Microfinance Business Environment

Several factors are important for privately provided microfinance to thrive and develop successfully in any country. Key among them I think are:
1. Supportive regulatory framework that recognizes microfinance practitioners as important players and provides space for operation under laws of land;
2. Enabling policy environment with economic development policies that prioritize financial inclusion and encourages private sector players to participate;
3. Minimal infrastructure that makes it possible and relatively cheaper to reach the excluded communities; and
4. Good business environment that enables private sector to thrive, protects investor interests and helps build healthy industry

Economist Intelligence Unit has been conducting microfinance business environment survey that culminates into a report every year since last four years. The 2010 index covered the period from August 2009 through May 2010, and evaluated microfinance across three distinct categories:
1. the regulatory framework, including official legal recognition, interest rate restrictions, market distortions, capital requirements and regulatory capacity;
2. the general investment climate for microfinance providers, especially accounting standards, governance tendencies
and transparency requirements; and
3. the level of microfinance institutional development, as measured by market concentration, the range of services provided beyond credit and the quality of borrower
information.

54 countries were evaluated this year and list of top ten countries is here:
1 Peru
2 Philippines
3 Bolivia
4 Ghana
5 Pakistan
=6 Ecuador
=6 El Salvador
8 India
9 Colombia
10 Kenya

When it comes to regulatory framework, the top 10 countries are:
=1 Cambodia
=1 Pakistan
=1 Philippines
4 Peru
=5 Bolivia
=5 Ghana
=5 Kenya
=5 Kyrgyz Republic
=5 Uganda
=10 Paraguay
=10 Tajikistan
=10 Tanzania
=10 Yemen

Investment climate rankings:
1 Chile
2 Turkey
3 Bosnia
4 Morocco
5 Peru
=6 Brazil
=6 Kenya
=6 Panama
9 Costa Rica
10 Ghana

Institutional development rankings:
=1 Bolivia
=1 Ecuador
=1 Peru
=4 El Salvador
=4 Nicaragua
=4 Philippines
=7 Colombia
=7 Ghana
=7 Guatemala
=7 Honduras
=7 India

But for institutional development clearly India would not have found a place among the top ten in overall rankings. While investment climate is an independent parameter one would expect regulation and institutional development to correlate to a large extent. Good regulation encourages MFIs to grow stronger and healthier. But the evidence suggests otherwise except for Peru, Philippines, Bolivia and Ghana (top 4 in overall rankings).

Such evaluations help various stakeholders including investors, policymakers and support providers to make decisions of their respective actions.

Full report can be accessed here.