The term governance refers to how the rights, claims and obligations are divided among the stakeholders of an organization. Governance deals with the rules and regulations shaping ownership, management and its monitoring. The governance of an organization consists of a set of internal as well as external mechanisms that are in place to make sure that the interests of its stakeholders (shareholders, banks, employees, government, and society as a whole) are taken care of by management. Since the corporate scandals of the early 2000s, governance has received a lot of attention, both from academia as well as from policy makers. Governance is also important for microfinance. According to the Centre for the Study of Financial Innovation (CSFI), governance is one of the main concerns microfinance institutions (MFIs) have to deal with, especially in the last couple of years. In particular, the reports stress concerns related to the low quality of management and lack of professionalism, cronyism, and lack of transparency and disclosure.
Niels Hermes and Robert Lensink
Niels Hermes, Robert Lensink and Aljar Meesters
Microfinance is an instrument for achieving responsible finance as its aim is to contribute to the financial inclusion of poor households and small businesses. We investigate whether the country-level financial environment in which microfinance institutions (MFIs) work affects their operations. In particular, we argue that the efficiency of MFIs and their capacity to contribute to increasing financial inclusion of poor households and small businesses is determined by the extent to which financial markets of countries are developed. On the one hand, well-developed financial markets provide an environment in which MFIs are able to flourish and increase their efficiency, which increases their capacity to contribute to financial inclusion. On the other hand, well-developed financial markets may also substitute for MFIs and/or may lead to MFI clients taking up multiple loans, reducing efficiency. We find strong evidence that MFI efficiency is positively associated with the level of financial market development.