Determinants of the governance quality of microfinance institutions

• We identify the main board characteristics that drive the quality of MFI governance and link governance quality to MFIs outreach.
• Board expertise and activity are significantly and positively associated with governance rating.
• Board size and CEO–chairman duality do not drive MFI governance quality.
• Cooperative status is negatively and significantly associated with the governance score.
• MFIs with an effective governance system tend to serve large numbers of customers.

The objective of this article is twofold: identify the primary board characteristics that drive the quality of MFI governance and link governance quality to microfinance institutions’ outreach performance. We measure governance quality with the governance rating score provided by Planet Rating, one of the agencies that specialize in the rating of microfinance institutions. The study focuses on an independently pooled cross-section sample of 178 MFIs rated by Planet Rating from 2001 to 2011. Findings obtained after controlling for selection bias suggest that board expertise, board activity, and ownership type are the main board characteristics that significantly determine the quality of MFI governance. Findings seem to be robust when we change the measurement of board size and ownership type. Moreover, MFIs with an effective governance system tend to serve large numbers of customers.