Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States

Examines the impacts of organizational governance on the outreach capabilities and sustainability of microfinance institutions (MFIs) in Central and Eastern Europe and the Newly Independent States. Microfinance institutions are NGOs, banks, credit cooperatives, or nonbank financial institutions that provide loans and other financial services to the poor. These institutions have a double bottom line: outreach, defined as the ability to provide services to the poor, and sustainability, defined as the ability to cover costs. This study examines data from two surveys conducted on MFIs in 1998 and 2001, respectively, by the Microfinance Center for Central Europe and the Newly Independent States (MFC) and another survey conducted in 2002 jointly by the author and the MFC. Results show that performance-based compensation of managers is not associated with better-performing MFIs, while managers who were paid lower wages than what they considered adequate reached fewer borrowers. However, the performance of MFIs was enhanced by having highly experienced managers and by having a board of directors not affiliated with the organization. External mechanisms of control on the institutions, such as external auditing, rating, or supervision, had a limited effect on performance. (LKB)