The Impact of Governance and Institutional Quality on MFI Outreach and Financial Performance in Sub-Saharan Africa

• We study the financial and social performance of 200 MFIs in sub-Saharan Africa.
• We focus on governance as a determinant of MFI success.
• NGOs socially and financially perform better than banks and cooperatives.
• We examine how institutional quality alters MFI behavior in catering to the poor.
• Stronger institutions encourage banks and cooperatives to increase MFI outreach.

SummaryThis paper examines whether shareholder-owned MFIs financially and socially perform better than NGOs in sub-Saharan Africa (SSA). We also investigate the role of institutional quality in altering MFIs’ incentives and behavior in determining outreach. Our results indicate that NGOs are more profitable and have better outreach than banks and cooperatives. While a weak rule of law favors relationship-based exchanges and thus, results in NGO superiority, stronger institutional quality may encourage banks to cater to more borrowers, hence, shareholder-owned MFIs do not socially perform differently from NGOs. Overall, this study shows that NGOs are the best conduits of microfinance in SSA.