What Macro Factors Make Microfinance Institutions Reach Out?

This paper studies the relationship between the macro environment and uneven outreach of microfinance in the developing world.Insights from literature on individual countries are used to construct a set of hypotheses that are tested on a cross-sectional dataset of 115 countries. Results indicate that:

• Microfinance has a bigger presence in the richer countries of the developing world;
• Microfinance reaches more clients in countries that receive a higher proportion of international aid;
• Population density plays a positive role, explaining why the sector is still underdeveloped in rural areas.

While further research is required to better understand the specific role of environmental factors, study findings highlight the need for:

• Specific development programs that help countries reach required development levels, before they start developing microfinance markets;
• Active involvement of the international community;
• Strategic MFI alignments that take into account target customer characteristics;
• Special attention to those regions that do not attract commercial money;
• Macro-analysis of the environment to help commercial investors identify profit yielding regions;
• Complementary strategies between donors and commercial investors.