The effect of loan approval decentralization on microfinance institutions' outreach and loan portfolio quality

We study the impact of loan approval decentralization on MFI portfolio quality and outreach, and the effects of alignment mechanisms when loan officers combine information production and decision functions. Using an independently pooled cross-section of 374 MFI-year observations for 280 MFIs in 70 countries, we find that effective incentive schemes and internal control systems help mitigate agency problems within MFIs, and thus increase the outreach of MFIs without altering the quality of their loan portfolio. Our results are robust after controlling for alternative portfolio risk and outreach measures, outreach threshold effect, crisis period, selection bias and endogeneity.