Economic Freedom and the Success of Microfinance

Institutions

Draft: August 2006

PETER R. CRABB
School of Business and Economics
Northwest Nazarene University

Abstract

This study looks at the relationship between the success of microfinance institutions and
the degree of economic freedom in their host countries. Many microfinance institutions
are currently not self- sustaining and research suggests that the economic environment in
which the institution operates is an important factor in the ability of the institution to
reach this goal, furthering its mission of outreach to the poor. The sustainability of the
microlending institutions is analyzed here using a large cross-section of institutions and
countries. The results show that microfinance institutions operate primarily in countries
with a relatively low degree of overall economic freedom and that various economic
policy factors are important to sustainability.

This work is supported by the Watson Fellowship of Northwest Nazarene University. I am grateful to
Timothy Keller for research assistance on this subject. Address and contact information: 623 Holly Street,
Nampa, ID 83686, phone:208-467-8404 fax:208-467-8440, email: prcrabb@nnu.edu. All errors and
omissions are my own and any comments are welcome.

I.

Introduction
The general purpose of small lending in developing countries is to provide the

poor with financial services and capital in the hopes that they can break the cycle of
poverty through business development. For years, non-governmental agencies have
operated microlending, or microfinance, institutions but have been limited in the amount
of people they reach because they remain dependent on donations. While microfinance
institutions (MFIs) continue to serve nearly 100 million poor and near-poor individuals, it
is estimated that more than 1 billion people have no access to basic financial services. 1 In
recent years MFIs have begun seeking financial freedom from their donors and
government agencies. That is, these groups now seek sustainability. Operational or
financial sustainability is vital to the long-term success of each institution and the
microfinance system as a whole. This large cross-sectional study looks at microfinance
institutions around the world to see how important the economic conditions in a country
are to the sustainability of the institution.
Morduch (1999) describes the need for more empirical work on the sustainability
of MFIs. He points out, Empirical understandings of microfinance will also be aided by
studies that quantify the roles of the various mechanisms in driving microfinance
performance The empirical work on microfinance institutions to date is limited to
case studies and small sample reviews of financial conditions. The data for this study is a
large cross section of institutions, from many parts of the world, and measured over a
significant period of time. The panel data collected here provides a unique opportunity to
identify key factors, both institutionally and economically, in an effort to assist MFI
1

www.cgap.org

management and help them achieve sustainability. The results of this study will assist
managers and organizations that support these institutions by identifying the economic
situation in each country that will lead to their success.
The following section is a review of the literature on microfinance programs and
factors affe cting their success. Section III presents an empirical model for study here.
Section IV describes the data used to estimate the model and the results are presented in
section V. The final section reviews the key findings and provides recommendations for
further research.

II.

Literature Review
It is now widely accepted that financial sustainability is a necessary long-term

goal for microfinance institutions. According to the Consultative Group to Assist the
Poorest (1995), Microfinance institutions can and indeed need to be self sustaining if
they are to achieve their outreach potential providing rapid growth in access to financial
services by poor people. Sustainability is now considered a necessary precondition for
achieving growth, and therefore greater outreach to the poor. Sustainability is also
desirable because it allows MFIs to access the formal sector as a source of capital, rather
than relying on subsidies to bring about growth. Access to commercial capital includes
the ability to source capital more rapidly and increase leverage. This allows MFIs to
expand their operations and increase the level of outreach (see Drake & Rhyne, 2002).
Brau and Woller (2004) conduct an extensive review on the microfinance literature. In
the section on sustainability of MFIs they site many articles concluding that institutional

sustainability is a necessary goal as subsidized loan funds generally are more fragile and
less focused.
Factors affecting the sustainability of an MFI can broadly be divided between
institutional variables and environmental variables. Institutional variables are those
factors that are specific to the institution, while environmental variables relate to the
policy and economic setting of the country the institution operates in. The bus iness and
regulatory environment is now considered an important factor in the success of
microfinance institutions. Armendariz and Morduch (2004) conclude that MFIs cannot
provide effective financial intermediation without a well- functioning regulatory
framework in the country. Woller and Woodworth (2001) cite many impact studies and
conclude that governments must create a macroeconomic environment characterized by
stable growth, low inflation, and fiscal discipline. They further suggest that poor
macroeconomic, regulatory, and trade policies will undermine the viability of small
business owners and the MFIs that support them.
Hubka and Zaidi (2005) find that governments can help market-based
microfinance by eliminating unfair competition from public institutions; undertaking
overall regulatory reform; and improving the overall business environment. Ledgerwood
(1999) discusses the impact of policy and regulatory issues on MFIs. Many policy issues
are addressed, but two are recognized as playing a large role for sustainability - an
appropriate regulatory environment, and strong property rights. Zeller and Meyer (2002)
also found that improvements in the policy environment of a country contribute to the
overall performance of its institutions. They site China as an example where
administrative interference and distorted pricing systems resulted in a low level of

outreach and high fragility of many MFIs. In all, the overall economic condition of the
host country is extremely important to the success of any MFI. Data measuring
countrywide policy issues such as those mentioned above are used in this study to assess
their impact on the sustainability of microfinance institutions.
Some empirical work has shown institutional variables to be of minimal
importance to the success of MFI. Christen, et al (1995) found few institutional variables
to be significant. In particular, direct unit-cost-related variables in an institution had no
statistical significance in a regression on returns. As the authors mention, we should
expect programs with high operating costs to be less viable. Christen et al also
considered non- institutional factors; finding four key aspects of the policy environment to
be important for microenterprise development - recent economic growth, macroeconomic
stability, the extent of financial repression, and the regulatory environment for financial
institutions. The results suggest the economic situation faced by the MFI may be of
greater importance than any institutional factor. The study, however, is limited to only
eleven institutions, and most of these institutions have been around long enough that they
must all achieved some level of sustainability.
Woller (2000) reviews the financial viability of village banking, a common
lending program for MFIs, using data for nine institutions. Woller looks at the
relationship between the return on the institutions loan portfolio and various operational
cost measurements. As with Christian et al it is difficult to make strong conclusions from
the small sample, but Woller finds three strong indicators of financial health portfolio
yield (return), the interest spread, and number of borrowers. The study found that many
efficiency variables were uncorrelated with the return on the portfolio, tha t is, many

institutional factors are relatively less important. Of these three key indicators, only
number of borrowers can effectively be managed by the institution. Thus, MFIs may
better achieve sustainability by increasing the size of their operations.
In contrast, Woller (2001) finds no relationship between institutional size and
sustainability but a measure of the institutions yield on its portfolio is once again
positively related to sustainability. Many institutional variables were not found to be
significant but there was a positive relationship between financial self-sufficiency and
depth of outreach. The study used data over a three year period from thirteen institutions
operating village banking operations. The data set is robust, including many measures of
institutional operations, but only 13 of the 148 institutions in the MicroBanking Bulletin
could be reviewed and the regression results could not be measured using fixed effects
procedures. The results presented here incorporate some of these findings in Wollers
study and are measured using fixed effect regressions.
Other empirical research to date suggests that a countrys political, economic, and
cultural environment plays a key role in the ability of microfinance institutions to meet
their mission. Sharma (2004) found case studies that show the importance of the broader
national environment in facilitating the growth of institutions, comparing, for example,
success in India and not in Nepal. Growth of the MFI in Nepal leveled off just as
expansion of the institution in India accelerated. This coincided with the Maoist
insurgency in Nepal and an improving economic environment in India. The results
presented here are more robust than case study reports. Cross-sectional and time-series
data measuring country-wide policy issues are used in this study to assess their impact on

the sustainability of microfinance institutions, while also controlling for many

institutional variables.

III.

Empirical Model
The above literature review suggests that the economic environment of the host

country influences the sustainability of a microfinance program. Determination of the

dependent variable, operational sustainability, for this study is guided by the current
conventions in the industry. As noted above, previous studies have used return on assets
as the measure of the institutions ability to sustain its operations. More recently, MFIs
have reported operational self-sufficiency, which is calculated as the ratio of total
financial revenue to total financial expenses, loan loss provisions, and all other operating
expenses. This measure is used over another widely discussed ratio financial selfsufficiency. Financial self-sufficiency is likely to include revenues or expenses from
activities other than loans to the poor and is not reported in the data set obtained for this
study.
This section presents the empirical model used in the study and the expected
factors that determine operational self-sufficiency.
A general econometric model to study the issue takes the form
Yijt = + Xjt + Zit + ijt

(1)

where Yij t is the operational self-sufficiency of MFI i in country j for period t. The first
independent variable, Xjt is a measure of the economic freedom in the country j in
period t. Zit is a vector of institutional control variables for MFI i in period t. In the data

used for this study a higher value for X is associated with less economic freedom. We
would therefore suspect that the sign of to be negative a lower degree of economic
freedom reduces the MFIs sustainability.
The control variables for this study are based on the above review of previous
studies and are specific to each institution. They include gross loan portfolio, the percent
of the portfolio at risk, return on assets, the number of borrowers per staff member, and
the number of active clients. The appendix provides a definition for each of these
variables. The expected signs of the coefficient on gross loan portfolio, the number of
borrowers per staff member, and the number of active clients are positive. These
variables all measure economies of scale in the institution - higher economies of scale
increase the MFIs sustainability. Return on assets is used to proxy for the yield on the
institutions portfolio and its expected sign is positive as previously found. The expected
sign of the coefficient for the percent of the portfolio at risk is negative - greater risks
increase costs and reduce the sustainability of the institution. Many MFIs use group
lending programs to mitigate these risks.
The general model in equation (1) can be delineated by the factors affecting a
countrys economic freedoms. The data used here include 10 government policy and
economic environment factors: trade policy, fiscal burden of government, government
intervention in the economy, monetary policy, capital flows and foreign investment,
banking and finance, wages and prices, property rights, regulation, and informal market
activity. Using all ten of the available factors provides a more specific econometric
model for study:
Yijt = + 1 X1 jt + 2 X2 jt + + 10 X10 jt + Zit + ijt

(2)

where Yij remains the operational self-sufficiency of MFI i in country j for period t.
The independent variables for economic freedom are measured by X1jt through X10jt
for country j in period t, and Zit remains the vector of institutional control variables for
MFI i in period t. Each factor of economic freedom is accorded a higher value if the
economic environment for the country is less free, scored on a system ranging from 1-5.
Thus, the expected coefficient sign for each factor is negative a lower degree of
economic freedom in the indicated area reduces the MFIs sustainability. The next
section further describes these variables as they are used in this study.

IV.

Data
Data for this study were obtained from two public sources - the Microfinance

Information Exchange (MIX) and the Heritage Foundations Index of Economic

Freedom. The MIX is a not- for-profit private organization promoting information
exchange in the microfinance industry (www.themix.org and www.mixmarket.org). The
MIX provides reliable, comparable and publicly available information on the financial
strength and performance of MFIs. While they do not guarantee the data, the MIX
follows a quality control system to help ensure the validity of MFI data by verifying the
information posted and reviewing it for coherence and consistency. At the time of the
study there were 717 listed MFIs. Annual data from 2000 to 2004 for 511 reporting
institutions in 90 different countries was obtained for this study. The Appendix lists and
defines the variables collected annually for each MFI in this study over the sample
period.

Data on the level of economic freedom for countries comes from the Heritage
Foundations Index of Economic Freedom (EF). The data can be found at
http://www.heritage.org/research/features/index/. The EF is a set of objective economic
data in areas such as trade policy, fiscal burden of government, government intervention
in the economy, monetary policy, capital flows and foreign investment, banking and
finance, wages and prices, property rights, regulation, and informal market activity.
Countries are measured in each of the ten areas and given a score of 1 to 5, and the
ratings are averaged to create an overall level of economic freedom; low scores (less
than 2.99) represent a low level of government involvement in the economy and high
scores (greater than 3) correspond to a high level of government involvement. A an
economy with a high score has significant government involvement in the economy and
hence less economic freedom.
More detailed measurements of the economic environment are found in the
subcategories of the index. The ten subcategories of The Economic Freedom Index are
also scored on a system ranging from 1-5. For example, in the Banking and Finance
category, a 1 is for a country with little or no government restrictions, regulations, and
involvement in the banking or finance industry, while a 5 represents complete
government control. In order to earn a 1 in the Property Rights category, a country must
have a judicial system free from government influence, strong property rights, and strong
contract law. A country earning a 5, on the other hand, exhibits the opposite
characteristics. For each annual Index of Economic Freedom, the report covers data for a
12-month period starting 18 months prior. For example, the 2003 Index covers the

second half of 2001 through the first half of 2002. 2 Therefore, the 2003 Index value is
matched with the reported 2002 data for the MFI in that host country.

V.

Results
Table 1 shows descriptive statistics for all variables described in the appendix.

This large cross-section covers a variety of institutions from many different countries 511 MFIs from 90 different countries over the period of 2000 to 2004. There are over
1,500 observations for most variables. Missing data for some institutions in some years
results in 1,076 observations for regression analysis. Three important issues can be
observed from the details of Table 1. First, the data include observations for MFIs with
no active clients and no loans, to ones with nearly 4 million borrowers or well over $1.7
billion in lending activity. In other words, the size of the MFIs is skewed towards large
institutions and countries operating with higher average income. To control for resulting
heteroskedasticity, gross Loan portfolio is used as a weighting factor in all regression
measurements that follow. Second, these institutions operate in primarily unfree
countries as defined by the Heritage Foundations Index of Economic Freedom. The
average score for the 90 countries represented here is 3.28, where a country receiving a
score greater than 3 is considered to be unfree, and those with a score of 4 or above have
little to no economic freedom.
The third issue concerns the average operational self-sufficienc y. The 1.13
average for these reporting institutions suggests that most have more than achieved their
goal of sustainability. It is possible that there is some sample selection bias in the MIX
2

A detailed description of the methodology used in the collection of these data can be found at

10

data. Perhaps MFIs begin reporting to the MIX once they have achieved sustainability or
are close to it. To look at this issue the EF scores for those 206 institutions in the Mix
data not reporting operational self-sufficiency were collected. While the average EF score
for the reporting firms is 3.28 as indicated in Table 1. Conversely, the average score for
the countries where the non-reporting firms are operating is 3.53. The difference in these
mean values is significantly different (t-statistic of 7.16, p= 0.000). It could be that the
non-reporting firms have not achieved sustainability because they operate in very
difficult economic environments.
A. Univariate Tests
As a first look at the relationship between economic freedom and the
sustainability of MFIs a test of the means was conducted. The mean operating selfsufficiency for MFIs in count ries scored as mostly free (score of 2.99 or less) is 1.07
compared to 1.14 for those institutions operating in mostly unfree countries (score of 3 or
higher). While it looks as if the MFIs operating in more restrictive environments may
actually be doing better, there is no statistically significant difference in these two groups
(t-statistic of -1.2535, p= 0.105).
A second means test confirms the importance of institutional size discussed
earlier. The average operating self- sufficiency rate for MFIs with a gross loan portfolio
greater than the median value of $1,752,759 is 1.24. This value is statistically greater
than the 1.03 average for smaller MFIs (t-statistic of 8.322, p= 0.000). This result is
likely due to the economies of scale achieved by institutions that have been in existence
longer. It should be expected that when MFIs have achieved operating self-sufficiency
they can continue to grow their portfolio.
http://www.heritage.org/research/features/index/downloads.cfm
11

Table 2 reports Pearson correlation coefficients among all variables described in

the appendix. Each of the institutional variables is significantly correlated with
operational self- sufficiency - the sustainability of an MFI falls as the risk of the loans
increases and the rate of return rises, but rises with more borrowers and higher loan
values. Interestingly, rate of return and operational self-sufficiency are negatively
correlated. However, the relationship is in the expected direction when controlling of
other factors in the multivariate tests that follow. The overall score of the country where
the country operates is not significantly related to operational self- sufficiency, but five of
the factors that make up this score are. The relationship amongst these factors is
discussed next in the multivariate analysis. The high number of significant correlations
in Table 2 indicates possible multicolinearity problems which are addressed in the
following multivariate tests.
As previously mentioned, the MFIs in this sample operate in generally better
environments than MFIs in the MIX data that did not report their sustainability figure. It
may also be the case that MFIs have flourished simply because they operate in
environments where the poor have been burdened by the lack of economic opportunity,
that is, countries with less overall economic freedom than most. The current trend in
operationally self-sufficiency supports this idea. From 1998 to 2004 the average
operationally self-sufficiency has risen from 1.04 to 1.18 for all MFIs reporting in the
MIX data. Meanwhile, the average score for all countries in the EF data improved from
3.21 to 3.02. Therefore overall economic freedom is improving but MFIs have improved
their operations while still trying to support the poor in mostly unfree environments
(average score 3.28).

12

B. Multivariate Tests
Table 3 presents estimates of the model in Equation 1 for the sample period of
2000 through 2004. The dependent variable is operational self-sufficiency. The
parameters are measured accounting for fixed effects and gross loan portfolio is used as a
weight for each variable to control for heteroskedasticity. The model is overall
significant and the results indicate that the overall level of economic freedom in the host
country (Score) is not a contributing factor in the ability of an MFI to sustain its
operations. This result may be due to the sample selection bias discussed earlier or
simply that this aggregate measure does not reflect the key policy issues affecting MFIs.
The control variables in the estimates of Equation 1 are all significant and have
the expected sign. The coefficient on the variable measuring the percentage of the MFIs
portfolio that is at risk shows that this factor is very important to the success of the
institutions. The group lending programs used by most MFIs is thought to control this
risk. Controlling for the size of the institution, the risk in the portfolio significantly
affects the ability of the MFI to meet the objective of sustainability.
As previously discussed, the EF score is an average of ten factors. Table 4
presents estimates of the model in Equation 2 to test the implication of each of these
factors on the sustainability of MFIs. The dependent variable is again operational selfsufficiency and the parameters reflect controls for fixed effects. The model is overall
significant and the control variables remain significant and have the expected signs. Four
of the ten factors for economic freedom are significant predictors for operational self-

13

sufficiency. Two of these factors have positive impacts - less economic freedom in the
areas of trade and monetary policy lead to higher sustainability levels. The earlier
discussion of MFI success over time may also be true in these specific areas. If the
overall economic level of freedom is improving over the sample period it may be true
that the MFIs are having success where trade has not opened up extensively and the
monetary authority has not controlled inflation.
Two of the factors have significant negative impacts on sustainability
government intervention and banking. Consistent with the literature, a country with low
economic freedom in terms of role that the governme nt takes in the marketplace will have
trouble sustaining private business operations. Higher scores on Banking also lead to
lower sustainability. A heavy government involvement in financial sector suggests MFIs
will have difficulties lending to the poor. A high value for the EF rating on Banking
indicates that credit allocation in the country is controlled by government, bank formation
is difficult, and evidence of corruption exists.
As evidence in Table 2 shows, multicollinearity is present in the data. To address
this issue the model in Table 4 was estimated without the two variables receiving high
variable inflation factors (VIF) - the number of active borrowers (VIF= 3.38) and the
Banking factor (VIF = 4.78). The results (not reported) are qualitatively similar in terms
of both statistical significance and coefficient estimates.

VI.

Conclusions
Sustainability is now a necessary long-term goal for almost all microfinance

institutions. MFIs seek to cover their operating expenses and achieve growth so as to

14

further their outreach to the poor. MFIs no longer wish to rely on subsidies to bring
about growth. Many factors contribute to the ability of an MFI to meet these goals and
the economic environment in which the MFI operates is one important factor. Particular
negative aspects of the economic environment such as government intervention
significantly reduce an MFIs ability to achieve sustainability. The empirical results from
this large cross-section of institutions over many years support the need for governments
to provide good economic environments if MFIs are to meet their goal of breaking the
cycle of poverty.
A key area of concern in this study is the possible sample selection bias discussed
earlier. It is important for all MFIs to report the results of their operations so that
organizational managers and governmental officials can support their work. Greater
reporting should lead to better analysis of the factors affecting long-term success.
Another area of concern in this study is a possible identification problem. The predictors
in this study are economic factors in the host country leading to success of the MFI. It is
possible to think of successful MFIs helping a country improve its economic
environment. That is, when the MFIs are able to achieve sustainability the government
can reduce it role in the economy. Further theoretical work on the developmental
implications of MFIs and their role in the economy will prove beneficial.

15

Appendix
Data for the following factors was obtained from the MIX MARKET , a microfinance information
platform at http://www.mixmarket.org in July of 2006.

Operational Self-Sufficiency: Financial Revenue (Total)/ (Financial Expense + Loan

Loss Provision Expense + Operating Expense). A value of 1 indicates full operational
self-sufficiency, whereas a value less than one indicates the institution must rely on
outside sources.
Gross Loan Portfolio: All outstanding principal for all outstanding client loans, including
current, delinquent and restructured loans, but not loans that have been written off. It
does not include interest receivable. It does not include employee loans.
Return on Assets: A measure of the institutions earnings on invested assets and equal to
net after-tax operating income divided by average assets for the period.
Portfolio at Risk > 30 days Ratio (%): The value of the portfolio for which payments are
more than 30 days divided by the gross value of the loan portfolio.
Borrowers per Staff Member: Number of active borrowers divided by the number of
personnel.
Number of Active Clients: Number of individuals who are active borrowers and/or
savers with the MFI. A person with more than just one such account (i.e. with a loan and
a savings account) is counted as a single client in this measure.

16

References
Armendariz and Morduch (2004), Microfinance: Where do we stand?, in Financial
Development and Economic Growth: Explaining the Links, Charles Goodhart, editor,
Palgrave Macmillan, Basingstoke, Hampshire, UK.
Brau, James C. and Woller, Gary (2004), Microfinance: A Comprehensive Review of
the Existing Literature, Journal of Entrepreneurial Finance and Business Ventures, Vol.
9, p.p. 1-26.
Christen, R.P., Rhyne, E., Vogel, R.C., & McKean, C. (1995). Maximizing the outreach
of microenterprise finance: An analysis of successful microfinance programs. USAID.
Retrieved from http://www.microfinancegateway.org/files/1507_01507.pdf.
Consultative Group to Aid the Poor (1995), Maximizing the outreach of microenterprise
finance: The emerging lessons of successful programs. Retrieved from
http://cgap.org/publications/focus_notes.html
Drake, D., & Rhyne, E. (Eds.). (2002). The commercialization of microfinance:
Balancing business and development. Bloomfield, CT: Kumarian Press.
Hubka, A., & Zaidi, R. (2005). Impact of government regulation on microfinance. World
Bank: Washington, D.C.. Retrieved from
http://siteresources.worldbank.org/INTWDR2005/Resources/Hubka_Zaidi_Impact_of_G
overnment_Regulation.pdf
Ledgerwood, J. (1999). Microfinance handbook: An institutional and financial
perspective. World Bank: Washington, D.C.
Morduch, Jonathan (1999), The Microfinance Promise, Journal of Economic Literature
Vol. 37, p.p. 1569-1614.
Sharma, M.P. (2004). Community-driven development and scaling- up of microfinance
services: Case studies from Nepal and India. Retrieved April 4, 2005 from:
http://www.ifpri.org/divs/fcnd/dp/papers/fcndp178.pdf
Woller, Gary (2000), Reassessing the Financial Viability of Village Banking: Past
Performance and Future Prospects, MicroBanking Bulletin.
Woller, Gary (2001), Poverty Lending, Financial Self-Sufficiency and the Six Aspects
of Outreach, SEEP Network Working Group Papers,
(http://www.seepnetwork.org/files/691_PovertyLendingWoller.doc)

17

Woller, Gary and Woodworth, Warner (2001), Microcredit as a Grass-Roots Policy for
International Development, Policy Studies Journal, Vol. 29, p.p. 267-283.
Zeller, M., & Meyer, R.L. (Eds.). (2002). The Triangle of Microfinance: Financial
Sustainability, Outreach, and Impact. International Food Policy Research Institute,
Baltimore, U.S.

Table 1
Descriptive statistics: Annual data for 511 microfinance institutions from 2000 to 2004; Annual scores
from the Heritage Foundations Index of Economic Freedom (EF) for the countries where these
microfinance institutions operate.
http://www.heritage.org/research/features/index/.
Variable
a. Institutional data
Operational SelfSufficiency
Gross Loan Portfolio
Portfolio at Risk > 30 days Ratio
Return on Assets
Borrowers per Staff member
Number of Active Borrowers
b. Country data
Score
Trade
Fiscal Burden
Gov't Intervention
Monetary Policy
Foreign Investment
Banking
Wages & Prices
Property Rights
Regulation
Informal Market
Valid N (listwise)

Mean

Std. Dev.

Minimum

Maximum

1,586
1,585
1,372
1,229
1,498
1,546

1.1345
12,398,671
0.0565
0.0843
131.6555
47,591

0.5059
69,419,369
0.0899
0.1438
101.9538
285,355

0.0024
0
0
0.0001
0
0

8.3003
1,720,072,773
1.0535
2.1367
895
3,993,525

1,582
1,582
1,582
1,582
1,582
1,582
1,582
1,582
1,582
1,582
1,582
1,313

3.2771
3.6637
3.5419
2.8426
2.3394
2.9753
3.0506
2.7307
3.7168
3.8951
4.0152

0.4027
0.9532
0.6478
0.8576
1.2627
0.7444
0.8484
0.5851
0.5686
0.5694
0.5591

1.86
1
1.5
1
1
1
1
1
1
2
1.5

4.625
5
5
5
5
5
5
5
5
5
5

18

Table 2
Pearson Correlation Coefficients: Annual data for 511 microfinance institutions from 2000 to 2004, and annual scores from the Heritage Foundations Index of
Economic Freedom (EF) countries where these microfinance institutions operate.
Coefficients significant at the 5% level in bold.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

Operational SelfSufficiency
Gross Loan Portfolio
Portfolio at Risk > 30 days Ratio
Return on Assets
Borrowers per Staff member
Number of Active Borrowers
Score
Trade
Fiscal Burden
Gov't Intervention
Monetary Policy
Foreign Investment
Banking
Wages & Prices
Property Rights
Regulation
Informal Market

10

11

1
0.059
-0.14
-0.12
0.123
0.074
0.048
0.03
-0.09
0.013
0.004
0.05
0.021
0.068
0.107
0.097
-0

1
-0.02
-0.04
0.036
0.68
0.009
-0.01
-0.02
0.01
0.013
-0.01
0.03
-0.05
0.027
0.027
0.031

1
0.035
-0.09
-0.01
-0.03
-0.08
0.078
-0.07
0.056
0.001
0.02
-0.02
-0.12
-0.1
-0.01

1
-0.05
-0.03
0.04
-0.01
0.034
0.05
0.143
-0.01
0.02
0.027
-0.08
-0.04
-0.05

1
0.116
0.026
0.156
0.131
0.056
-0.09
-0.04
0.024
-0.02
-0.02
-0.02
-0.03

1
0.119
0.1
0.03
0.066
-0.02
0.038
0.142
0.041
0.044
0.143
0.106

1
0.515
0.298
0.583
0.369
0.659
0.772
0.665
0.436
0.548
0.507

1
0.303
0.331
-0.05
0.13
0.37
0.17
0.15
0.147
0.052

1
0.247
-0.19
0.145
0.296
0.091
-0.15
-0.08
0.01

1
0.017
0.222
0.405
0.282
0.141
0.192
0.233

1
0.09
0.211
0.174
0.004
-0.01
0.068

12

13

14

15

16

1
0.516
1
0.525 0.51
1
0.342 0.112 0.309
1
0.437 0.281 0.449 0.57
1
0.354 0.351 0.28 0.281 0.448

17

19

Table 3
Parameter estimates for equation 1:
Yijt = + X jt + Zit+ ijt
The dependent variable is the operational self-sufficiency of MFI i in country j during t. Score is a measure
of the economic freedom in the country j during that period. A higher value for Score indicates less
economic freedom in the country. The remaining variables in vector Z are specific to the institution for
period t. Annual data for 511 microfinance institutions from 2000 to 2004 and annual scores from the
Heritage Foundations Index of Economic Freedom (EF). Fixed effects estimation weighted by Gross Loan
Portfolio.

Dependent Variable - Operational Self-Sufficiency

Variables
Coefficients
Std. Error
t
Intercept
0.1560
0.3320
0.472
Portfolio at Risk > 30 days Ratio
-1.1370
0.2090
-5.430
Return on Assets
3.0960
0.2390
12.927
Borrowers per Staff member
0.0000
0.0000
2.245
Number of Active Borrowers
0.0000
0.0000
8.760
Score
-0.0610
0.0380
-1.611
Adjusted R-square
N

p-value
0.637
0.000
0.000
0.025
0.000
0.108

0.8290
1,076

20

Table 4
Parameter estimates for equation 2:
Yijt = + 1 X1 jt + 2 X2 jt + + 10 X10 jt + Zit + ijt
The dependent variable is the operational self-sufficiency of MFI i in country j during t. Ten factors
measure of the economic freedom in the country j during that period (trade policy, fiscal burden of
government, government intervention in the economy, monetary policy, capital flows and foreign
investment, banking and finance, wages and prices, property rights, regulation, and informal market
activity). A higher value for each factor indicates less economic freedom in this area for the respective
country. The remaining variables in vector Z are specific to the institution for period t. Annual data for 511
microfinance institutions from 2000 to 2004 and annual scores from the Heritage Foundations Index of
Economic Freedom (EF). Fixed effects estimation weighted by Gross Loan Portfolio.

Dependent Variable - Operational Self-Sufficiency

Coefficients
Std. Error
Intercept
0.0407
0.3601
Portfolio at Risk > 30 days Ratio
-0.8788
0.2104
Return on Assets
3.0111
0.2330
Borrowers per Staff member
0.0004
0.0002
Number of Active Borrowers
0.0000
0.0000
Trade
0.0652
0.0149
Fiscal Burden
-0.0031
0.0207
Gov't Intervention
-0.0419
0.0117
Monetary Policy
0.0228
0.0108
Foreign Investment
0.0025
0.0127
Banking
-0.0766
0.0229
Wages & Prices
-0.0162
0.0170
Property Rights
0.0242
0.0320
Regulation
-0.0473
0.0457
Informal Market
0.0007
0.0224
Variables

Adjusted R-square
N

t
0.1131
-4.1776
12.9249
2.4986
9.6752
4.3773
-0.1497
-3.5690
2.1125
0.1988
-3.3502
-0.9518
0.7566
-1.0361
0.0319

p-value
0.910
0.000
0.000
0.013
0.000
0.000
0.881
0.000
0.035
0.842
0.001
0.342
0.450
0.301
0.975

0.8220
1,076

21

22