Microfinance and business regulations in emerging markets

The rapid expansion of microfinance has been uneven across emerging market countries. Our study examines whether the regulatory and legal environment for small and medium enterprises (SMEs) associated with microfinance institution (MFI) lending in informal markets may be part of the explanation. Our study of 51 emerging market countries for the period 2007–2015 used two measures of MFI lending: 1) the market penetration index (PI) which reflects MFI outreach and 2) gross loan portfolio per capita (GLP) which gauges the volume of MFI lending. Based on our search, this is the first study to incorporate both measures of MFI lending. We find that excessive regulation and weak legal institutions are associated with less MFI lending both in terms of outreach (PI) and loan volume (GLP). Hence, the international differences in MFI expansion may be partially attributable to business-unfriendly regulations and legal structures.