pattern matrix) and unique variances

-----------------------------------------------------------
Variable | Factor1 Factor2 Factor3 | Uniqueness
-------------+------------------------------+--------------
LOANSIZE | -0.2393 -0.8385 0.1925 | 0.3546
BORROWER | 0.9002 0.1275 0.0892 | 0.2312
WOMAN | -0.1386 0.6623 0.0802 | 0.4677
ROA | -0.1179 0.2477 0.4485 | 0.6465
OSS | 0.1902 -0.3459 0.7968 | 0.3440
SAVER | 0.8586 0.0252 0.0320 | 0.2772
FINREV | -0.0498 0.2488 0.6234 | 0.4626
-----------------------------------------------------------

16
 An examination of the factor loadings reveal to us that BORROWER and SAVER load
positively and highly to Factor 1, ROA, O_SS and FINREV load positively and highly to Factor 3,
and LOANSIZE and WOMAN, load highly negatively and positively, respectively, to Factor 2. This
reflects that changes in BORROWER and SAVER changes Factor 1 in the same direction, which
may thus be attributed as actual changes of the breadth of outreach. Meanwhile, the negative
loading of LOANSIZE on Factor 2 and at the same time positive loading of WOMAN indicate that
the effect of these variables on the depth of outreach. Furthermore ROA, OSS and FINREV, all
indicators of sustainability affects Factor 3 highly compared to the other variables. To sum it up,
Factors 1, 2 and 3 are mainly determined by the breadth of outreach, depth of outreach and
sustainability, respectively.
The scores of MFIs obtained through factor analysis will now be used as dependent variable
of an equation. We will try to explain why some MFIs perform better than other.
Denoting performance or score of MFI i at time t on dimension j=1,2,3 by , we estimate
the following regression model:

Where consist of the MFI i’characteristics at time t that explain both outreach (depth and

breadth) and sustainability. meanwhile contains the variables that are presumed to affect the
dimensions uniquely. Since the scores may be inter-related by possible trade-offs, and thus the error
terms may be correlated, we consider estimating our equations by using seemingly unrelated
regressions (SUR). Moreover, the Breusch-Pagan statistic shows whether the equations are to be
estimated by SUR or can just be estimated by the least squares method.
We report the seemingly unrelated regressions by institutional type and external governance
mechanism employed of the MFIs in Table 6. The Breusch-Pagan test indicates that in all our
equations, seemingly unrelated regression is preferred than the OLS method. The results indicate
that non government organizations perform better in terms of the depth of outreach and
sustainability12 compared to the others but fall short in terms of the breadth of outreach. Moreover,
it is also interesting to note that expansion of MFIs in terms of asset increases result in higher
number of borrowers and savers, however it may be at the expense of lower depth of outreach as
evidenced by the negative relationship between Assets and Factor 2. Meanwhile, we do not find any
12
With the exception of banks

17
significant relationship between assets and sustainability. This may be due to the presence of
institutional type dummies in the equation which may better explain sustainability than assets.
In terms of external governance, we find regulated MFIs to have lower depth of outreach
than the unregulated ones and also have lower sustainability. This last result is expected as
unregulated institutions may choose to pursue riskier but more profitable activites, which may be
controlled by authories in regulated institutions. Moreover, we find that MFIs with audited financial
statements tend to have lesser clients.
Our results also show that lagged values of risk influence depth of outreach negatively. This
means that MFIs, which have high risk in period t-1 tend to decrease their depth of outreach.
5.2 MFI outreach growth and the macroeconomy
We also investigate the effects of the macroeconomic indicators, specifically the real GDP
growth and its lagged values on the growth of MFI outreach. We decompose the latter into borrower
growth and loan growth. This mechanism allows us to examine more closely what component of
outreach is affected by more stable and vibrant economy and/or economic development.
The results of our regressions are presented in Table 7. These indicate that economic growth
in time t result in decreases in growth rate of depth of outreach in terms of the average loan per
borrower. This suggests that during boom times, borrowers tend to increase the amount of loans
they borrow from the MFIs more than during low times. On the other hand, this may also indicate
that MFIs are more willing to lend higher amounts of loans when the economy is well. Furthermore,
it is worth noting that economic growth does not translate into increased or decreased borrower
growth although our main results in Table 5 suggest that increased economic growth translates to
more borrowers. This may be explained by the presence of alternative sources of funds and loans
for borrowers. It is therefore not tantamount to say that improvement in the economy increases or
decreases changes in influx of borrowers. The results indicate that it is asset growth that determines
markedly increases in borrower growth.
It is equally interesting to note that while economic growth at time t is translates to lower
outreach growth at time t, economic growth at time t-1 increases the growth of depth of outreach at
time t.
5.3 Use of Interaction terms
We also perform several regressions by interacting our institutional type and external
governance variables with the MFI size and age and loan focus. The results are presented in Tables
8-12. We find that as asset increases, the level of ROA for cooperatives and credit unions also

18
increases suggesting that MFIs may increase profitability by expanding their asset bases. In
addition, we also find that although NGOs have higher depth of outreach through extending smaller
average loan sizes compared to cooperatives and nonbank financial institutions, it is worth to note
that as asset size increase for the latter two, the depth of outreach also increase. In terms of the
percentage of women borrowers on the other hand, we find that as banks and cooperatives increase
their sizes, the corresponding involvement of women in those institutions decrease. We do not find
however significant results when investigating portfolio risk.
Interacting age with our institutional type variables, we find in Table 9 that banks and
nonbanks have higher operational self-sufficiency as their ages increase. In addition, we find that in
terms of depth of outreach, cooperatives and credit union that are older have lower percentages of
women borrowers. Meanwhile, Tables 10 and 11, which presents the interaction between external
governance and asset and age, show a clear effect of an increase in asset on regulated MFIs on the
breadth of outreach in terms of the number of borrowers.
Table 12, which presents the interaction between institutions and external governance, show
that regulated cooperatives have higher profitability than the nonregulated ones. They also tend to
have higher average loan sizes, indicating lower depth of outreach.
5.4 Differences in MFI performance by region13
We examine the performance of the microfinance institutions using the equations for
Hypotheses 1 and 2 over a subsample of the four regions that make up Sub-Saharan Africa. In doing
so, we are able to see whether behavioural and institutional differences are present in determining
MFI performance.
In terms of profitability, the results on the different regions are consistent with our prior
findings- that is, nongovernment organizations are more profitable but not necessarily self-
sufficient14. We also find that outreach and portfolio risk don’t vary much by region. In examining
the effects of external governance on MFI performance, we find that variations across regions occur
only in terms of portfolio risk- in Central Africa, regulation increases risk, while the contrary is
found on South African MFIs.

6. Conclusion

13
The regression results are not reported for the sake of brevity, but they are available upon request to the authors
14
With the exception of banks being more profitable, and cooperatives and nonbank financial insitutions being less operationally self-sufficient in
East Africa.

19
 The objective of the paper was to analyze the relationship between the types of MFI and
their external governance mechanisms on their performance. We find that different types of
institution have different levels of performance, sustainability, outreach and portfolio quality. Our
findings indicate that though non government organizations perform better in terms of depth of
outreach and profitability compared to the other institutions, they are not necessarily operationally
more self-sufficient. Our results suggest that though NGOs may be the “best” conduits of
microfinance to attain the social goal of providing credit among the poor, there is doubt about their
capacity to serve poorer households on a sustainable basis, implying the possible need to raise
additional grants to cover losses. On the other hand, while prospects for growth in MFIs attract
larger client bases, it is at the expense of lower depth of outreach. Meanwhile, asset expansion
leads to higher number of clients but at the expense of catering less to the poor. Moreover, external
governance leads to higher efficiency and productivity without necessarily improving portfolio
quality. The results obtained in this paper are further strengthened even when the factor analysis
method is employed.

20
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Table 3 Bivariate comparison of MFI performance by institutions types and external governance

NGO COOP COOP NONBANK NGO NONBANK REGUL UNREGUL AUDITED UNAUDITED
t-Statistic t-Statistic t-Statistic t-Statistic t-Statistic
ROA 0.1078 0.0557 0.0557 0.0703 0.1078 0.0703 0.0690 0.0938 0.0740 0.0984
5,377*** 5,377*** 3,447*** 3,033*** 2,055**
OSS 0.9681 1.1352 1.1352 0.9863 0.9681 0.9863 1.0692 0.9613 1.0398 0.9855
2,623*** 2,532*** 0.457 2,160** 0.769
EFFICIENCY 0.4797 0.2948 0.2948 0.4025 0.4797 0.4025 0.3510 0.5206 0.4132 0.4210
6,721*** 4,084*** 2,473** 6,476*** 0.165
PROD 164.7699 110.6253 110.6253 157.1785 164.7699 157.1785 134.2593 152.8078 143.3976 116.3517
5,985*** 5,021*** 0.821 2,201** 2,432**
LOAN SIZE 0.6215 1.7229 1.7229 1.0461 0.6215 1.0461 1.4217 0.6178 1.2669 0.9520
5,961*** 3,449*** 3,520*** 4,818*** 1,707*
SAVING SIZE 0.1474 0.3456 0.3456 0.2639 0.1474 0.2639 0.3523 0.0755 0.3313 0.2009
3,414*** 1,751588* 1,659* 5,072*** 1.636
WOMAN 0.7750 0.5164 0.5164 0.5696 0.7750 0.5696 0.5654 0.7238 0.6127 0.6082
13,8225*** 2,690*** 11,116*** 8,770*** 0.178
BORROWER 10837.87 11927.25 11927.25 35283.91 10837.87 35283.91 24585.97 13007.20 20505.39 5454.68
0.801 5,510*** 5,566*** 4,679*** 3,841***
CLIENTS 8.6473 9.2795 9.2795 9.3806 8.6473 9.3806 9.3899 8.8087 9.4238 7.8501
5,0134*** 0.743 5,926*** 4,679*** 10,206***
PORT_RISK 0.0827 0.1105 0.1105 0.0649 0.0827 0.0649 0.0903 0.0759 0.0866 0.0949
2,057** 3,764*** 1,934*** 1.326 0.498
LLR RATIO 0.0535 0.0378 0.0378 0.0612 0.0535 0.0612 0.0492 0.0539 0.0517 0.0536
2,672*** 3,525** 0,935*** 0.725 0.219
WRITE -OFF 0.0291 0.0252 0.0252 0.0173 0.0291 0.0173 0.0228 0.0263 0.0198 0.0411
0.731 1,745* 2,209*** 0.766 3,400***
***, **, and * indicate significance, respectively, at the 1%, 5% and 10% levels respectively. Variable definitions: ROA = return on average assets;
OSS(operational self-sufficiency ) = financial revenue/(Financial Expense + Net Loan Loss Provision Expense + Operating Expense), Efficiency =
expense over loan ratio, PROD = (number of active borrowers + number of savings accounts)/Number of Personnel, Loan size = average loan
balance per borrower/GNI per capita, Saving size = Average savings balance per saver/GNI per capita, Woman = Number of active women
borrowers/Number of active borrowers, Borrower = number of borrowers with loan outstanding, Clients = No. Of borrowers + Number of Savers,
Port_Risk = Outstanding balance, loans overdue>30 Days/Gross Loan Portfolio, LLR ratio = loan loss reserve ratio; Write-off = Value of loans
written off/Gross loan portfolio.

23
Table 4. OLS regression on the differences among institutional types on MFI performance in African countries, over the period 1996-2008

Outreach
Sustainability Portfolio quality
Depth of Outreach Breadth of Outreach
Saving Woman No. of No. of Portfolio at LLR Write-off
Variable ROA OSS Efficiency Prod Loan Size Size borrower Borrowers Clients risk >30 ratio ratio
Constant 0.167* -0.363 1.282*** -149.852* 1.127 0.682** 1.072*** -1.979*** 0.113 0.246*** 0.082 0.03
(1.91) (-1.43) (6.57) (-1.81) (1.19) (2.02) (8.21) (-3.85) (0.23) (3.06) (1.61) (0.98)
Dbank -0.020 0.125 -0.005 110.583*** 0.724*** 0.283* -0.131*** -0.669*** 0.219* 0.017 0.011 -0.011
(-1.44) (1.37) (-0.10) (3.00) (3.07) (1.78) (-4.05) (-4.48) (1.78) (1.05) (0.65) (-1.54)
Dcoop -0.043*** 0.284** -0.221*** 161.930*** 0.620*** 0.023 -0.223*** -0.869*** 0.093 0.020* -0.025*** -0.005
(-3.69) (2.28) (-7.57) (7.40) (3.07) (0.19) (-9.46) (-9.57) (1.06) (1.67) (-3.38) (-0.68)
Dnonbank -0.019* 0.074 -0.078** 52.056** -0.135 -0.120 -0.139*** -0.004 0.176* -0.005 0.013 -0.009
(-1.83) (1.25) (-2.32) (2.55) (-0.88) (-0.96) (-5.21) (-0.04) (1.73) (-0.50) (1.38) (-1.38)
Dother -0.070*** 0.058 -0.166*** 2.836 0.398* 0.186 -0.140** -0.950*** -0.737*** -0.037*** -0.039*** -0.012
(-3.02) (0.38) (-3.57) (0.06) (1.62) (0.47) (-2.27) (-5.79) (-3.15) (-2.84) (-3.96) (-1.04)
Drural -0.095*** 0.346 -0.377*** 133.123** 0.059 0.212 -0.223** -0.529** -0.080 0.126 -0.025 -0.021**
(-4.98) (3.12) (-8.46) (2.22) (0.27) (1.56) (-2.41) (-2.42) (-0.52) (1.29) (-1.45) (-2.48)
Asset -0.009*** 0.026 -0.026*** 25.864*** 0.144*** 0.046*** -0.030*** 0.781*** 0.771*** -0.008** 0.000 -0.001
(-2.97) (1.03) (-3.81) (4.41) (2.83) (2.75) (-4.76) (30.36) (33.04) (-2.37) (0.11) (-0.69)
Age -0.016** -0.009 -0.079*** 73.731*** 0.214* 0.018 -0.009 -0.037 0.185*** 0.026*** 0.015*** 0.007***
(-2.44) (-0.29) (-3.87) (5.82) (1.75) (0.68) (-0.61) (-0.64) (3.38) (3.89) (3.17) (2.85)
Loan 0.003 0.949 -0.660*** -119.432** 0.705** -0.028 -0.006 0.822*** -0.537** -0.049 -0.017 -0.036***
(0.09) (3.01) (-8.65) (-2.43) (2.12) (-0.28) (-0.12) (4.26) (-2.29) (-1.49) (-0.46) (-3.14)
Years -0.005** 0.014 0.000 -9.026** -0.046 -0.006 0.016*** 0.042** -0.015 -0.005* -0.005*** -0.001
(-2.34) (1.37) (0.13) (-2.22) (-1.57) (-0.46) (3.86) (2.55) (-0.95) (-1.86) (-4.17) (-0.87)
Lag Risk 0.003 -0.299 0.019 -146.369** -0.209 -0.116 -0.126** -0.292* -0.163
(0.08) (-2.27) (0.28) (-2.48) (-0.90) (-1.18) (-2.56) (-1.61) (-1.06)
Growth -0.002** 0.006 -0.001 4.921 -0.019* -0.007 -0.005** 0.014 0.013* -0.003* -0.002*** -0.000
(-2.11) (1.16) (-0.21) (1.39) (-1.85) (-1.20) (-2.22) (1.53) (1.72) (-1.78) (-2.58) (-0.15)
Inflation -0.000 0.001 0.001 -1.132** -0.003* -0.002 0.001 0.001 -0.004*** -0.000 -0.000 0.000
(-0.29) (1.10) (0.63) (-2.28) (-1.77) (-1.55) (1.32) (0.55) (-2.84) (-0.03) (-1.04) (0.72)
GDP 0.022 0.039 0.030 -0.014 -0.477*** -0.170*** 0.011 -0.206*** -0.328*** -0.004 -0.000 0.005
(1.20) (0.51) (1.04) (-1.03) (-4.48) (-3.72) (0.67) (-3.10) (-5.05) (-0.47) (-0.07) (1.25)
No of Obs 653 673 656 641 526 565 607 674 660 919 1161 715
R-squared 0.1264 0.0578 0.3097 0.2416 0.1451 0.0373 0.2287 0.7648 0.7792 0.0572 0,0437 0.0570
F-stat 6.37*** 7.34*** 14.00 15.64*** 13.50*** 9.94 18.13*** 181.52*** 211.33*** 4.39*** 5,59*** 2.22***
***, **, and * indicate significance, respectively, at the 1%, 5% and 10% levels respectively. The t-statistics are derived from robust(adjusted) standard errors. Variable definitions: ROA =
return on average assets; OSS(operational self-sufficiency ) = financial revenue/(Financial Expense + Net Loan Loss Provision Expense + Operating Expense), Efficiency = expense over loan
ratio, Prod = (number of active borrowers + number of savings accounts)/Number of Personnel, Loan size = average loan balance per borrower/GNI per capita, Saving size = Average savings
balance per saver/GNI per capita, Woman borrower = Number of active women borrowers/Number of active borrowers, No. Of borrowers = number of borrowers with loan outstanding, No. Of
Clients = No. Of borrowers + Number of Savers, Portfolio at Risk>30 = Outstanding balance, loans overdue>30 Days/Gross Loan Portfolio, LLR ratio = loan loss reserve ratio; Write-off ratio =
Value of loans written off/Gross loan portfolio. DBank, Dcoop, Dnonbank, Dother, Drural are dummy variables, which indicate the MFI institutional type. Dbank =1, if MFI is a bank, Dcoop=1
if the MFI is a credit union or cooperative, Dnonbank=1 if MFI is a nonbank financial institution, Dother=1 if MFI belongs to other type, Drural=1 if MFI is a rural bank, and 0, otherwise.
Control variables: Asset= log of total assets, Age = age of the MFI at time t, Loan = loans over total assets, Years = number of years wherein financial statements are reported by the MFI, Lag
Risk = lag portfolio at risk>30 days, Growth = real GDP growth, inflation = average inflation rate, and GDP= real GDP per capita.

24
Table 5.OLS regression on the effect of external governance on MFI performance in African countries, over the period 1996-2008

25
 Outreach
Sustainability Portfolio quality
Depth of Outreach Breadth of Outreach
Saving Woman No. of No. of Portfolio at LLR Write-off
Variable ROA OSS Efficiency Prod Loan Size Size borrower Borrowers Clients risk >30 ratio ratio
Constant 0.180* -0.426 1,269*** -163.477* -0,127 0,272 0,957*** -1,915*** 0,243 0.1923*** 0,085 0,015
(1.73) (-1.40) (5,61) (-1.72) (-0,15) (0,75) (6,31) (-3,13) (0,43) (3.4538) (1,50) (0,46)
Regulated -0.013 0.147 -0,147*** 88.266*** 0,625*** 0,192** -0,114*** -0,525*** 0,087 0.0154 -0,010 -0,004
(-0.89) (1.49) (-3,83) (4.10) (6,37) (2,05) (-4,33) (-5,55) (0,90) (1.4499) (-1,14) (-0,96)
Audited -0.000 0.061 0,162*** -90.794*** 0,030 0,014 0,028 -0,158 -0,205* -0.0024 -0,005 -0,014
(-0.01) (0.32) (2,86) (-2.96) (0,15) (0,15) (0,71) (-1,08) (-1,64) (-0.1516) (-0,35) (-1,33)
Asset -0.012** 0.013 -0,041*** 36.358*** 0,193*** 0,047*** -0,036*** 0,768*** 0,772 -0.0078* 0,001 0,001
(-2.40) (0.29) (-4,06) (4.66) (3,80) (2,75) (-4,31) (25,14) (28,59) (-2.1909) (0,49) (0,51)
Age -0.018** 0.003*** -0,096*** 92.574*** 0,102 0,001 -0,037** -0,088 0,198*** 0.0285*** 0,015*** 0,006**
(-2.20) (0.08) (0,025) (6.02) (1,29) (0,05) (-2,10) (-1,37) (3,17) (3.6103) (2,78) (2,29)
Loan 0.018 0.962 -0,658*** -191.866*** 0,743* 0,004 0,148** 1,049*** -0,678*** -0.0491 -0,19 -0,018*
(0.49) (2.59) (-7,42) (-3.24) (1,73) (0,03) (2,53) (4,87) (-2,45) (-1.472) (-0,41) (-1,92)
Years -0.004** 0.008 0,010* -11.016** -0,053* -0,000 0,021*** 0,062*** -0,010** -0.0034 -0,005*** -0,002**
(-1.99) (0.53) (1,68) (-2.08) (-1,86) (-0,02) (4,05) (3,23) (-0,56) (-1.6017) (-3,82) (-2,13)
Lag Risk -0.055** -0.211 -0,083 -87.366 0,046 -0,064 -0,160*** -0,420* -0,063
(-2.38) (-1.36) (-1,51) (-1.14) (0,18) (-0,51) (-3,12) (-1,64) (-0,40)
Growth -0.001 -0.001 0,004 3.769 -0,027** -0,005 -0,001 0,028*** 0,011 -0.0012 -0,002* -0,000
(-1.56) (-0.09) (1,31) (0.93) (-2,55) (-0,63) (-0,34) (3,07) (1,42) (-0.8353) (-1,95) (-1,07)
Inflation 0.000 0.003 0,005*** -3.051*** -0,014** -0,003 0,003*** 0,013* -0,005 0.0002 -0,000 -0,000
(0.14) (1.14) (3,61) (-2.81) (-2,17) (-1,36) (2,89) (1,75) (-1,12) (1.4004) (-1,19) (-1,51)
GDP 0.027 0.079 0,038 -0.024 -0,376*** -0,133*** 0,014 -0,206** -0,310*** 0 -0,002 0,005
(1.15) (0.84) (1,04) (-1.50) (-4,83) (-3,00) (0,72) (-2,39) (-4,14) (0.7179) (-0,28) (1,27)
No of Obs 465 478 466 455 391 417 432 475 470 650 850 526
R-squared 0.1376 0.0448 0,3108 0.2431 0,1576 ,0270 0,1829 0,7403 0,7686 0.0498 0,0290 0,0472
F-stat 5.05*** 4.91*** 17,70*** 14.81*** 12,00*** 7,80*** 13,33*** 131,57*** 169,35 3.00*** 3,00*** 2,27**
***, **, and * indicate significance, respectively, at the 1%, 5% and 10% levels respectively. The t-statistics are derived from robust(adjusted) standard errors. Variable definitions: ROA =
return on average assets; OSS(operational self-sufficiency ) = financial revenue/(Financial Expense + Net Loan Loss Provision Expense + Operating Expense), Efficiency = expense over loan
ratio, Prod = (number of active borrowers + number of savings accounts)/Number of Personnel, Loan size = average loan balance per borrower/GNI per capita, Saving size = Average savings
balance per saver/GNI per capita, Woman borrower = Number of active women borrowers/Number of active borrowers, No. Of borrowers = number of borrowers with loan outstanding, No. Of
Clients = No. Of borrowers + Number of Savers, Portfolio at Risk>30 = Outstanding balance, loans overdue>30 Days/Gross Loan Portfolio, LLR ratio = loan loss reserve ratio; Write-off ratio =
Value of loans written off/Gross loan portfolio. Regulated, and Audited are the variables for external governance. Regulated is a dummy variable which takes the value of 1 if the MFI is
regulated, and 0, otherwise. Audited is a dummy variable which takes the value of 1 if the MFI’s financial statements are audited and 0, otherwise. Control Variables:Asset= log of total assets,
Age = age of the MFI at time t, Loan = loans over total assets, Years = number of years wherein financial statements are reported by the MFI, Lag Risk = lag portfolio at risk>30 days, Growth =
real GDP growth, inflation = average inflation rate, and GDP= real GDP per capita.

26
Table 6.OLS regressions using factor analysis to investigate the determinants of performance in African MFIs, over the period 2006-2008

By Institutional Type External Governance

Variable
Factor 1 Factor 2 Factor 3 Factor 1 Factor 2 Factor 3
Constant -4.9346*** 2.2318*** -0.4472 -4.7612*** 2.2941*** -0.4306
(-13.4867) (8.4832) (-1.1782) (-11.8034) (7.0663) (-1.0018)
Dbank 0.5389** -0.3504** -0.1865
(2.9012) (-2.729) (-1.3031)
Dcoop 0.3343** -0.8511*** -0.638***
(3.1484) (-11.37) (-7.5769)
Dnonbank 0.3352** -0.3021*** -0.1884*
(3.1028) (-3.9609) (-2.2233)
Drural 0.0227 -0.8533*** -0.5122*
(0.0872) (-4.5859) (-2.5526)
Regulated 0.2233 -0.5030*** -0.4378***
(1.9284) (-5.6036) (-4.6929)
Audited -0.4497** 0.1100 -0.0700
(-2.6494) (0.804) (-0.5098)
Assets 0.2973*** -0.135*** -0.0119 0.3124*** -0.1529*** -0.0190
(10.8477) (-7.599) (-0.5234) (9.8923) (-6.2692) (-0.6435)
Growth 0.0175 -0.0066 0.0021 0.0065 0.0082 0.0045
(1.687) (-0.8755) (0.2571) (0.5866) (0.9233) (0.5055)
Age 0.0847 -0.0257 0.1123 -0.0179
(1.3613) (-0.5982) (1.6299) (-0.3606)
Lag Risk -0.1405 -0.2107 -0.4675* -0.4226
(-0.8039) (-1.1085) (-2.1907) (-1.9526)
Loan 1.7292*** 2.0065***
(10.3929) (10.2527)
Borrower/mem -0.1805*** -0.1590**
(-3.8945) (-2.6954)
Cost/borrower 0.1507*** 0.1304*
(3.8472) (2.5662)
Products 0.0284 0.0543
(0.7158) (1.2)
>90 MFI 0.2901*** 0.3023*
(3.3516) (2.5573)
R-squared 0.3337 0.2194 0.3093 0.3200 0.2261 0.2188
F-stat 30.42*** 20.36*** 26.76*** 27.24*** 16.93*** 17.22***
Obs 486 486 486 349 349 349
Breusch-pagan 125.433*** 78.369***
***, **, and * indicate significance, respectively, at the 1%, 5% and 10% levels respectively. The t-statistics are derived from robust
(adjusted) standard errors. Factor 1 is determined largely by the breadth of outreach, for Factor 2 – depth of outreach, and for Factor
3- financial performance. DBank, Dcoop, Dnonbank, Dother, Drural are dummy variables, which indicate the MFI institutional type.
Dbank =1, if MFI is a bank, Dcoop=1 if the MFI is a credit union or cooperative, Dnonbank=1 if MFI is a nonbank financial institution,
Drural=1 if MFI is a rural bank, and 0, otherwise. Regulated, and Audited are the variables for external governance. Regulated is a
dummy variable which takes the value of 1 if the MFI is regulated, and 0, otherwise. Audited is a dummy variable which takes the value
of 1 if the MFI’s financial statements are audited and 0, otherwise. d. Control variables: Asset= log of total assets, Age = age of the MFI

27
at time t, Lag Risk = lag portfolio at risk>30 days, Growth = real GDP growth, = loans over total assets, Borrower/mem = number of
borrowers per member, Cost/borrower = operating expense over number of borrowers, Products= number of products offered,
>90MFI = dummy equal 1 if institution’s exposure to microfinance is greater than 90%.

28
 Table 7. OLS regressions on the relationship between outreach growth and the
macroeconomic indicators

Loan growth - borrower

Variable Borrower growth Loan growth
growth
Constant 0.150 -0.026 -0.18
(0.58) (-0.21) (-0.66)
Growth -0.011 0.020** 0.031***
(-1.39) (2.11) (0.011)
Growth (t-1) 0.009 -0.019 -0.028*
(1.00) (-1.19) (-1.95)
Growth (t-2) -0.015 -0.003 0.012
(0.010) (-0.50) (1.15)
Loan 0.409 0.249** -0.148
(1.05) (1.98) (-0.36)
Asset growth 0.631*** 0.966*** 0.334***
(7.41) (27.31) (3.77)
Lag Risk 0.278 1.017 0.737
(0.83) (0.735) (1.21)
Inflation 0.000 0.000 -0.000
(0.28) (0.57) (-0.02)
Age -.127*** -0.068 0.058
(-2.68) (0.031) (0.472)
R-squared 0.3202 0.7035 0.1357
No of obs 514 521 514
F-stat 10.44*** 284.60*** 3.17***
***,**, and * indicate significance, respectively, at the 1%, 5% and 10% levels respectively. The t-statistics
are derived from robust (adjusted) standard errors. Variable definitions: Borrower growth is the percentage
increase in number of borrowers, loan growth is the percentage increase of the amount of loans, loan growth-
borrower growth is the inverse of the outreach growth. Growth is the real GDP growth at time t, Growth (t-1)
is the real GDP growth at time t-1, Growth (t-2) is the real GDP growth at time t-2. Loan is the ratio of loans
to assets, Asset growth is the growth rate of assets, Lag Risk is the lag value of the portfolio at risk>30 days,
Inflation is the average inflation rate, Age is the age of MFI at time t.

29
Table 8. OLS regression on the differences among institutional types on MFI performance in African countries, over the period 1996-2008

(1) (2) (3) (4) (5) (6)

ROA OSS Loan Size Woman borrower No. of borrowers Portfolio at risk > 30
(1) (2) (3) (4) (5) (6)
DBank -0.0253 -0.768 1.204 0.398* -0.644 0.00898
ROA OSS Loan Size Woman Borrower No. of Borrowers Portfolio at risk >30
(-0.19) (-1.06) (0.64) (1.73) (-0.51) (0.05)
DBank -0.0349 -0.332* 0.889* -0.110 -0.812** -0.0644**
DCoop -0.172** 1.152 4.615*** 0.120 -3.447*** -0.0245
(-0.92) (-1.74) (1.71) (-1.48) (-2.42) (-2.34)
DCoop (-2.26)
-0.0626* (1.03)
0.282 (3.18)
0.277 (0.73)
-0.0901 (-4.59)
-0.901*** (-0.21)
0.00330
Dnonbank -0.0314
(-1.75) -1.192*
(0.69) 4.966***
(0.71) -0.239
(-1.32) -2.091**
(-3.91) -0.00442
(0.10)
Dnonbank (-0.32)
0.0185 (-1.96)
-0.379** (3.61)
0.366 (-1.03)
-0.178** (-2.20)
-0.133 (-0.04)
-0.0109
Dother -0.0713
(0.46) 3.992**
(-2.00) -1.442
(1.35) -1.257
(-2.38) -0.135
(-0.53) -0.197*
(-0.45)
Dother (-0.35)
-0.0684 (2.44)
-0.281 (-0.75)
0.798** (-1.41)
0.120 (-0.06)
-1.265*** (-1.76)
-0.0599**
Drural -0.308*
(-1.35) 0.931
(-0.81) 3.603*
(2.11) -2.618***
(0.79) 0.246
(-3.20) -1.286***
(-2.27)
Drural (-1.81)
-0.115*** (0.97)
0.280 (1.90)
0.0576 (-5.52)
-0.612*** (0.12)
-0.122 (-2.73)
-0.162**
Asset (-2.90)
-0.0115** (1.40)
0.0400 (0.24)
0.333*** (-8.76)
-0.0179** (-0.44)
0.663*** (-2.40)
-0.0105
Asset -0.00775***
(-2.58) 0.0362*
(1.12) 0.120**
(3.52) -0.0278***
(-2.07) 0.778***
(13.57) -0.00816**
(-1.58)
Bank*Asset (-3.66)
0.000966 (1.92)
0.0523 (2.22)
-0.0563 (-4.22)
-0.0342** (29.17)
0.0138 (-2.49)
0.000841
Bank*Age 0.00848
(0.12) 0.230**
(1.12) -0.0716
(-0.45) -0.0121
(-2.39) 0.0712
(0.18) 0.0460***
(0.08)
Coop*Asset (0.50)
0.00928* (2.42)
-0.0603 (-0.28)
-0.279*** (-0.31)
-0.0236** (0.50)
0.181*** (2.93)
0.00334
Coop*Age 0.0128
(1.86) -0.00308
(-0.86) 0.185
(-2.71) -0.0695**
(-2.12) 0.0326
(3.49) 0.0105
(0.43)
(0.77) (-0.02) (0.80) (-2.13) (0.28) (0.69)
Nonbank*Asset 0.00112 0.0818** -0.347*** 0.00583 0.148** 0.000236
Nonbank*Age -0.0199 0.229** -0.214 0.0202 0.0949 0.00358
(0.18)
(-1.07) (1.98)
(2.51) (-3.53)
(-1.37) (0.38)
(0.56) (2.31)
(0.72) (0.03)
(0.31)
Other*Asset
Other*Age 0.00152
0.0144 -0.260**
0.188 0.105
-0.331 0.0732
-0.187** -0.0509
0.176 0.0113
0.0140
(0.11)
(0.41) (-2.38)
(1.01) (0.75)
(-1.56) (1.24)
(-2.00) (-0.33)
(0.58) (1.43)
(0.92)
Rural*Asset
Rural*Age 0.0146
0.0215 -0.0380
0.0200 -0.256**
-0.0806 0.150***
0.248*** -0.0428
-0.320* 0.0943***
0.202**
(1.37)
(1.02) (-0.61)
(0.18) (-1.99)
(-0.46) (4.80)
(5.55) (-0.33)
(-1.74) (2.63)
(2.44)
Age
Age -0.0184***
-0.0170 -0.0111
-0.102 0.261**
0.220** -0.0121
0.00784 -0.0690
-0.0915 0.0243***
0.0141
(-3.00)
(-1.24) (-0.36)
(-1.26) (2.06) (-0.80)
(0.30) (-1.17)
(-1.13) (3.63)
(1.26)
Loan
Loan -0.0190
-0.0162 0.975***
0.942*** 0.692**
0.615* -0.00876
-0.0145 0.870***
0.874*** -0.0497
-0.0505
(-0.78)
(-0.69) (3.12)
(2.98) (2.06)
(1.82) (-0.17)
(-0.28) (4.48)
(4.44) (-1.49)
Years
Years -0.00236
-0.00278* 0.00643
0.00914 -0.0335
-0.0581* 0.0132***
0.0150*** 0.0412**
0.0509*** -0.00438*
-0.00417
(-1.62)
(-1.96) (0.47)
(0.74) (-1.21)
(-1.85) (3.07)
(3.56) (2.46)
(3.08) (-1.74)
(-1.64)
Lag
Lag Risk
Risk 0.00558
0.00722 -0.307**
-0.296** -0.130
-0.159 -0.138***
-0.143*** -0.235
-0.229
(0.14)
(0.18) (-2.15)
(-2.08) (-0.53)
(-0.63) (-2.98)
(-3.06) (-1.40)
(-1.34)
Growth -0.00136* 0.00470 -0.0138 -0.00484** 0.0177* -0.00265
Growth -0.00144* 0.00319 -0.0114 -0.00506** 0.0181* -0.00279
(-1.87) (0.87) (-1.24) (-2.15) (1.85) (-1.41)
inflation
(-1.93)
0.0000320
(0.58)
0.00128
(-1.00)
-0.00273
(-2.28)
0.000556
(1.82)
0.00127
(-1.49)
0.0000505
inflation -0.00000314
(0.15) 0.000739
(1.08) -0.00264
(-1.57) 0.00152
(0.52) 0.00110
(0.71) 0.0000365
(0.30)
GDP (-0.02)
0.00000921 (0.80)
-0.00000866 (-1.54)
-0.000487*** (1.39)
0.00000558 (0.61)
-0.0000482 (0.21)
0.00000495
GDP 0.0000107
(1.12) -0.0000279
(-0.18) -0.000542***
(-6.36) 0.0000145
(0.38) -0.0000150
(-0.55) 0.00000484
(0.42)
Constant (1.33)
0.271*** (-0.57)
-0.0535 (-5.70)
-1.236* (0.93)
1.089*** (-0.17)
-3.091*** (0.39)
0.245***
Constant 0.329***
(6.29) -0.257
(-0.19) -4.091***
(-1.67) 0.968***
(11.07) -1.572**
(-7.98) 0.258***
(4.14)
R-square Adj (4.96)
0.124 (-0.61)
0.0408 (-3.32)
0.108 (7.97)
0.228 (-2.27)
0.755 (2.63)
0.0574
R-square
N Adj 0.119
652 0.0454
673 0.129
526 0.226
607 0.761
674 0.0578
919
Risk level to reject
N 652 673 526 607 674 919
β 1 + level
Risk β 7 = to
0 reject 0.2509 0.3676 0.0104** 0.0049*** 0.0007*** 0.9794
β
β 21 ++ ββ 87==00 0.0153**
0.8432 0.2746
0.2909 0.0233**
0.5154 0.001***
0.0929* 0.0000***
0.5949 0.6018
0.9520
β
β 32 ++ ββ 98==00 0.9518
0.0227** 0.1480
0.2962 0.3345
0.0014*** 0.0002***
0.5317 0.7848
0.0000*** 0.4372
0.8450
β
β 4+
3 +ββ10 9== 00 0.0242**
0.7412 0.6496
0.0510* 0.0386**
0.003*** 0.3607
0.2805 0.0000***
0.0284** 0.9386
0.9671
β 5 + β 11 = 0 0.0000*** 0.0155** 0.8849 0.0000*** 0.0151** 0.2307
β 4+ β 10 = 0 0.7150 0.0149** 0.4554 0.1567 0.9323 0.0748*
β 5 + β 11 = 0 0.0667* 0.3232 0.0592* 0.0000*** 0.9154 0.0064***

30
Table 9. OLS regression on the differences among institutional types on MFI performance in African countries, over the period 1996-2008

(1) (2) (3) (4) (5) (6)

ROA OSS Loan Size Woman borrower No. of borrowers Portfolio at Risk > 30
Regulated -0.244* 0.443 -0.512 0.0170 -2.240** -0.112
(-1.77) (0.47) (-0.62) (0.06) (-2.47) (-1.10)
Audited -0.00328 0.654 -1.683 0.320 0.928 -0.213
(-0.04) (0.58) (-1.49) (1.25) (1.06) (-1.46)
Asset -0.0211** 0.0723 -0.00170 -0.00964 0.717*** -0.0314***
(-2.06) (0.94) (-0.02) (-0.34) (8.04) (-2.71)
Reg*Asset 0.0154* -0.0202 0.0818 -0.00904 0.121* 0.00905
(1.71) (-0.34) (1.44) (-0.43) (1.91) (1.36)
Audited*Asset -0.000807 -0.0456 0.133 -0.0225 -0.0832 0.0172*
(-0.14) (-0.60) (1.61) (-1.15) (-1.25) (1.65)
Age -0.0206*** 0.00986 0.103 -0.0359** -0.0821 0.0328***
(-2.81) (0.30) (1.26) (-2.06) (-1.26) (3.60)
Loan -0.00711 0.965*** 0.764* 0.146** 1.050*** -0.0756**
(-0.24) (2.63) (1.77) (2.51) (4.85) (-1.99)
Years -0.00278* 0.00798 -0.0487* 0.0214*** 0.0643*** -0.00531
(-1.73) (0.56) (-1.72) (4.15) (3.46) (-1.57)
Lag Risk -0.0416** -0.215 0.0464 -0.161*** -0.405*
(-2.40) (-1.36) (0.17) (-3.16) (-1.71)
Growth -0.00126* -0.00289 -0.0238** -0.000758 0.0329*** -0.00392*
(-1.68) (-0.40) (-2.31) (-0.31) (3.38) (-1.69)
inflation -0.0000465 0.00218 -0.0124** 0.00250*** 0.0136* 0.0000773
(-0.13) (0.82) (-2.01) (2.81) (1.67) (0.47)
GDP 0.0000110 -0.0000118 -0.000524*** 0.0000320 0.0000113 0.00000764
(1.27) (-0.19) (-7.77) (1.49) (0.12) (0.60)
Constant 0.481*** -0.750 0.401 0.676* -2.350* 0.536***
(3.14) (-0.69) (0.39) (1.81) (-1.94) (3.31)
R-square Adj 0.155 0.0186 0.138 0.165 0.731 0.0455
N 464 478 391 432 475 652
Risk level to reject
β1+β4=0 0.0759* 0.6327 0.5734 0.9770 0.0125** 0.2782
β2+β5=0 0.9568 0.5467 0.1407 0.2077 0.2970 0.1484

Table 10. OLS regression on the effect of external governance on MFI performance in African countries, over the period 1996-2008

***, **, and * indicate significance, respectively, at the 1%, 5% and 10% levels respectively. The t-statistics are derived from robust(adjusted) standard errors. Variable definitions: ROA = return on average
assets; OSS(operational self-sufficiency ) = financial revenue/(Financial Expense + Net Loan Loss Provision Expense + Operating Expense), Efficiency = expense over loan ratio, Client per member = (number of
active borrowers + number of savings accounts)/Number of Personnel, Loan size = average loan balance per borrower/GNI per capita, Saving size = Average savings balance per saver/GNI per capita, Woman
borrower = Number of active women borrowers/Number of active borrowers, No. Of borrowers = number of borrowers with loan outstanding, No. Of Clients = No. Of borrowers + Number of Savers, Portfolio at
Risk>30 = Outstanding balance, loans overdue>30 Days/Gross Loan Portfolio, LLR ratio = loan loss reserve ratio; Write-off ratio = Value of loans written off/Gross loan portfolio. Regulated, and Audited are the
variables for external governance. Regulated is a dummy variable which takes the value of 1 if the MFI is regulated, and 0, otherwise. Audited is a dummy variable which takes the value of 1 if the MFI’s financial
statements are audited and 0, otherwise. Control Variables:Asset= log of total assets, Age = age of the MFI at time t, Loan = loans over total assets, Years = number of years wherein financial statements are
reported by the MFI, Lag Risk = lag portfolio at risk>30 days, Growth = real GDP growth, inflation = average inflation rate, and GDP= real GDP per capita.

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 (1) (2) (3) (4) (5) (6)
ROA OSS Loan Size Woman borrower No. of borrowers Portfolio at Risk > 30
Regulated -0.0552 -0.120 0.534*** -0.134* -0.967*** 0.0107
(-1.35) (-0.54) (2.67) (-1.85) (-4.40) (0.38)
Audited -0.0148 0.328 0.216 -0.00318 -0.124 -0.0120
(-0.39) (1.28) (0.90) (-0.04) (-0.53) (-0.37)
Asset -0.00806*** 0.0186 0.181*** -0.0367*** 0.755*** -0.00907**
(-3.17) (0.44) (3.57) (-4.48) (24.58) (-2.47)
Reg*age 0.0187 0.144 0.0779 0.0107 0.258** 0.00535
(0.96) (1.56) (0.66) (0.28) (2.07) (0.37)
Audited*age 0.00216 -0.176* -0.114 0.0226 0.00376 0.0155
(0.11) (-1.94) (-0.67) (0.51) (0.03) (0.79)
Age -0.0385 0.0304 0.138 -0.0644 -0.310** 0.0162
(-1.39) (0.27) (0.83) (-1.28) (-2.08) (0.80)
Loan -0.00541 0.991*** 0.772* 0.146** 1.081*** -0.0763**
(-0.18) (2.68) (1.76) (2.51) (4.99) (-2.00)
Years -0.00295* 0.00854 -0.0486* 0.0210*** 0.0622*** -0.00534
(-1.81) (0.59) (-1.71) (4.04) (3.39) (-1.54)
Lag Risk -0.0417** -0.229 0.0475 -0.163*** -0.420*
(-2.43) (-1.38) (0.17) (-3.18) (-1.74)
Growth -0.00127* -0.00296 -0.0241** -0.000873 0.0327*** -0.00399*
(-1.68) (-0.42) (-2.30) (-0.36) (3.30) (-1.71)
Inflation 0.0000165 0.00239 -0.0126** 0.00249*** 0.0142* 0.0000719
(0.05) (0.89) (-2.12) (2.79) (1.80) (0.43)
GDP 0.00000997 -0.00000795 -0.000521*** 0.0000306 0.00000409 0.00000631
(1.15) (-0.13) (-8.00) (1.43) (0.04) (0.49)
Constant 0.322*** -0.0448 -2.053*** 1.078*** -2.634*** 0.264***
(4.84) (-0.08) (-2.87) (8.24) (-5.55) (3.90)
R-square Adj 0.148 0.0218 0.135 0.163 0.730 0.0406
N 464 478 391 432 475 652
Risk level to reject
β1+β4=0 0.1024 0.8611 0.0000*** 0.0019*** 0.0000*** 0.3179
β2+β5=0 0.5752 0.4588 0.5603 0.6562 0.4457 0.8598

Table 11. OLS regression on the effect of external governance on MFI performance in African countries, over the period 1996-2008

***, **, and * indicate significance, respectively, at the 1%, 5% and 10% levels respectively. The t-statistics are derived from robust(adjusted) standard errors. Variable definitions: ROA = return on average
assets; OSS(operational self-sufficiency ) = financial revenue/(Financial Expense + Net Loan Loss Provision Expense + Operating Expense), Efficiency = expense over loan ratio, Client per member = (number of
active borrowers + number of savings accounts)/Number of Personnel, Loan size = average loan balance per borrower/GNI per capita, Saving size = Average savings balance per saver/GNI per capita, Woman
borrower = Number of active women borrowers/Number of active borrowers, No. Of borrowers = number of borrowers with loan outstanding, No. Of Clients = No. Of borrowers + Number of Savers, Portfolio at
Risk>30 = Outstanding balance, loans overdue>30 Days/Gross Loan Portfolio, LLR ratio = loan loss reserve ratio; Write-off ratio = Value of loans written off/Gross loan portfolio. Regulated, and Audited are the
variables for external governance. Regulated is a dummy variable which takes the value of 1 if the MFI is regulated, and 0, otherwise. Audited is a dummy variable which takes the value of 1 if the MFI’s financial

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 statements are audited and 0, otherwise. Control Variables:Asset= log of total assets, Age = age of the MFI at time t, Loan = loans over total assets, Years = number of years wherein financial statements are
reported by the MFI, Lag Risk = lag portfolio at risk>30 days, Growth = real GDP growth, inflation = average inflation rate, and GDP= real GDP per capita.

Table 12 OLS Regressions on the Effect of regulation and institutional type and other services on performance of MFIs in Africa, over the period 1996-2008

(1) (2) (3) (4) (5) (6)

ROA OSS Loan Size Woman borrower No. of borrowers Portfolio at risk>30
DBank -0.0189 0.110 0.683*** -0.124*** -0.635*** 0.0195
(-1.36) (1.19) (2.82) (-3.79) (-4.14) (1.19)
DCoop -0.0673*** 0.250*** 0.235* -0.215*** -0.662*** 0.0430
(-3.73) (5.34) (1.79) (-9.08) (-6.04) (0.79)
Dnonbank -0.0259** 0.0471 -0.269** -0.0502 -0.116 -0.00307
(-1.98) (0.80) (-2.07) (-1.36) (-0.90) (-0.18)
Dother -0.0571*** 0.00373 0.389 -0.122** -1.015*** -0.0216
(-2.97) (0.02) (1.56) (-1.99) (-5.46) (-0.96)
Drural -0.0856*** 0.368*** -0.103 -0.212** -0.465** 0.175
(-4.86) (3.24) (-0.51) (-2.25) (-2.11) (1.40)
Reg*coop 0.0279* 0.0504 0.298 -0.157 -0.0357
(1.95) (0.37) (1.58) (-1.33) (-0.66)
Reg*nonbank 0.00778 0.0219 0.236* -0.113*** 0.169 -0.00216
(0.59) (0.32) (1.69) (-2.74) (1.12) (-0.14)
Asset -0.00700*** 0.0266 0.152*** -0.0300*** 0.782*** -0.00990**
(-3.33) (1.03) (3.06) (-4.65) (30.12) (-2.44)
Age -0.0162*** -0.00748 0.127* -0.0211 -0.0337 0.0288***
(-2.63) (-0.24) (1.80) (-1.38) (-0.58) (3.58)
Loan -0.0123 0.974*** 0.749** -0.0106 0.834*** -0.0297
(-0.51) (3.06) (2.31) (-0.21) (4.27) (-0.96)
Years -0.00369** 0.0128 -0.0363 0.0183*** 0.0421** -0.00392**
(-2.54) (1.21) (-1.35) (4.41) (2.53) (-2.20)
Lag Risk 0.00903 -0.322** -0.0412 -0.109** -0.318* 0.269***
(0.23) (-2.33) (-0.20) (-2.19) (-1.74) (2.71)
Growth -0.00151* 0.00570 -0.0241** -0.00427* 0.0127 -0.000139
(-1.90) (1.06) (-2.42) (-1.95) (1.39) (-0.11)
Inflation 0.0000591 0.00672*** -0.0115** 0.00102 0.00934** 0.00124
(0.17) (2.82) (-2.16) (1.02) (2.20) (1.63)
GDP 0.00455 0.0528 -0.378*** -0.00254 -0.199*** 0.00217
(0.70) (0.63) (-5.30) (-0.15) (-2.79) (0.20)
Constant 0.244*** -0.504* 0.601 1.139*** -2.127*** 0.173
(4.99) (-1.88) (0.81) (8.60) (-3.94) (1.61)
R-square Adj 0.140 0.0590 0.141 0.237 0.768 0.236
N 635 655 515 593 657 624
Risk level to reject
β 2+ β 6 = 0 12.38*** 5.65** 9.38*** 82.48*** 77.05*** 0.31
β 3+ β 7 = 0 2.39 0.92 0.03 28.58*** 0.20 0.24

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APPENDIX

A1. Description of variables used in the factor analysis

Variable Description Values

LOANSIZE Average loan per borrower/ GNI per capita continuous variable (%)
BORROWERS number of active borrowers continuous variable
WOMAN percentage of woman borrowers continuous variable (%)
ROA return on average assets continuous variable
Operational self sufficiency (Financial Revenue/
OSS (Financial Expense + Net Loan Loss Provision Expense continuous variable
+ Operating Expense)
SAVERS Number of savers continuous variable
FINREV financial revenue ratio continuous variable

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