Economic Indicators and the Performance of Microfinancing Institutions

Abstract

Microfinancing has proven to be an effective way of reducing poverty over the last 30 years after it was pioneered by Professor Muhammad Yunus in 1976 when he set up the Grameen Bank (GB) in Bangladesh. The phenomenal success of the Grameen Bank by offering financial services to the poor without any collateral sparked a growth of microfinancing institutions in the developing countries during the last three decades. Yunus was awarded the Nobel Prize in 2007 for his contribution. At the moment it is estimated that there are over 3000 microfinancing institutions (MFIs)around the world serving over 130 million poor people. The performance of a MFI depend on a number of factors both within and outside its control. An understanding of factors affecting the performance of MFIs is important considering the hundreds of millions of dollars that are injected into the MFIs by donor agencies and governments. Using data collected from 234 MFIs around the world, this paper examines the effect on the performance of MFIs made by three external economic factors that are completely beyond their control; literacy of the borrowers, economic growth and the population density.